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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
Commission file number 0-22170
EPOCH PHARMACEUTICALS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 91-1311592
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12277 134th Court N.E., Suite 110, Redmond, Washington 98052
------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(425) 821-7535
(Issuer's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding at November 3, 1999
----- -------------------------------
Common Stock, $.01 par value 19,212,669
Page 1 of 14 Pages
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EPOCH PHARMACEUTICALS, INC.
INDEX TO FORM 10-QSB
Part I. Financial Information Page Number
Item 1. Financial Statements
Balance Sheets as of December 31, 1998
and September 30, 1999 (unaudited)................................ 3
Statements of Operations (unaudited) for the three months and
nine months ended September 30, 1998 and 1999..................... 4
Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1998 and 1999..................... 5
Notes to Financial Statements (unaudited)......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations; Plan of Operations............... 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...................................... 14
Note: Items 1- 5 are omitted, as they are not applicable.
Signature .......................................................................... 15
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EPOCH PHARMACEUTICALS, INC.
BALANCE SHEETS
ASSETS
SEPTEMBER 30,
DECEMBER 31, 1999
1998 (UNAUDITED)
------------ ------------
Current assets:
Cash and cash equivalents ................................ $ 658,363 $ 218,584
Receivables .............................................. 38,303 61,065
Prepaid expenses ......................................... 45,769 43,904
------------ ------------
Total current assets .................................. 742,435 323,553
Equipment, net ............................................... 173,831 322,286
Other assets ................................................. 53,937 39,628
------------ ------------
Total assets .......................................... $ 970,203 $ 685,467
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ......................................... $ 215,813 $ 222,811
Accrued interest on note payable to related party ........ 208,804 405,979
Accrued expenses for canceled relocation ................. 391,042 103,645
Other accrued liabilities ................................ 356,033 322,201
Deferred revenue - current portion ....................... -- 350,000
Note payable to related party ............................ -- 3,000,000
------------ ------------
Total current liabilities ............................. 1,171,692 4,404,636
Note payable to related party ................................ 3,000,000 --
Deferred revenue ............................................. -- 2,201,613
Stockholders' deficit:
Preferred stock, par value $.01; 10,000,000 shares
authorized; no shares issued and outstanding ............ -- --
Common stock, par value $.01; 50,000,000 shares authorized;
issued and outstanding: 14,824,227 at December 31, 1998
and 14,932,669 at September 30, 1999 .................... 148,242 149,327
Additional paid-in capital ................................. 54,460,706 54,531,269
Deferred compensation expense .............................. (159,826) (123,862)
Deferred financing expense ................................. (817,794) (317,781)
Accumulated deficit ........................................ (56,832,817) (60,159,735)
------------ ------------
Total stockholders' deficit ........................... (3,201,489) (5,920,782)
------------ ------------
Contingency
Total liabilities and stockholders' deficit .................. $ 970,203 $ 685,467
============ ============
See accompanying notes to financial statements.
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EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTH ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
Research contract revenue .................. $ 41,787 $ 17,162 $ 126,159 $ 169,779
Operating expenses:
Research and development ................... 712,053 617,167 2,114,240 1,914,983
General and administrative ................. 913,246 334,936 1,667,266 988,571
------------ ------------ ------------ ------------
Total operating expenses .............. 1,625,299 952,103 3,781,506 2,903,554
------------ ------------ ------------ ------------
Operating loss ........................ (1,583,512) (934,941) (3,655,347) (2,733,775)
Other income (expense):
Interest income ............................ 26,732 4,065 92,820 35,992
Interest and financing expense ............. (260,696) (235,531) (566,210) (699,135)
Other income ............................... 200 -- 23,290 --
------------ ------------ ------------ ------------
Loss from continuing operations ....... (1,817,276) (1,166,407) (4,105,447) (3,396,918)
Discontinued operations -
gain on disposal of discontinued operations 30,000 -- 90,000 70,000
------------ ------------ ------------ ------------
Net loss .............................. $ (1,787,276) $ (1,166,407) $ (4,015,447) $ (3,326,918)
============ ============ ============ ============
Loss per share from continuing operations -
basic and diluted ......................... $ (0.12) $ (0.08) $ (0.28) $ (0.22)
Income per share from discontinued
operations - basic and diluted ............ -- -- 0.01 --
------------ ------------ ------------ ------------
Net loss per share - basic and diluted ..... $ (0.12) $ (0.08) $ (0.27) $ (0.22)
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic and diluted ........... 14,821,968 14,926,539 14,817,185 14,876,983
See accompanying notes to financial statements.
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EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1999
----------- -----------
Cash flows from operating activities:
Net loss ...................................................... $(4,015,447) $(3,326,918)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 44,023 73,134
Amortization of deferred financing expense ................. 419,224 500,013
Amortization of deferred compensation expense .............. -- 35,964
Changes in operating assets and liabilities:
Receivables ............................................. 41,526 (22,762)
Prepaid expenses and other assets ....................... (93,772) 16,174
Accounts payable ........................................ (76,444) 6,998
Accrued interest on note payable to related party ....... 144,951 197,175
Accrued expenses for canceled relocation ................ 391,042 (287,397)
Deferred revenue ........................................ -- 2,551,613
Other accrued liabilities ............................... 142,096 (33,832)
----------- -----------
Net cash used in operating activities ............... (3,002,801) (289,838)
----------- -----------
Cash used in investing activities -
acquisition of equipment ...................................... (65,963) (221,589)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable .................................... 3,000,000 --
Exercise of stock options ..................................... 4,861 71,648
----------- -----------
Net cash provided by financing activities .................. 3,004,861 71,648
----------- -----------
Net decrease in cash and cash equivalents ......................... (63,903) (439,779)
Cash and cash equivalents at beginning of period .................. 1,485,483 658,363
----------- -----------
Cash and cash equivalents at end of period ........................ $ 1,421,580 $ 218,584
=========== ===========
Supplemental disclosure of non-cash financing activities - warrants
issued in debt financing ..................................... $ 1,133,361 $ --
=========== ===========
Supplemental disclosure of cash flow information - cash
payments made during the period for interest .................. $ 2,036 $ 1,262
=========== ===========
See accompanying notes to financial statements.
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EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE (1) BASIS OF PRESENTATION
The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required to be presented for complete financial
statements. The accompanying financial statements include all adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Certain 1998 balances have been reclassified to conform with
the 1999 presentation.
The financial statements and related disclosures have been prepared
with the presumption that users of the interim financial information have read
or have access to the audited financial statements for the preceding fiscal
year. Accordingly, these financial statements should be read in conjunction with
the audited financial statements and the related notes thereto included in the
Company's 1998 Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission on April 15, 1999.
NOTE (2) NATURE OF BUSINESS
Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") is a biomedical
company utilizing nucleoside and nucleotide chemistry to develop molecular tools
for genetic analysis. Utilizing unique and proprietary technology in the
rational design, synthesis and chemical modification of oligonucleotides, the
Company has positioned itself to provide products and techniques for high
throughput genetic sequence analysis that are in increasing demand in the
rapidly expanding field of genetic pharmacology.
Previously, Epoch's therapeutic research and development program had
focused on the modification of gene expression by altering cellular genomic DNA
using oligonucleotide targeting technology combined with chemical reactivity.
The Company's technology is based on its expertise in designing and synthesizing
oligonucleotides bearing modifications that selectively bind to and interact
with the target genes.
Epoch discovered that the compounds and techniques that were being
developed for its gene modification therapeutic program could be adapted to
several gene sequencing analysis systems currently in use or being developed by
others. The Company believes that this technology has broad application
potential in the developing fields of molecular diagnostics and genomics,
including the detection of infectious diseases, inheritable diseases through
prenatal testing, screening populations to identify genetic markers that
correlate with disease risk or drug response, as well as any other genetic
analysis based on DNA sequence determination. The Company is pursuing these
technologies.
NOTE (3) LICENSE AND SUPPLY AGREEMENT
In January 1999, the Company and the PE Biosystems Division of PE
Corporation (formerly known as The Perkin-Elmer Corporation) ("Perkin-Elmer")
entered into a License and Supply Agreement (the "License and Supply Agreement')
pursuant to which the Company licensed certain of its enabling genetic analysis
technology to Perkin-Elmer. Under the terms of the agreement, Perkin-Elmer made
payments to the Company consisting of initial fees for licensed technology and
proprietary know
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how, and will make ongoing payments for chemical intermediate purchases as well
as royalties on sales of product which use the licensed technology. The
agreement also requires Perkin-Elmer to purchase annual minimum amounts of
proprietary chemical intermediates from the Company.
In June 1999, the Company and Perkin-Elmer amended the License and
Supply Agreement to increase the scope of the agreement to include Epoch's
proprietary probe design software. This software allows for the efficient custom
design of Perkin-Elmer's Taqman(R) probes by the end user. The software will be
incorporated into Perkin-Elmer's Primer Express(TM) software which is sold with
its 7700 Sequence Detection System. In addition to license fees, Epoch shall
receive a royalty on all products that Perkin-Elmer sells which incorporate the
software.
In November 1999, the License and Supply Agreement was amended and
restated pursuant to a subsequent License and Supply Agreement entered into
between the Company and Perkin-Elmer.
In November 1999, Perkin-Elmer converted $1,000,000 of prepayments made
by it pursuant to the License and Supply Agreement into equity in the Company.
Through September 1999, the Company received $2,552,000 under the agreements, a
portion of which represented prepayments to be credited against future product
purchases and royalty payments. There have been no further receipts under the
License and Supply Agreement since September 1999. See Note 5.
In order to secure any unused portion of the purchased product
prepayments, the Company granted to Perkin-Elmer a security interest in the
Company's patents related to its enabling genetic technology (the "Patents")
under the terms of a Security Agreement (the "Security Agreement"). The security
interest automatically terminates when any unused portion of the purchased
product prepayments is $50,000 or less. Although no security interest was
granted with respect to the royalty prepayments, if such royalty payments do not
become due under the agreement, the Company will also be required to refund any
unused prepayments to Perkin-Elmer.
Under the terms of the agreement, if Perkin-Elmer terminates the
agreement upon 60 days written notice to the Company, or if the Company
terminates the agreement following a material breach by Perkin-Elmer,
Perkin-Elmer will release its security interest in the Patents and forfeit any
unused portion of the prepayments. However, if the Company and Perkin-Elmer
mutually agree to terminate the agreement, or if Perkin-Elmer terminates the
agreement as a result of a material breach by the Company, the Company must
reimburse Perkin-Elmer the difference between the unused portion of the
purchased product prepayments and $50,000.
NOTE (4) LOSS PER SHARE
Basic earnings per share (EPS) is computed based on weighted average
shares outstanding and excludes any potential dilution. Diluted EPS reflects
potential dilution from the exercise or conversion of securities into common
stock or from other contracts to issue common stock. The capital structure of
the Company includes common stock options and common stock warrants. At
September 30, 1999, there were 1,419,756 options outstanding to purchase the
common stock of the Company with exercise prices ranging from $0.30 to $5.88.
Also outstanding at September 30, 1999 were 7,798,775 warrants to purchase the
common stock of the Company with exercise prices ranging from $0.30 to $9.21 per
share. At September 30, 1998, there were 1,107,016 options outstanding to
purchase the common stock of the Company with exercise prices ranging from $0.30
to $10.00. Also outstanding at September 30, 1998 were 7,498,875 warrants to
purchase the common stock of the Company with exercise prices ranging from $0.30
to $9.21 per share. The assumed conversion and exercise of these securities have
been excluded from the calculation of Diluted EPS as their effect is
anti-dilutive.
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NOTE (5) LIQUIDITY
The Company has experienced recurring losses from operations and has a
total stockholders' deficit of approximately $5,921,000 at September 30, 1999
and cash of approximately $219,000.
In November 1999, the Company concluded $7 million of private equity
financing. The financing included:
The sale of 1,200,000 shares of common stock for $3,000,000 in cash at
$2.50 per share.
The conversion by Bay City Capital of $1.2 million of its $3 million
loan to the Company to 480,000 shares of the Company's common stock at
$2.50 per share.
The application by Bay City Capital of $1.8 million of its $3 million
loan to the Company to the purchase of 2 million shares of the
Company's common stock at $.90 per share pursuant to a warrant issued
to Bay City Capital in connection with the $3 million loan.
The conversion of $1 million of prepayments under the licenses
agreement with Perkin Elmer to 400,000 shares of the Company's common
stock at $2.50 per share.
The $2.50 price per share of common stock received by the Company in
the Private Equity Financing represented a premium to the trading price of the
Company's common stock as of the close of the transaction. Investors who
purchased the 1,200,000 shares included PE Corporation (the parent company of PE
Biosystems), Bay City Capital, Grace Brothers Ltd. and Hilspen Capital
Management.
Management estimates that the September 30, 1999 cash balance, coupled
with the $3,000,000 in new funding, will be sufficient to operate into the
second quarter of 2000.
To continue operations, the Company will be required to sell additional
equity securities, borrow additional funds, or obtain additional financing
through licensing, joint venture, or other collaborative arrangements. The
Company is pursuing other financing arrangements but has no commitments for such
financing and there can be no assurance that such financing will be available on
satisfactory terms, if at all. If additional funds are not available, the
Company will be required to delay, reduce, or eliminate expenditures for certain
or all of its programs or products.
NOTE (6) DEFERRED REVENUE
Deferred revenue represents unrecognized license and technology fees,
prepaid royalties, and prepayments for product purchases related to the
Perkin-Elmer license and supply agreement. License fees, technology fees, and
prepayments for product purchases will be recognized as revenue based upon
minimum sales of products sold to the licensee by the Company as specified over
the term of the agreement. Prepaid royalties will be recognized as revenue based
upon sales of the licensed product by the licensee as specified in the
agreement.
As a general policy, revenues are not recognized if amounts received
are refundable or the Company has related future performance obligations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS; PLAN OF OPERATIONS
William G. Gerber, M.D., was appointed to the position of Chief
Executive Officer in September 1999. Prior to joining Epoch, Dr. Gerber served
as President and Chief Executive Officer of diaDexus LLC, a joint venture
established by Incyte Pharmaceuticals and SmithKline Beecham to apply genomics
to the discovery of novel diagnostic products. Dr. Gerber previously served as
Vice President and Chief Operating Officer of Onyx Pharmaceuticals, a
biotechnology firm involved in the discovery of novel cancer therapeutics; as
President of Chiron Diagnostics; and as Senior Vice President and General
Manager of the PCR Division with Cetus Corporation. Dr. Gerber also has medical
practice and managerial experience in emergency medicine and founded an urgent
care center management company. He also served on and was President of the Board
of Medical Quality Assurance, State of California. He received his M.D. and B.S.
from the University of California, San Francisco Medical Center after attending
Dartmouth College.
Dr. Gerber will lead the daily operations of the Company and the
commercialization of the Company's technologies. Dr. Fred Craves will continue
as Chairman of the Board of Directors and Mr. Zweifach will continue as
President and Chief Financial Officer.
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements that are based on current expectations. In light of the important
factors that can materially affect results, including those set forth below and
elsewhere in this Quarterly Report on Form 10-QSB, the inclusion of
forward-looking information herein should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company will
be achieved. The Company may encounter competitive, technological, financial and
business challenges making it more difficult than expected to continue to
develop therapeutic technologies and products; the market may not accept the
Company's therapeutic products; the Company may be unable to retain existing key
management personnel; and there may be other material adverse changes in the
Company's operations or business. Certain important factors affecting the
forward-looking statements made herein include, but are not limited to (i) the
successful development of viable therapeutic technologies and products, (ii)
accurately forecasting capital expenditures, and (iii) obtaining new sources of
external financing. Assumptions relating to budgeting, product development and
other management decisions are subjective in many respects and thus susceptible
to interpretations and periodic revisions based on actual experience and
business developments, the impact of which may cause the Company to alter its
operating, capital expenditure or other budgets, which may in turn affect the
Company's financial position and results of operations.
Future operating results may be impacted by a number of factors that
could cause actual results to differ materially from those stated herein, which
reflect management's current expectations. These factors include industry
specific factors, the Company's ability to maintain access to external financing
sources and its financial liquidity, the Company's ability to timely develop and
produce commercially viable therapeutic products and the Company's ability to
manage expense levels.
RESULTS OF OPERATIONS
Research Contract Revenue. Research contract revenue reflects revenue
from U.S. government grants and contracts, and subcontracts.
Research and Development. The decreases in research and development
expenses of $95,000 for the quarter and $199,000 for the nine months ended
September 30, 1999, respectively, in relation to comparable 1998 periods, are
primarily the result of reduced rent and building expenses in 1999, as the
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new facility is smaller than the previous facility. Additional variations in
research and development expense are the result of normal business fluctuations.
General and Administrative. General and administrative expenses
decreased $578,000 and $679,000, respectively, in the three and nine month
periods ended September 30, 1999 compared to the respective prior year periods.
These decreases in expenditures are primarily the result of expenses incurred
prior to the abandonment of a proposed facility in 1998, which resulted in the
recognition of $472,000 in expenses for the three and nine month periods ended
September 30, 1998. Also included in the three and nine month period expenses of
1998 is $77,000 in expenses associated with the move to a new building. A
further decrease in expenditures is the result of a decrease in expenditures for
the filing of patents on new technologies. During the first nine months of 1998,
the Company expended $145,000 for patent filings on new technologies, as
compared to $90,000 in the comparable period of the current year. Similarly, the
Company expended $44,000 less in the quarter ended September 1999 than in the
comparable third quarter of 1998. We believe that these patents, if issued, will
improve the Company's proprietary position with regard to its genetic analysis
technologies. However, there can be no assurance that the Company's patent
applications will result in further issued patents or that such issued patents
will offer protection against competitors with similar technology. Additionally,
there can be no assurance that any manufacture, use or sale of the Company's
technology or products will not infringe on patents or proprietary rights of
others, and the Company may be unable to obtain licenses or other rights to
these other technologies that may be required for commercialization of the
Company's proposed products. Further variances in the results for the three and
nine month periods ended September 30, 1999 are the result of normal business
fluctuations.
Interest Income. Interest income in the 1999 periods is less than the
1998 comparable periods due to lower cash balances available for investment.
Interest and Financing Expense. Interest and financing expense
represents the costs associated with the $3,000,000 note payable to a related
party, which was funded at the end of February 1998. The increase in the nine
month period of 1999 results from nine months of expense in 1999 versus seven
months in 1998. Interest expense in the three month period ended September 30,
1998 was higher than the comparable period of 1999 as a result of an adjustment
to the amortization of deferred financing expense in 1998 from a five year term
to a two year term.
Other Income. Other income in 1998 represents payments received from a
sublease and administrative support agreement. As of April 1998, this agreement
was terminated and, consequently, there is no further income from this source
beyond April 1998.
Gain on Disposal. The gain on disposal of discontinued operations
represents only that portion of the gain for which cash payments were received
during the reporting periods.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of
$219,000, which resulted primarily from $2,552,000 received from Perkin-Elmer
through September 1999 under a license and supply agreement, less normal
expenditures for operations.
In January 1999, the Company and the PE Biosystems Division of The
Perkin-Elmer Corporation ("Perkin-Elmer") entered into a License and Supply
Agreement pursuant to which the Company licensed certain of its enabling genetic
analysis technology to Perkin-Elmer. Under the terms of the agreement,
Perkin-Elmer made payments to the Company consisting of initial fees for
licensed technology and proprietary know how, and will make ongoing payments for
chemical intermediate
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purchases as well as royalties on sales of product which uses the licensed
technology. The agreement also requires Perkin-Elmer to purchase annual minimum
amounts of proprietary chemical intermediates from the Company.
In July 1999, the Company announced that it had licensed its
proprietary probe design software to Perkin-Elmer. This agreement increased the
scope of the licensing agreement that it entered into in January 1999 with
Perkin-Elmer to include software that allows for the efficient custom design of
Taqman(R) probes by the end user. The software will be incorporated into
Perkin-Elmer's Primer Express(TM) software which is sold with its 7700 Sequence
Detection System. In addition to license fees, Epoch shall receive a royalty on
all products that Perkin-Elmer sells which incorporate the software.
Through September 1999, the Company received $2,552,000 under the
agreements, a portion of which represented prepayments to be credited against
future product purchases and royalty payments. There have been no further
receipts since September1999.
In order to secure any unused portion of the purchased product
prepayments, the Company granted to Perkin-Elmer a security interest in the
Company's patents related to its enabling genetic technology (the "Patents")
under the terms of a Security Agreement (the "Security Agreement"). The security
interest automatically terminates when any unused portion of the purchased
product prepayments is $50,000 or less. Although no security interest was
granted with respect to the royalty prepayments, if such royalty payments do not
become due under the agreement, the Company will also be required to refund any
unused prepayments to Perkin-Elmer.
Under the terms of the agreement, if Perkin-Elmer terminates the
agreement upon 60 days written notice to the Company, or if the Company
terminates the agreement following a material breach by Perkin-Elmer,
Perkin-Elmer will release its security interest in the Patents and forfeit any
unused portion of the prepayments. However, if the Company and Perkin-Elmer
mutually agree to terminate the agreement, or if Perkin-Elmer terminates the
agreement as a result of a material breach by the Company, the Company must
reimburse Perkin-Elmer the difference between the unused portion of the
purchased product prepayments and $50,000.
In November 1999, the Company concluded $7 million of private equity
financing. The financing included:
The sale of 1,200,000 shares of common stock for $3,000,000 in cash at
$2.50 per share.
The conversion by Bay City Capital of $1.2 million of its $3 million
loan to the Company to 480,000 shares of the Company's common stock at
$2.50 per share.
The application by Bay City Capital of $1.8 million of its $3 million
loan to the Company to the purchase of 2 million shares of the
Company's common stock at $.90 per share pursuant to a warrant issued
to Bay City Capital in connection with the $3 million loan.
The conversion of $1 million of prepayments under the licenses
agreement with Perkin Elmer to 400,000 shares of the Company's common
stock at $2.50 per share.
Management estimates that the September 30, 1999 cash balance coupled
with the $3,000,000 in new funding will be sufficient to operate into the second
quarter of 2000.
Using the proceeds of the Perkin-Elmer licensing agreement, the
November 1999 Private Equity Financing, and any future financing, the Company
plans to further develop and verify applicability of its
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compounds and techniques in the developing fields of molecular diagnostics and
genomics and to determine how its technology may be exploited.
The Company is focused on the development of its products with the goal
of entering into corporate partnering arrangements to further commercialize the
technology. Our primary future needs for capital are for continued research and
development and relocation expenses anticipated to be incurred in a move to new
facilities. The Company's working capital requirements may vary depending upon
numerous factors including the progress of our research and development,
competitive and technological advances, possible relocation expenses and other
factors. We anticipate operating with approximately 25 employees.
To continue operations, the Company will be required to sell additional
equity securities, borrow additional funds, or obtain additional financing
through licensing, joint venture, or other collaborative arrangements. The
Company is pursuing other financing arrangements but has no commitments for such
financing and there can be no assurance that such financing will be available on
satisfactory terms, if at all. If additional funds are not available, the
Company will be required to delay, reduce, or eliminate expenditures for certain
or all of its programs or products.
Cash decreased by $440,000 during the first nine months of 1999
primarily as a result of the net of $2,552,000 received from Perkin-Elmer offset
by normal expenditures on the Company's operations, the acquisition of $222,000
of equipment used in research and development, and payment of $287,000 on the
canceled building facility project discussed below. The comparable period of the
prior year had a cash decrease of $64,000, the net result of proceeds from a
$3,000,000 note payable offset by normal operating expenditures on the Company's
operations and the acquisition of $66,000 of equipment used in research and
development.
Prior to September 1998, the Company had been in negotiations for a
lease on approximately 21,000 square feet in the general vicinity of its then
current facility in Bothell, Washington. A design build team had been selected
and was working on plans for the new space. In September 1998, the project was
canceled in favor of an already existing space. Costs for architectural fees and
long lead equipment items incurred prior to cancellation of the project are
estimated at $472,000, which were included in general and administrative
expenses in the year ended 1998. Cash payments of $287,000 were distributed
during the first quarter of 1999. There were no cash expenditures toward this
obligation in the second or third quarters of 1999. $104,000 remains in accrued
liabilities. The remaining liability is expected to be resolved by the end of
1999.
Variances in receivables, accounts payable and other accrued
liabilities in 1999 and 1998 are the result of normal business fluctuations.
The note payable to related party was converted into equity in November
1999.
SUBSEQUENT EVENTS
In November 1999, the Company concluded $7 million of private equity
financing. The financing included:
The sale of 1,200,000 shares of common stock for $3,000,000 in cash at
$2.50 per share.
The conversion by Bay City Capital of $1.2 million of its $3 million
loan to the Company to 480,000 shares of the Company's common stock at
$2.50 per share.
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The application by Bay City Capital of $1.8 million of its $3 million
loan to the Company to the purchase of 2 million shares of the
Company's common stock at $.90 per share pursuant to a warrant issued
to Bay City Capital in connection with the $3 million loan.
The conversion of $1 million of prepayments under the licenses
agreement with Perkin Elmer to 400,000 shares of the Company's common
stock at $2.50 per share.
The $2.50 price per share of common stock received by the Company in
the Private Equity Financing represented a premium to the trading price of the
Company's common stock as of the close of the transaction. Investors who
purchased the 1,200,000 shares included PE Corporation (the parent company of PE
Biosystems), Bay City Capital, Grace Brothers Ltd. and Hilspen Capital
Management.
In connection with the private equity financing, the Company and
Perkin-Elmer entered into an Amended and Restated License and Supply Agreement,
dated as of November 1, 1999 (the "Amended License Agreement"), which restated
the License Agreement entered into between the parties on January 11, 1999, as
amended June 30, 1999.
The terms of the Amended License Agreement are substantially the same
as the terms of the License Agreement, except that certain products will no
longer be sold to Perkin-Elmer pursuant to the Amended License Agreement.
YEAR 2000 COMPLIANCE
Many existing information technology (IT) systems, such as computer
systems and software products, as well as non-IT systems that include embedded
technology, were not designed to correctly process dates after December 31,
1999. We have assessed the impact of such "Year 2000" issues on our products,
our internal IT and non-IT systems, as well as on our suppliers and service
providers. We have determined that our business systems are not Year 2000 ready.
We have developed a plan to replace these systems in a timely fashion at a cost
of approximately $30,000 by December 1999. We are also discussing with our
significant suppliers and service providers their plans to investigate, identify
and fix their Year 2000 issues. We believe that most of our significant
suppliers and service providers will cooperate in resolving any Year 2000
problems. However, we are also dependent on certain utility companies,
telecommunication service companies and other service providers that are outside
our control. Therefore, it may be difficult for us to obtain assurances of Year
2000 readiness from such third parties. We believe that we will have identified
all of our material Year 2000 issues. However, given the pervasiveness of Year
2000 issues and the complex interrelationships among Year 2000 issues both
internal and external to us, we cannot guarantee that we will be able to
identify and accurately evaluate all such issues.
If any supplier or service provider fails to appropriately address
their Year 2000 issues, our business, financial condition and operating results
could be significantly hurt. For example, if a supplier or service provider
experiences a Year 2000 problem which results in or contributes to delays or
interruptions in delivering products or services to us, our business, financial
condition and operating results could be significantly hurt. Finally, general
economic disruption resulting from Year 2000 issues could also significantly
hurt us.
In preparation for the Year 2000, we are developing contingency plans
in case we fail to complete our remediation programs in a timely manner and in
the event that any third party who provides goods or services essential to our
business fails to appropriately address their Year 2000 issues. We expect to
finalize these contingency plans by the end of 1999. Even if we complete these
plans on
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time and put them in place, we cannot guarantee that such plans will be
sufficient to address any third party failures or that unresolved or undetected
internal and external Year 2000 issues will not significantly hurt our business,
financial condition and operating results.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.22 Amended and Restated License and Supply
Agreement between the Registrant and
Perkin-Elmer Corporation dated November 1,
1999. (Portions of this exhibit are omitted and
were filed separately with the Secretary of the
SEC pursuant to the Registrant's application
requesting confidential treatment under Rule
406 of the Securities Act.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Epoch Pharmaceuticals, Inc.
Date: November 15, 1999 By: /s/ Sanford S. Zweifach
------------------------------------
Sanford S. Zweifach
President/Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.22 Amended and Restated License and Supply Agreement between the
Registrant and Perkin-Elmer Corporation dated November 1, 1999.
(Portions of this exhibit are omitted and were filed separately with
the Secretary of the SEC pursuant to the Registrant's application
requesting confidential treatment under Rule 406 of the Securities Act.
27.1 Financial Data Schedule