<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, 1998
[ ] 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 Identification Number)
of incorporation or organization)
1725 220th Street, S.E., No. 104, Bothell, Washington 98021
(Address of principal executive offices)
(425) 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.
Class Outstanding at May 1, 1998
----- --------------------------
Common Stock, $.01 par value 14,814,793
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> <C>
Item 1. Financial Statements
Balance Sheets as of December 31, 1997
and March 31, 1998 (unaudited).......................................... 3
Statements of Operations (unaudited) for the three
months ended March 31, 1997 and 1998.................................... 4
Statements of Cash Flows (unaudited) for the three months ended
March 31, 1997 and 1998................................................. 5
Notes to Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................ 11
NOTE: Items 1- 5 are omitted as they are not applicable.
SIGNATURE ............................................................................. 12
</TABLE>
<PAGE> 3
EPOCH PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
1997 (UNAUDITED)
------------ ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 1,485,483 $ 3,537,956
Receivables .......................................... 63,287 56,435
Prepaid expenses ..................................... 38,801 39,560
------------ ------------
Total current assets ............................. 1,587,571 3,633,951
Equipment and leasehold improvements, net ................ 160,011 166,896
Other assets ............................................. 65,064 69,981
------------ ------------
Total assets ..................................... $ 1,812,646 $ 3,870,828
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... 236,970 178,912
Accrued liabilities .................................. 226,549 326,126
------------ ------------
Total current liabilities ........................ 463,519 505,038
------------ ------------
Note payable ............................................. $ -- $ 3,000,000
------------ ------------
Stockholders' equity:
Preferred stock, par value $.01; authorized 10,000,000
shares; no shares issued and outstanding ......... -- --
Common stock, par value $.01; authorized
30,000,000, shares issued and outstanding
14,814,793 shares at December 31, 1997
and March 31, 1998 .............................. 148,148 148,148
Additional paid-in capital ........................... 52,930,787 54,465,340
Deferred financing expense ........................... -- (1,508,977)
Accumulated deficit .................................. (51,729,808) (52,738,721)
------------ ------------
Total stockholders' equity ....................... 1,349,127 365,790
------------ ------------
Total liabilities and stockholders' equity ....... $ 1,812,646 $ 3,870,828
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
Research contract revenue ............................ $ 43,520 $ 40,783
Operating Expenses:
Research and development ......................... 648,234 703,147
General and administrative ....................... 454,991 375,485
------------ ------------
Total operating expenses ..................... 1,103,225 1,078,632
------------ ------------
Operating loss ............................... (1,059,705) (1,037,849)
Other income (expense):
Interest income .................................. 52,022 26,448
Interest and financing expense ................... (611) (47,467)
Other income ..................................... 31,268 19,955
------------ ------------
Loss from continuing operations .............. (977,026) (1,038,913)
Discontinued operation -
Gain on disposal of Diagnostics Division ......... 20,000 30,000
------------ ------------
Net loss ......................................... (957,026) (1,008,913)
============ ============
Loss per share from continuing operations -
basic and diluted ................................ $ (0.06) $ (0.07)
Income per share from discontinued operation -
basic and diluted ................................ -- --
------------ ------------
Loss per share - basic and diluted ................... $ (0.06) $ (0.07)
============ ============
Weighted average number of common shares outstanding -
basic and diluted ................................ 14,729,535 14,814,793
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................ $ (957,026) $(1,008,913)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................... 48,175 13,627
Amortization of deferred financing expense ...... -- 25,576
Changes in operating assets and liabilities:
Other assets .................................... 34,167 1,176
Accounts payable and accrued liabilities ........ 65,953 41,519
----------- -----------
Net cash used in operating activities ........... (808,731) (927,015)
Cash used in investing activities - acquisition of
equipment and leasehold improvements .............. (18,037) (20,512)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable ..................... -- 3,000,000
Principal payments on notes payable ............. (2,673) --
Exercise of stock options ....................... 9,706 --
----------- -----------
Net cash provided by financing activities ....... 7,033 3,000,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (819,735) 2,052,473
Cash and cash equivalents at beginning of period .... 4,890,358 1,485,483
----------- -----------
Cash and cash equivalents at end of period .......... $ 4,070,623 $ 3,537,956
=========== ===========
Supplemental disclosure of cash flow information-cash
payments made during the period for interest $ 610 $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE (1) BASIS OF PRESENTATION
Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") (formerly MicroProbe
Corporation) is a biomedical company focused on the development of
oligonucleotides (short chains of nucleotides which are the building blocks of
DNA and RNA) as new biologically useful compounds. Utilizing unique and
proprietary technology in the rational design, synthesis and chemical
modification of oligonucleotides, the Company has been developing a gene-therapy
approach to inactivate or reverse mutate disease associated genes.
Epoch's therapeutic research and development program has 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 has recently discovered that the compounds and techniques that were being
developed for its gene modification therapeutic program can 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 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 1997 balances have been reclassified to conform with
the 1998 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 14, 1998.
NOTE (2) LOSS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share. This statement establishes standards for computing
and presenting earnings per share (EPS), replacing the presentation of primary
EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new
statement, Basic 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 and is similar to the previously required fully
6
<PAGE> 7
diluted EPS. Basic EPS and diluted EPS have been restated for the quarter ended
March 31, 1997. The capital structure of the Company includes stock options and
stock warrants. The assumed conversion and exercise of these securities have
been excluded from Diluted EPS as their effect is anti-dilutive.
NOTE (3) NOTE PAYABLE
In February 1998, Bay City Capital LLC, ("Bay City Capital"), San Francisco,
California, loaned $3,000,000 to the Company from Bay City Capital Fund I LP as
a bridge to the earlier of a public rights offering, other financing, or
February 25, 2000. The loan is accruing interest at 8% per annum. In the event
of a rights offering, Bay City Capital has agreed, subject to certain
conditions, to convert the loan into equity to the extent that the current
stockholders do not subscribe for their proportionate share of the offering. In
partial consideration for the bridge loan and Bay City Capital's agreement to
purchase excess shares, if any, in a rights offering, Bay City Capital received
a warrant to purchase 2,000,000 shares of Epoch's Common Stock at a price of
$0.90 per share. Bay City Capital is a merchant banking partnership that was
formed by The Craves Group and The Pritzker Family business interests. The
founding partner of The Craves Group, Fred Craves, Ph.D., is the Chairman and
CEO of Epoch. Sanford S. Zweifach, Epoch's President and Chief Financial
Officer, is also the Chief Financial Officer of Bay City Capital.
The company has recorded deferred financing expense of $1,534,553 in connection
with the issuance of these warrants to purchase 2,000,000 shares of Epoch's
Common Stock. This deferred financing expense will be amortized over the two
year term of the note.
NOTE (4) ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards (SFAS) No. 130, Reporting Comprehensive Income. This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The purpose of reporting comprehensive income is to report a measure of all
changes in equity of an enterprise that result from recognized transactions and
other economic events of the period other than transactions with owners in their
capacity as owners. SFAS 130 is effective for financial statements issued for
earlier periods ending after December 15, 1997, including interim periods. The
Company did not have any items of comprehensive income or loss during the year
ended December 31, 1997, or during the three months ended March 31, 1998. As a
result, a separate statement of comprehensive income is not included with the
financial statements.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS; PLAN OF OPERATIONS
At March 31, 1998, the Company had cash and cash equivalents of $3,537,956 which
provides sufficient liquidity to operate until early 1999, based on the
Company's current plan of operation. 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 the 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.
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
The following discussion of results of operations reflects the Company's
diagnostics division as discontinued operations for the three months ended March
31, 1997 and 1998.
Research contract revenue reflects revenue from U.S. government grants and
contracts and subcontracts.
Research and development expenses for the three months ended March 31, 1998
increased $55,000 over the same period in the prior year as a result of
increased research activity. This level of expenditures for research and
development is anticipated throughout 1998 as the Company devotes resources to
these efforts.
8
<PAGE> 9
General and administrative expenses decreased $80,000 in the three month period
ended March 31, 1998 compared to the respective prior year period. This decrease
in expenditures is primarily the result of a decrease in expenditures for the
filing of patents on new technologies. During the first quarter of 1997 the
Company expended $104,000 for patent filings on new technologies, as compared to
$41,000 in the comparable period of the current year. The Company believes that
these patents, if issued, will improve the Company's proprietary position with
regard to its targeted gene mutagenesis technologies. 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.
Interest income in the two periods is comparable.
Interest expense in the current period increased from the respective period in
the prior year due to the increase in notes payable of $3,000,000, as well as
including $26,000 of amortized financing expense incurred in the transaction.
Other income primarily represents payments received from Saigene Corporation
("Saigene") for administrative support functions as well as for rented
laboratory and office space. As of April 1998, Saigene had secured and relocated
to separate facilities. As such, there will be no further income for
administrative support functions beyond April 1998.
The income from discontinued operations relates to the operations and disposal
of the assets of the Company's then existing diagnostics division. The Company
sold the majority of the diagnostic assets of the Company to Becton Dickinson in
November 1995. In November 1996, the Company entered into an agreement with
Saigene, whereby Epoch transferred its remaining diagnostic technologies,
including SBIR grants, to Saigene for $1,100,000. The $1,100,000 is in the form
of an 8% note receivable with terms of $50,000 down and $10,000 per month. The
note is secured by the assets and technologies transferred to Saigene in the
agreement. The balance of the note originally was due March 31, 1997, or upon
Saigene completing financing arrangements, whichever occurred first. On June 20,
1997, the note was amended to payments of $10,000 per month up to the closing of
an anticipated private placement which is currently in process by Saigene and
increasing to $20,000 per month after completion of the anticipated private
placement. If the private placement raises $1,500,000 or more, then Epoch is to
receive a payment on the note of $500,000. Additionally, Epoch now holds a 12%
equity position, acquired as compensation for the note extensions, in Saigene.
The note must be repaid in full upon completion of any additional financing in
excess of $1,000,000 or on June 20, 1999, whichever occurs first.
The gain on disposal of diagnostic division represents only that portion of the
gain, $20,000 and $30,000, for which cash payments were received during the
three months ended March 31, 1997 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $2,052,470 from December 31, 1997 to March 31, 1998 primarily
as a result of $3,000,000 of loan proceeds offset by $927,000 of cash used in
operations. In February 1998, Bay City Capital LLC, ("Bay City Capital"), San
Francisco, California, loaned $3,000,000 to the Company from Bay City Capital
Fund I LP as a bridge to the earlier of a public rights offering, other
financing, or February 25, 2000. The loan is accruing interest at 8% per annum.
In the event of a rights offering, Bay City Capital has agreed, subject to
certain conditions, to convert the
9
<PAGE> 10
loan into equity to the extent that the current stockholders do not subscribe
for their proportionate share of the offering. In partial consideration for the
bridge loan and Bay City Capital's agreement to purchase excess shares, if any,
in a rights offering, Bay City Capital received a warrant to purchase 2,000,000
shares of Epoch's Common Stock at a price of $0.90 per share. Bay City Capital
is a merchant banking partnership that was formed by The Craves Group and The
Pritzker Family business interests. The founding partner of The Craves Group,
Fred Craves, Ph.D., is the Chairman and CEO of Epoch. Sanford S. Zweifach,
Epoch's President and Chief Financial Officer, is also the Chief Financial
Officer of Bay City Capital.
The Company's accounts payable and accrued liabilities balances increased by
$42,000 from December 31, 1997 to March 31, 1998 due to normal business
fluctuations.
The Company is focused on the development of its products with the goal of
entering into corporate partnering arrangements to further commercialize the
technology. The Company's primary future needs for capital are for continued
research and development, as well as relocation expenses anticipated to be
incurred in the move to new facilities. 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
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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Bridge Financing Agreement dated as of February 25, 1998, with
form of note and warrant between the Company and Bay City
Capital, LLC. (incorporated by reference to exhibit 10.69 of the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997).
Exhibit 27 Financial Data
(b) REPORTS ON FORM 8-K
None
10
<PAGE> 11
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: ____________, 1998 By: /s/ SANFORD S. ZWEIFACH
------------------------------------
Sanford S. Zweifach
President/Chief Financial Officer
11
<PAGE> 12
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,537,956
<SECURITIES> 0
<RECEIVABLES> 56,435
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,633,951
<PP&E> 166,896
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,870,828
<CURRENT-LIABILITIES> 505,038
<BONDS> 0
0
0
<COMMON> 148,148
<OTHER-SE> 217,642
<TOTAL-LIABILITY-AND-EQUITY> 3,870,828
<SALES> 0
<TOTAL-REVENUES> 40,783
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,078,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,467
<INCOME-PRETAX> (1,008,913)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,008,913)
<DISCONTINUED> 30,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,008,913)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
