<PAGE> 1
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 MARCH 31, 1996
[ ] 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
1725 220th Street, S.E., No. 104, Bothell, Washington 98021
(Address of principal executive offices)
(206) 485-8566
(Issuer's telephone number)
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.
<TABLE>
<CAPTION>
Class Outstanding at May 3, 1996
----- ---------------------------
<S> <C>
Common Stock, $.01 par value 7,044,463
Redeemable Common Stock Purchase Warrants
</TABLE>
Page 1 of 12 Pages
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EPOCH PHARMACEUTICALS, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
<S> <C>
Item 1. Financial Statements
Balance Sheets as of December 31, 1995
and March 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations (unaudited) for the three
months ended March 31, 1995 and 1996. . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows (unaudited) for the three months ended
March 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
2
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EPOCH PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
1995 (UNAUDITED)
------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 3,739,144 $ 2,762,449
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 147,975 116,908
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 52,968 48,946
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . 3,940,087 2,928,303
Equipment and leasehold improvements, net . . . . . . . . . . . 350,045 331,626
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 39,363 21,150
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 4,329,495 $ 3,281,079
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . $ 1,217,994 $ 1,337,949
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 341,899 266,409
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 361,664 296,875
Accrued litigation costs . . . . . . . . . . . . . . . . . . 250,000 249,375
------------ ------------
Total current liabilities . . . . . . . . . . . . . . 2,171,557 2,150,608
Stockholders' equity:
Common stock, par value $.01; authorized 20,000,000 shares,
issued and outstanding 7,023,400 and 7,036,036 shares . . 70,234 70,360
Additional paid-in capital . . . . . . . . . . . . . . . . . 46,860,059 46,863,723
Deferred compensation . . . . . . . . . . . . . . . . . . . . (99,512) (86,552)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (44,672,843) (45,717,060)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . 2,157,938 1,130,471
Total liabilities and stockholders' equity . . . . . . $ 4,329,495 $ 3,281,079
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1995 1996
---------- -----------
<S> <C> <C>
Operating expenses:
Research and development . . . . . . . . . . . . . . . . $ 449,502 $ 528,922
Selling, general and administrative . . . . . . . . . . 260,796 407,316
---------- -----------
Operating loss . . . . . . . . . . . . . . . . . . . (710,298) (936,238)
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . 3,537 35,943
Interest and financing expense . . . . . . . . . . . . . (49,942) (155,756)
Other income . . . . . . . . . . . . . . . . . . . . . . 600 4,800
---------- -----------
Loss from continuing operations . . . . . . . . . . (756,103) (1,051,251)
Income from operations of discontinued Diagnostics Division . 478,835 7,033
---------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . (277,268) (1,044,218)
========== ===========
Loss per share from continuing operations . . . . . . . . . . $ (0.11) $ (0.15)
Income per share from discontinued operations . . . . . . . . 0.07
---------- -----------
Net loss per share . . . . . . . . . . . . . . . . . $ (0.04) $ (0.15)
========== ===========
Weighted average number of common shares outstanding . . . . 7,008,062 7,024,437
</TABLE>
See accompanying notes to financial statements.
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EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1995 1996
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (277,268) $(1,044,218)
Adjustments to reconcile net loss to net cash
used in operating activities:
Continuing operations:
Depreciation and amortization . . . . . . . . . . . . . . . 58,999 61,895
Amortization of discount on notes payable . . . . . . . . . -- 122,326
Changes in operating assets and liabilities:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 41,987 27,076
Accounts payable and accrued liabilities . . . . . . . . . . (216,021) (128,033)
Discontinued operations:
Changes in current assets and current liabilities . . . . . 276,840 13,355
Decrease in net noncurrent assets
in excess of noncurrent liabilities . . . . . . . . . . 12,522 --
---------- -----------
Net cash used in operating activities . . . . . . . . . . . (102,941) (947,599)
Cash used in investing activities - acquisition of equipment
and leasehold improvements . . . . . . . . . . . . . . . (1,425) (30,516)
---------- -----------
Cash flows from financing activities:
Proceeds from notes payable . . . . . . . . . . . . . . . . 1,250,000 --
Principal payments on notes payable . . . . . . . . . . . . (72,551) (2,371)
Principal payments on capital leases . . . . . . . . . . . . (5,298) --
Exercise of warrants and stock options . . . . . . . . . . . 2,012 3,790
---------- -----------
Net cash provided by financing activities . . . . . . . . . 1,174,163 1,419
---------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . 1,069,797 (976,695)
Cash and cash equivalents at beginning of period . . . . . . . 9,984 3,739,144
---------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . $1,079,781 $ 2,762,449
========== ===========
Supplemental disclosure of cash flow information-
cash payments made during the period for interest . . . . $ 10,159 $ 902
========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
Epoch Pharmaceuticals, Inc. ("Epoch" or "the Company"), formerly MicroProbe
Corporation, was organized to develop, manufacture and market therapeutic and
diagnostic products utilizing oligonucleotide technology. In November 1995,
the Company sold its diagnostics assets to Becton, Dickinson and Company (see
note 2). The Company's continuing activities are focused on the development of
therapeutic technologies and products.
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 1995 balances have been reclassified to conform
with the 1996 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 Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission on April 9, 1996 (pursuant to Rule 12b-25 under the
Securities Exchange Act of 1934).
The Company has experienced significant quarterly fluctuations in operating
results and it expects that these fluctuations in revenue, expenses and net
losses will continue.
(2) SALE OF DIAGNOSTICS ASSETS
In November 1995, the Company sold the Company's assets and technology
associated with its Diagnostics Division (the "Assets") to Becton, Dickinson
and Company, a New Jersey corporation, through its Becton Dickinson Diagnostic
Instrument Systems Division (collectively, "Becton"). The Assets related to
the Company's development, marketing and sale of diagnostic products which
involve the use of nucleic acid probes to detect and identify microorganisms in
biological samples under the names "Affirm(R) VP," "Affirm(R) VPIII,"
"Affirm(R) DP," "Hybriquick(R)" and "Isoquick(R)". The Assets included:
tangible personal property, interests in certain contracts and other
instruments, rights in permits and licenses, raw materials and inventory,
technology, trade secrets, patents, other intellectual property (including the
name "MicroProbe"), rights in customer lists, records and data, computer
software programs, goodwill and causes of action held by the Company against
third parties. The aggregate purchase price paid by Becton for the Assets and
for the Company's covenant not to compete with Becton for a period of five
years was $8,510,000. The Purchase Price is subject to an upward adjustment of
$1,500,000 contingent upon Procter & Gamble entering into a supply
6
<PAGE> 7
agreement with Becton by November 2002, for the dental diagnostic products,
which were transferred by the Company to Becton, and Procter & Gamble obtaining
all clearances from the United States Food and Drug Administration necessary
for the commercial sale of such products in the U.S.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
At March 31, 1996, the Company had cash and cash equivalents of $2,762,000
which provides sufficient working capital to operate approximately three months
after repaying $1,396,000 in notes payable and accrued interest due April 30,
1996. The Company's continuing operations are research and development, and
will not generate working capital in the near term to fund future operations.
Since inception, the Company has financed its operations primarily through the
sales of its equity securities. In addition, the Company received $8,510,000
from the sale of it's Diagnostics Division. 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 such
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.
At the present time the Company is actively seeking investment funds through a
private placement of shares to qualified investors. The private offering is
for a minimum of 5,000,000 shares and a maximum of 6,000,000 shares of the
Common Stock, with a purchase price of $1.00 per share. If the Company is
successful in raising the minimum investment required by May 15, 1996, then the
current holders of warrants to purchase 2,200,000 shares of Common Stock at
$0.30 per share have agreed to exercise those warrants which will generate an
additional $660,000 for the Company. There is no assurance that the Company
will be successful in obtaining the minimum subscriptions and completing this
private placement.
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 and market 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, marketing, 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
7
<PAGE> 8
cause the Company to alter its marketing, 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
The following discussion of results of operations reflects the Company's
Diagnostics Division as discontinued operations for the three months ended
March 31, 1995 and 1996.
Research and development expenses for the three months ended March 31, 1996
increased $79,000 over the same period in the prior year as a result of
increased research activity which is being funded from the sale of the
diagnostic assets (see note 2 to financial statements). Additional increases
in expenditures for research and development throughout 1996 are anticipated as
the Company devotes additional resources to these efforts.
Selling, general and administrative expenses increased $147,000 in the three
month period ended March 31, 1996 compared to the respective prior year period.
In the three month period ended March 31, 1995, the Company completed
negotiations with various vendors which resulted in reductions of $138,000 in
the amounts due these vendors as compared with the amounts recorded at December
31, 1994. Without the adjustments to the 1995 period, the two periods would be
comparable.
Interest income in the three month period ended March 31, 1996 increased
compared with the respective period in the prior year due to higher investable
funds. Interest expense in the period increased over the respective periods in
the prior year as a result of obligations incurred to secure bridge financing
for the Company. In addition to the interest on the principle amounts of the
loans, interest expense in the quarter ended March 31, 1996 includes $122,000
of amortization of debt discount relating to a $480,000 warrant price
adjustment associated with the bridge refinancing. The price adjustment was
credited to additional paid-in capital and the debt discount is being amortized
over the term of the notes. At March 31, 1996 the discount had been fully
amortized.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $977,000 from December 31, 1995 to March 31, 1996 as a result
of disbursements for normal operating expenditures.
The Company's accounts payable and accrued liabilities balances decreased by
$140,000 from December 31, 1995 to March 31, 1996 due to normal business
fluctuations and payments issued after receipt of funds from the sale of the
Diagnostics Division.
8
<PAGE> 9
The Company's primary future needs for capital are for continued research and
development. The Company's working capital requirements may vary depending
upon numerous factors including the progress of the Company's research and
development, competitive and technological advances, the FDA regulatory process
and other factors.
The Company will require additional funds to continue its operations and, over
the longer term, will require substantial additional funds to maintain and
expand its research and development activities and to ultimately commercialize,
with or without the assistance of corporate partners, any of its proposed
products. The Company will seek collaborative or other arrangements with
larger pharmaceutical companies, under which such companies would provide
additional capital to the Company in exchange for exclusive or non-exclusive
license or other rights to certain of the technologies and products the Company
is developing. However, the competition for such arrangements with major
pharmaceutical companies is intense, with a large number of biopharmaceutical
companies attempting to satisfy their funding requirements through such
arrangements. There can be no assurance that an agreement or agreements will
arise from these discussions in a timely manner, or at all, or that revenues
that may be generated thereby will offset operating expenses sufficiently to
reduce the Company's short- or long-term funding requirements. Additional
equity or debt financings may be required, and there can be no assurance that
funds will be available from such financings on favorable terms, or at all.
On October 12, 1994 the Company entered into a bridge financing agreement with
certain investors under which the Company received $1,200,000 in operating
funds and issued secured notes with a principal amount of $1,200,000 and
2,400,000 warrants priced at $0.50 per share. On May 22, 1995 the Company and
the investors agreed to amend the Bridge Financing agreement by extending the
payment due date of the secured notes to March 31, 1996, adding the interest
accrued through that date ($56,000) to the principal balance, and adjusting the
warrant price to $0.30 per warrant share. On March 29, 1996 the Company and
the investors agreed to further amend the Bridge Financing agreement by
extending the payment due date of the Secured Notes to April 30, 1996. On
April 30, 1996, the Company repaid $736,000 in principal and interest on these
Secured Notes. The Company, with the agreement of certain of the investors,
retained $660,000 of the principal pending the successful completion of the
Company's private placement, at which time the investors have agreed to
exercise warrants to purchase 2,200,000 shares of Common Stock at a price of
$0.30 per share, or an aggregate exercise price of $660,000. If the private
placement is not completed by May 15, 1996, then the remaining $660,000 will be
due and payable at that time.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has from time to time written notices from parties alleging that
the Company's products and proposed products infringe the proprietary rights of
such parties. The Company believes that such notices are common in its
industry and believes it is not infringing the proprietary rights of such
parties. However, there can be no assurance that such parties will not
ultimately bring legal proceedings against the Company.
9
<PAGE> 10
The Company was named as an additional defendant in In Re Blech Securities
Litigation, 94 Civ. 7696 (RWS) pursuant to an Amended Consolidated Class Action
Complaint (the "Amended Complaint") filed on March 28, 1995 in the United
States District Court for the Southern District of New York (the "Court"). The
plaintiffs bring this action as a purported class action on behalf of persons
who purchased, during the period from July 1, 1991 through September 21, 1994,
securities of 24 companies, including securities issued by the Company. The
Amended Complaint names as defendants David Blech, D. Blech & Co., Mark S.
Germain, Nicholas Madonia as trustee for various trusts, Mordechai Jofen as
trustee for The Edward Blech Trust, Chancellor Capital Management, Inc., Parag
Saxena, Bear, Stearns & Company, Inc., Baird Patrick & Co., and eleven of the
foregoing 24 issuing companies. The Company is one of those eleven named
defendant companies.
The Amended Complaint seeks to allege against the Company violations of
antifraud provisions of the federal securities law and common law fraud and
deceit in connection with a purported scheme to, inter alia, artificially
inflate and maintain prices of the securities issued by the 24 companies
referenced above. In that regard, the Amended Complaint purports to allege
fraudulent activities involving the foregoing securities, including without
limitation unlawful "sham" transactions and the providing of undisclosed
"incentives" to investment fund managers and others to purchase such
securities. The Amended Complaint seeks the following relief: (a)
certification of this action as a class action; (b) damages in an unspecified
amount and interest; (c) costs and expenses of this action, including
reasonable fees of attorneys, accountants and experts and other disbursements;
and (d) such other and further relief as may be proper.
The Company has moved to dismiss the Amended Complaint as it applies to the
Company on the grounds that the Amended Complaint fails to plead the purported
fraud with the requisite particularity and fails to state a claim. Plaintiffs
have opposed the motion. Oral argument of the motion occurred on November 9,
1995 and the motion is pending before the Court. In view of the pending motion
to dismiss, the Company has not answered the Amended Complaint. Should the
Company's motion to dismiss be denied, management intends to contest the
litigation vigorously.
The Company also moved for a protective order to stay pretrial discovery
against it, pending a decision of its motion to dismiss the Amended Complaint.
The stay motion was granted in part and denied in part. By an order dated
August 23, 1995, the Court directed certain limited document discovery by
defendants to be completed within thirty days of the order and stayed other
discovery only until the limited document discovery was completed. The Company
responded to such limited document discovery and thus, such discovery is
complete as to it; since then no further discovery has been sought from the
Company. In the opinion of management the outcome will not have a material
effect on the financial condition of the Company.
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K
None
11
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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: May 7, 1996 By: /s/ Sanford Zweifach
---------------------------------
Sanford Zweifach
President/Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 2762449
<SECURITIES> 0
<RECEIVABLES> 116908
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2928303
<PP&E> 331626
<DEPRECIATION> 0
<TOTAL-ASSETS> 3281079
<CURRENT-LIABILITIES> 2150608
<BONDS> 0
0
0
<COMMON> 70360
<OTHER-SE> 1060111
<TOTAL-LIABILITY-AND-EQUITY> 3281079
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 936238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155756
<INCOME-PRETAX> (1044218)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1051251)
<DISCONTINUED> 7033
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1044218)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
