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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to __________
Commission file number 0-22170
-----------------------------------------------
EPOCH PHARMACEUTICALS, INC.
(Name of Small Business Issuer in its charter)
Delaware 91-1311592
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1725 220th Street, S.E., No. 104 Bothell, Washington 98021
(Address of principal executive offices) (Zip Code)
(425) 485-8566
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Common Stock Purchase
Warrants (Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
Issuer's revenues for its most recent fiscal year were $187,737
As of February 28, 1998, the aggregate market value of the voting stock
held by non-affiliates, computed by reference to the price at which the stock
was sold on such date, was approximately $12,962,943
14,814,793 shares of Common Stock were outstanding at February 28, 1998
DOCUMENTS INCORPORATED BY REFERENCE
None
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INTRODUCTORY NOTE
This Annual Report on Form 10-KSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and the Registrant intends
that such forward-looking statements be subject to the safe harbors created
thereby. These forward-looking statements include, without limitation, (i) the
development of the Registrant's technology, and (ii) the need for, and
availability of, additional financing.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that the Registrant will be
able to obtain sufficient financing to continue operations, that the
Registrant's technology will continue to be developed, and will not be replaced
by new technology, that Registrant will retain key technical and management
personnel, and that there will be no material adverse change in the Registrant's
operations or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future technology, economic, competitive
and market conditions, and future business decisions, all of which are difficult
or impossible to predict accurately and many of which are beyond the control of
the Registrant. Although the Registrant believes that the assumptions underlying
the forward-looking statements are reasonable, any of the assumptions could
prove inaccurate and, therefore, there can be no assurance that the results
contemplated in forward-looking statements will be realized. In addition, the
business and operations of the Registrant are subject to substantial risks which
increase the uncertainty inherent in such forward-looking statements. In light
of the significant uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be regarded as a
representation by the Registrant or any other person that the objectives or
plans of the Registrant will be achieved.
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PART I
ITEM 1. BUSINESS
THE COMPANY
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 Company was incorporated in Delaware on August 14, 1985, under the
name MicroProbe Corporation and changed its name in December 1995 to Epoch
Pharmaceuticals, Inc.
BACKGROUND
Nucleic acids are found in all living organisms and are the sole
carriers of the genetic code that specifies an organism's makeup. There are two
types of closely related nucleic acids, deoxyribonucleic acid (DNA) and
ribonucleic acid (RNA). DNA carries the permanent genetic information for
construction of all proteins in higher living organisms, while RNA carries a
temporary copy of this information to direct protein synthesis. Proteins perform
most of the normal physiological functions of living organisms, and aberrant
production or activity of proteins may cause numerous diseases.
DNA is comprised of two linear strands that are formed in a double
helix. Each strand is a sequential array of four nucleotide bases: adenine (A),
guanine (G), thymine (T) and cytosine (C), which are linked together in DNA by a
sugar and phosphate backbone. Every gene contains unique sequences of these
bases and it is these unique sequences which constitute the genetic information
or code which guides all cellular processes. The two chains, or strands,
normally comprising DNA are held together by chemical attractions between
opposing paired bases according to certain rules: A
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always pairs with T, G always pairs with C. Figure 1 is a schematic diagram of
double-stranded DNA showing this highly specific interaction between the bases
in the two strands. This process of base pairing, called hybridization, can
occur between DNA strands of any size, as long as the segments hybridizing are
complementary.
[GRAPHIC]
FIGURE 1. SEGMENT OF DOUBLE-STRANDED DNA SHOWING THE BASE PAIR RELATIONSHIP
Hybridization can also occur between a DNA strand and a complementary
RNA strand or two complementary RNA strands. RNA occurs in several forms in
cells, and each of these forms has a different function. Messenger RNA (mRNA) is
copied, or transcribed, from the DNA comprising a gene and carries the genetic
code which is translated into the proteins synthesized by the cell. Transfer RNA
(tRNA) transports the necessary building block amino acids to ribosomes, complex
intracellular structures where protein synthesis occurs through the
"translation" of the mRNA message. Ribosomal RNA (rRNA) functions to bring mRNA
and tRNA together so protein synthesis can occur. The process of transcription
and translation which results in protein synthesis is called gene expression.
Oligonucleotides are well suited for development as pharmaceuticals and
diagnostic probes because they can be designed to bind selectively to, and
inhibit or inactivate specific sequences in, DNA and RNA or the proteins they
produce. The Company's expertise in the chemistry, design and synthesis of
oligonucleotides forms the basis of the Company's research and development
activities for therapeutic and diagnostic products.
DIAGNOSTIC RESEARCH AND DEVELOPMENT
A probe molecule is designed to be complimentary to a unique sequence of
bases in the DNA or RNA of the target cell or organism. This probing is usually
done with short pieces of DNA (oligonucleotides) of known sequence. However,
short oligonucleotides (10 to 18 nucleotides) do not form (as a group) very
stable duplexes and longer oligonucleotides can form stable duplexes that are
not perfect complements (i.e., that have mismatches) leading to errors in
sequence determination. The ability to overcome these issues is the key to the
Company's technology.
Certain naturally occurring antibiotics have a shape which allows them
to "fold" into the "minor groove" of the DNA helix. The Company has found that
it can direct the binding of these "minor groove binders" ("MGB") to a specific
site on DNA by coupling it to a short DNA molecule (an oligonucleotide) such
that when the oligonucleotide reacted with its complement, the MGB folded into
the minor groove of the duplex formed by the oligonucleotide and its complement.
The MGB-oligonucleotide duplex could not be disassociated at temperatures that
would normally separate the two strands. When the MGB was coupled to
oligonucleotides as short as seven nucleotides, the duplex formed with its
complement was stable at temperatures 15(degree) to 30(degree)C higher than the
non-MGB oligonucleotide. However, the duplex was stabilized to this extent only
if a perfect duplex (i.e., with no mismatches) was formed. This finding enabled
the Company to develop MGB-oligonucleotides into exquisite DNA sequence probes
that the Company believes offer the best solutions yet found for the following
situations:
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- Single base mismatch discrimination at high temperatures with
short oligonucleotides;
- Enhancement and sequence-independent equalization of
oligonucleotide hybrid stability concurrently; and
- Mismatch "hiding" with longer oligonucleotide conjugates.
The Company believes that the ability of oligonucleotides to precisely
bind to matching DNA sequences will have broad use in the developing fields of
molecular diagnostics and genomics. The Company believes that the technology
offers immediate advantages to any PCR-based assay where sensitive detection of
mutations is required. The Company anticipates that its use in genotyping and
quantitation of HIV-I to follow load of virus-resistant to inhibitors of reverse
transcriptase or protease. Similarly, it can be used to identify and type other
infectious organisms. The Company also believes that the mismatch sensitivity
offered by its technology is ideal for the detection of inheritable diseases by
prenatal genotyping.
Epoch's technology has potential applications to the emerging area of
genetic testing. The correlation of genetic make-up with phenotypic (physically
evident) response is a developing field. Genetic markers, which are changes in
DNA sequence, can be linked either directly (e.g., sickle cell trait and cystic
fibrosis) or indirectly (e.g., Alzheimer's disease, Type II diabetes) to disease
traits. Some of these genetic markers with single nucleotide changes, Single
Nucleotide Polymorphisms (SNPs), have recently been identified. However, several
hundred thousand more of these sites exist throughout the human genome. True
SNPs are stable genetic markers, likely established thousands of years ago. As
these are characterized, they are being linked to genetic traits. Thus, one can,
by identifying one or more SNP in an individual's DNA, correlate the SNP with
physical or metabolic traits. This will allow the prediction of, for instance,
the individual's propensity to a given disease or responsiveness to a given
drug. This field is rapidly growing and depends upon screening populations to
correlate known physical traits with sets (one or more) of SNPs. In practice,
potential SNPs will be discovered as differences in gene sequences among a few
individuals. However, in order to definitively identify these differences as
true allelic polymorphisms, and to link them to relevant characteristics
(disease propensity, drug response, etc.) large populations must be screened for
the sequence differences. Current sequencing methods are too slow and costly to
be effective for this effort. The Company believes that it will be able to
deliver this technology and analytical tools on a cost-effective basis, thus
making the Company's technology the method of choice in SNP screening.
Other sorts of mutations of a similar nature are known to occur in
precancerous or cancer cells. These mutations in specific genes which regulate
cell growth can be associated with characteristics of different cancers and will
be used in diagnosis and prognosis in cancer therapy. The Company believes that
its technology can be used in these test systems as well.
THERAPEUTIC RESEARCH AND DEVELOPMENT
Epoch's current therapeutic research and development program is focused
on the modification of gene expression by altering cellular genomic DNA using
oligonucleotide targeting
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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. The
Company is currently applying this novel method of gene therapy to the treatment
of certain autoimmune diseases, viral infections and cancers.
Pharmaceutical compounds can be developed from oligonucleotides designed
to act at different points in the process of gene expression. Oligonucleotides
may regulate the expression of targeted genes in two ways, at the mRNA or DNA
level. Whereas "antisense" oligonucleotides act against messenger RNA and are
transient, the Company's gene modifying oligonucleotides ("GMOs") could act
directly and more permanently on the genetic code itself at the DNA level.
Epoch's GMOs form sequence-specific three-stranded complexes with the
genetic double-stranded DNA in order to alter its function. This alteration of
function is due to mutations in the gene at the targeted site induced by the
reactive function of the GMO. Because the DNA sequences of many
disease-associated genes are known, the Company believes that it may be able to
treat these diseases by rationally designing and synthesizing GMO's capable of
altering the chosen sequence of the targeted gene. Depending on the desired
effect, the mutation may be designed so as to eliminate the expression of a
disease-associated gene, or to correct a genetic defect.
Oligonucleotide-based gene modification technology potentially
represents a significant advance over other therapeutic approaches. While
traditional drugs generally act on the millions of proteins generated from mRNA
and antisense drugs are designed to act on the thousands of mRNA molecules
generated from a gene, GMOs act directly against the gene. In contrast to
certain antibiotics that also act directly on DNA, GMOs can be targeted by
design to act only on DNA sequences which are disease-related.
The Company's oligonucleotide technology has led to proprietary advances
which it believes can overcome the current limitations on developing gene
modifying oligonucleotides as pharmaceuticals.
The first of these advances is enzyme mediated complexing (triplexing)
of the oligonucleotide drug with both DNA strands. Under natural cellular
conditions, such as the process of repairing certain damaged DNA, an enzyme (or
a member of a family of enzymes) called recombinase promotes the
sequence-specific binding of single-stranded DNA with double-stranded DNA to
form a three-stranded complex. In the presence of this recombinase, a single
stranded GMO whose sequence can contain all DNA bases can recognize and bind to
its exact complement in the double stranded DNA of a gene, in a rapid and
sequence-specific fashion. Many of the oligonucleotide drugs under investigation
by others contain chemical modifications to the backbone of the oligonucleotide
which, the Company believes, results in the inability of such oligonucleotide to
take advantage of recombinase promoted association with double-stranded DNA. By
using its proprietary technology, Epoch is able to design and synthesize
sufficiently stable gene modifying oligonucleotides with non-modified backbones,
resulting, the Company believes, in the ability to interact with naturally
occurring recombinase to rapidly form triple-stranded complexes involving all
four DNA bases.
The second of these two advances is the crosslinking of the
oligonucleotide to the double-stranded DNA after the recombinase-promoted
sequence recognition and complexing has
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occurred. Crosslinking "freezes" this complex and covalently modifies the
targeted gene. By using its proprietary technology, the Company adds a reactive
site to its oligonucleotides which, when properly aligned in a three-stranded
DNA/oligonucleotide complex, forms a chemically stable (covalent) linkage with a
targeted reactive site on the target DNA. The effect of this reaction will vary
by design. Certain modifications will induce the cell to make errors when it
attempts to repair the lesion. The Company believes that this will irreversibly
inactivate the gene by mutation. Alternatively, rational design of the chemical
modification can, the Company believes, give a targeted change of a single base
pair in a gene at the site of a genetic defect, providing correction of certain
of those genetic defects.
Epoch Pharmaceuticals has refined these crosslinkers so that, in in
vitro studies, crosslinking occurs rapidly and efficiently in systems as complex
as the entire human genome. To enhance the effectiveness of this technology, the
Company believes that by using multiple crosslinkers on a single
oligonucleotide, both DNA strands of the target gene will be irreversibly bound
and the efficiency of inactivation by mutation, hence the therapeutic effect,
will be very high. Alternatively, this binding process may directly inactivate
the gene, halting the expression of disease-associated proteins. In addition to
the pivotal role that the Company's proprietary crosslinking chemistry plays in
the Company's 4-letter targeting technology, it is also applicable to 2-letter,
or triplex, DNA targeting.
The Company believes it was the first to demonstrate the successful
targeting and chemical reaction of an oligonucleotide with both strands of a
double-stranded DNA sequence. It believes that it was the first to show highly
specific targeting and chemical modification of a sequence containing all 4
genetic code letters on a double stranded DNA target, including genomic DNA. It
furthermore believes it has been the first to show covalent modification of a
targeted native gene in living cells.
The Company is currently developing the use of GMOs in a collaborative
drug development program with the Virginia Mason Research Center ("VMRC"),
Seattle, WA. This program will apply GMO technology to type I diabetes and other
autoimmune diseases. VMRC has discovered a gene that indicates predisposition to
type I diabetes, and the Company and its collaborators believe that inhibition
or alteration of the expression of that gene will attenuate the immunologic
response causing the diabetes. Epoch and its collaborators believe that
treatment of blood stem cells with this GMO treatment, followed by
reintroduction of those cells into the patient, will sufficiently alter the
patient's immune response to affect a treatment. If successful, as to which
there can be no assurance, the resultant technology may have broad application
in a wide number of diseases, especially chronic viral diseases, cancer, and
other autoimmune diseases, such as rheumatoid arthritis.
The Company is in the early development stages of its GMO technology and
substantial additional research and development efforts will be required to
develop effective therapeutics, including research and development in the area
of drug delivery. There can be no assurance, however, that the Company will be
able to successfully commercialize its GMO technology.
The Company had previously developed lead compounds in two classes of
protein blockers, one for inhibition of human immunodeficiency virus
replication, and the other for potential
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treatment of certain types of cancers. Due to limited financial resources, the
Company has deferred the substantial additional research and development that
these compounds require.
SALES AND MARKETING
The Company has no recent experience in marketing products and
anticipates that it will seek to enter collaborative arrangements with
pharmaceutical companies to market its therapeutic and diagnostic products. To
date, the Company has not entered into any collaborative arrangements for any of
its proposed products and there can be no assurance that the Company will be
able to enter into any such arrangements on favorable terms or at all.
MANUFACTURING
The Company's current plan for operations is to enter collaborative
arrangements with pharmaceutical companies to manufacture its products. To date,
the Company has not entered into any collaborative arrangements for any of its
proposed products and there can be no assurance that the Company will be able to
enter into any such arrangements on favorable terms or at all.
RESEARCH AND DEVELOPMENT
The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company has assembled a
scientific staff with a variety of complementary skills in a broad range of
advanced research technologies. As of December 31, 1997, the Company had 18
employees engaged in research and development, including 12 with Ph.D.'s and/or
MD.'s.. Of these 18 employees, 4 were engaged in research and development
related to therapeutics and 14 were engaged in research and development related
to technology applications. The Company's in-house research and development
efforts are focused primarily on the development of DNA probes, probe labeling
and detection techniques and reagent chemistries.
In addition to its in-house research programs, the Company collaborates
with academic and research institutions to support research in areas of interest
to the Company. In October 1996, The National Institute of Arthritis and
Musculoskeletal and Skin Disease, of the National Institutes of Health, awarded
a four-year contract to Virginia Mason Research Center, and the Company as
subcontractor, to develop and test a compound designed to inactivate a gene
which causes rheumatoid arthritis. The federal research award is for $1.2
million of which Epoch will receive $584,000 over the four year period. Epoch
earned $159,000 of these funds in 1997, and as of December 31, 1997, there was
$388,000 remaining on this contract.
Virginia Mason, with its expertise in arthritis, will partner with
Epoch, with its expertise in gene-modification, to develop novel therapeutic
compounds for the treatment of arthritis. Such compounds are expected to search
the DNA structure to locate and attach to the affected gene. Researchers then
hope to turn off the genetic element which causes the patient's immune system to
attack cells in patients' joints, resulting in rheumatoid arthritis.
Research and development expenses amounted to approximately $2,149,000
and $2,682,000 for the years ended December 31, 1996, and 1997, respectively.
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PATENTS AND PROPRIETARY TECHNOLOGY
The Company has pursued a patent portfolio to protect its technology. As
of February 20, 1998, the Company had seven issued U.S. patents and three U.S.
patent applications with Notices of Allowance and ten additional U.S. patent
applications in process. There are international patent applications
corresponding to many of the U.S. patents and patent applications. The issued
patents and pending patent applications cover inventions relating to the
components of Epoch's core therapeutics and diagnostics technology. The
expiration dates of these patents range from January 2010 to August 2014.
The therapeutics technology covered includes solid support synthesis of
oligonucleotides, crosslinking oligonucleotides, and oligonucleotides having
antiviral and anticancer activity. The Company's policy is to file patent
applications to protect technology, inventions and improvements that are
important to the development of its business. The Company also relies upon trade
secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
The patent position of biomedical companies, including Epoch, is
uncertain and may involve complex legal and factual issues. Consequently, the
Company does not know whether any of its patent applications will result in the
issuance of any further patents, or whether issued patents will provide
significant proprietary protection or will not be circumvented or invalidated.
Epoch cannot be certain that it was the first creator of inventions covered by
pending patent applications or that it was the first to file patent applications
for such inventions, largely because patent applications in the U.S. are
maintained in secrecy until patents issue, and because publications of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months. Moreover, the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of inventions, which could result in substantial costs to
the Company. 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.
The Company requires its employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with the Company. Each agreement provides that all confidential
information developed or made known to the individual during the course of the
relationship will be kept confidential and not disclosed to third parties except
in specified circumstances. In the case of employees, the agreements provide
that all inventions conceived by an individual shall be the exclusive property
of the Company, other than inventions unrelated to the Company's business and
developed entirely on the employee's own time. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for misappropriation of the Company's trade secrets in the event of
unauthorized use or disclosure of such information.
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COMPETITION
Diagnostic Products
Competition in the development and marketing of infectious disease
diagnostics using a variety of technologies is intense. There are many
pharmaceutical, diagnostic and biotechnology companies, public and private
universities and research organizations engaged in the research and development
of diagnostic products. Most of these organizations have financial,
manufacturing, marketing and human resources greater than those of the Company.
Therapeutics Products
If successfully developed, the Company's products will compete with
existing products for market share. In addition, a number of companies are
pursuing the development of gene therapy products, some of which include
oligonucleotide technology. The Company competes with fully integrated
pharmaceutical companies, most of which have more experience, financial and
other resources and superior expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, marketing and
distribution. Smaller biotechnology companies may also prove to be significant
competitors, particularly through their collaborative arrangements with large
pharmaceutical companies or academic institutions. Many of the Company's
competitors are significantly more advanced in their research and development
activities. The Company currently does not have any collaborative arrangements
with large pharmaceutical companies. Furthermore, academic institutions,
governmental agencies and other public and private research organizations have
conducted and will continue to conduct research, seek patent protection and
establish arrangements for commercializing products. Such products may compete
directly with any products which may be offered by the Company.
The Company expects that competition among any products approved for
sale will be based, among other things, on product efficacy, safety,
reliability, availability, price, patent position and sales, marketing and
distribution capabilities.
GOVERNMENT REGULATION
Manufacturers of therapeutic products are governed by the Food and Drug
Administration ("FDA") regulations as well as regulations of state agencies and
foreign countries. The testing, preparation of necessary applications, and
subsequent FDA review of those applications is expensive and time-consuming.
Failure to comply with applicable requirements can result in FDA refusal to
approve products or in the revocation of approvals or clearances previously
granted.
The process of obtaining FDA approval for therapeutic products has
historically been costly and time consuming. To obtain such approval, a company
must first conduct pre-clinical studies in the laboratory and in animal models
to evaluate the potential efficacy and the safety of a product. The results of
these studies are submitted to the FDA as part of an Investigational New Drug
(IND) application, which must be approved before human clinical trials may
commence. This pre-clinical stage can take several years to complete and there
can be no assurance that such pre-clinical studies will be successful in
securing FDA approval of the IND so that proposed clinical trials can
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commence. Following pre-clinical testing, clinical trials are conducted pursuant
to the FDA-approved clinical protocol, typically in three sequential phases,
although the phases may overlap. In Phase I, clinical trials are conducted with
a small number of human subjects to determine the early safety profile, the
pattern of drug distribution and metabolism. In Phase II, clinical trials are
conducted with groups of patients afflicted with a specific disease in order to
determine preliminary efficacy, optimal dosages and expanded indices of safety.
In Phase III, large scale, multi-center comparative trials are conducted with
patients afflicted with a target disease in order to provide enough data to
demonstrate the efficacy and safety required by the FDA. The results of the
clinical testing for a pharmaceutical product are submitted to the FDA in the
form of a New Drug Application (NDA) for approval to commence commercial
marketing. In addition, detailed manufacturing information is also included with
each submission. In responding to an NDA, the FDA may grant marketing approval,
request additional information or deny the application if the FDA determines
that the application does not satisfy its regulatory approval criteria. The
process of completing clinical testing usually takes a number of years and
requires the expenditure of substantial resources. Additionally, the length of
time it takes for the FDA to evaluate an application for marketing approval
varies considerably as does the amount of pre-clinical and clinical data
required to demonstrate the safety and efficacy of a specific product.
Historically, the FDA has taken a minimum of two to four years to review drug
applications after submission, although the length of the review period may vary
widely depending upon the nature and indications of the proposed product. Also,
the FDA will require post-market reporting, and may require surveillance
programs to monitor the side effects of the drug product. There can be no
assurance that any of the Company's potential products will be approved by the
FDA or approved on a timely basis or that any approvals received will not
subsequently be revoked. In addition, future regulations could affect the
Company's operations or impose additional requirements before products are
approved.
In addition to obtaining FDA approval for each product, each
manufacturing establishment for new drugs must be inspected and approved by the
FDA. Among the conditions for such approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's Good Manufacturing Practices ("GMP") regulations, which must be
followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, money and effort in the
area of production and quality control to ensure full technical compliance.
Therapeutic products that may be developed and sold by the Company
outside the United States will be subject to regulation by the various countries
in which they are to be distributed. In addition, products manufactured in the
United States which have not yet been cleared for domestic distribution will
require FDA approval in order to be exported to foreign countries for
distribution there.
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EMPLOYEES
As of December 31, 1997, the Company had 23 full-time employees, of
which 18 employees were devoted to research and development activities, and 5
were devoted to general and administrative activities. The Company believes it
has been successful in attracting skilled employees with experience in the
biomedical industry, although there can be no assurance that it will continue to
do so in the future. None of the employees is covered by a collective bargaining
agreement, and management considers relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal administrative office and research laboratories
are located in Bothell, Washington, where the Company leases and occupies
approximately 19,000 square feet. The Company's current building lease will
expire in September 1998 at which time the Company intends to relocate to new
facilities. There can be no assurance that the Company will be able to relocate
on terms favorable to the Company, to manage the relocation successfully or that
the relocation will not disrupt the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the OTC Bulletin Board. The following
table presents quarterly information on the high and low bid prices on the OTC
Bulletin Board, which reflects inter-dealer prices, without retail mark-up, mark
down or commission and may not represent actual transactions:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1997 High Low
---- ---
<S> <C> <C>
Fourth Quarter $ 0.84 $ 0.47
Third Quarter 0.75 0.25
Second Quarter 0.72 0.39
First Quarter 1.03 0.59
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1996 High Low
---- ---
<S> <C> <C>
Fourth Quarter $ 1.56 $ 0.63
Third Quarter 1.56 0.95
Second Quarter 2.03 1.50
First Quarter 1.04 0.50
</TABLE>
As of December 31, 1997, there were approximately 198 stockholders of
record of the Company's Common Stock. The Company has not paid any dividends on
its Common Stock since its inception and does not contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future. It is
currently anticipated that earnings, if any, will be used to finance the
development and expansion of the Company's business.
There were no major transactions by the Company during the year ended
December 31, 1997 involving sales of the Company's securities.
The following is a summary of transactions by the Company during the
fiscal year ended December 31, 1996 involving sales of the Company's securities
that were not registered under the Securities Act:
1. On January 16, 1996, the Company issued five year warrants to
purchase 250,000 shares of Common Stock to Burrill & Craves, a consulting firm
of which Dr. Craves is a principal, and 345,000 shares of Common Stock to the
Olmsted Group, L.L.C., a merchant banking firm of which Mr. Zweifach is a
principal, at an exercise price of $0.50 per share in consideration for the
services performed by Burrill & Craves and the Olmsted Group, L.L.C.,
respectively, in connection with the sale of the Corporation's then existing
diagnostics division and other corporate matters. The warrants vest as follows:
(i) 33 1/3% at issuance; (ii) 33 1/3% upon the earlier of (1) June 30, 1997, or
(2) the date on which the corporation enters into an agreement with a corporate
partner; and
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<PAGE> 14
(iii) 33 1/3% on January 1, 1999. All such warrants shall vest, to the extent
not already vested upon a change of control.
2. On June 26, 1996, the Company issued 5,000,000 shares of Common Stock
and warrants to purchase 2,500,000 shares of Common Stock at an exercise price
of $2.50 to institutional and accredited individual investors, for an aggregate
purchase price of $5 million. In connection therewith, pursuant to an agreement
with David Blech, its financial advisor on the Private Placement, the Company
issued to Mr. Blech five year warrants to purchase 500,000 shares of Common
Stock at $1.00 per share.
3. On October 1, 1996, the Company issued 457,143 shares of Common Stock
at $1.75 per share and warrants to purchase an additional 900,000 shares of
Common Stock, 450,000 of which are at an exercise price of $2.00, and 450,000 or
which are at an exercise price of $3.00 to VIMRx.
Exemption from the registration provisions of the Securities Act for the
transactions described above is claimed under Section 4(2) of the Securities
Act, among others, on the basis that such transactions did not involve any
public offering and the purchasers were sophisticated with access to the kind of
information registration would provide.
In June 1996, the Company announced that it intended to exchange for
every two Redeemable Common Stock Purchase Warrants, which were issued in
conjunction with the Company's public offering in September 1993 at $6.50 per
share, one new warrant to purchase one share of the Company's Common Stock until
June 20, 2001, (the "Public Warrants"), that is exercisable at $2.50 per share
(the "Exchange Warrants"). In June 1997, this exchange of warrants was
completed, with 2,603,825 of the Public Warrants being exchanged for 1,301,912
of the Exchange Warrants. Each Exchange Warrant is redeemable by the Company at
any time after eighteen months from the date that they were issued at $0.05 per
warrant, provided that the closing trading price per share of Common Stock is at
least $3.75 for twenty consecutive trading days. Exemption from registration
provisions of the Securities Act for this transaction is claimed under section
3(a)(9) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Since its inception in 1985, the Company has devoted its principal
efforts toward research and development. The Company has an accumulated deficit
of $52 million as of December 31, 1997. The Company expects to incur substantial
operating losses for the next several years as the Company continues research
and development spending in applying its oligonucleotide-based technology to the
expanding areas of genomics and molecular diagnostics, as well as for
therapeutic applications.
In June 1997, the Company exchanged for every two Redeemable Common
Stock Purchase Warrants, which were issued in conjunction with the Company's
public offering in September 1993 at $6.50 per share, one new warrant to
purchase one share of the Company's Common Stock until June 20, 2001, (the
"Public Warrants"), that is exercisable at $2.50 per share (the "Exchange
Warrants"). 2,603,825 of the Public Warrants were exchanged for 1,301,912 of the
Exchange
13
<PAGE> 15
Warrants. Each Exchange Warrant is redeemable by the Company at any time after
eighteen months from the date that they were issued at $0.05 per warrant,
provided that the closing trading price per share of Common Stock is at least
$3.75 for twenty consecutive trading days. The Company received no proceeds from
the exchange of the Exchange Warrants for the Public Warrants.
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 or other
financing. 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.
RESULTS OF OPERATIONS
The following discussion of results of operations reflects the Company's
diagnostics division as discontinued operations.
Years Ended December 31, 1996 and 1997
Research contract revenue reflects revenue from U.S. government grants
and contracts and subcontracts.
Research and development expenses increased in total by $534,000 for the
year ended 1997 from the prior year. This increase is the result of increased
research funded with proceeds from the private placement completed in June 1996.
General and administrative expenses increased $257,000 in the year ended
December 31, 1997 compared to the prior year. General and administrative
expenses in the year ended 1997 included $263,000 in fees toward filing patents
on new technologies, as compared to $87,000 in 1996. The Company believes that
these patents, if issued, will improve the Company's proprietary position with
regards 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.
Offsetting the increase in patent fees, the Company's general legal
expense was $82,000 less in 1997 than in 1996. This reduction was the result of
normal fluctuations in business transactions
14
<PAGE> 16
requiring legal counsel. Expenses in 1997 were further reduced by $21,000
compared to 1996 as deferred compensation from stock options became fully
amortized during the year. There is no deferred compensation remaining to be
amortized as of December 31, 1997. Further contributing to the variance, in July
1996 the In Re Blech Securities Litigation suit was dismissed. Accordingly,
$250,000 of estimated costs which had been accrued for this matter was reversed
as a reduction of expenses in the year ended December 31, 1996. Additional
variations in general and administrative expenses are the result of normal
business fluctuations.
Interest income in the year ended December 31, 1997 decreased compared
with the prior year's results due to lower investable funds during 1997.
Interest expense decreased in 1997 as proceeds from the June 1996 private
placement were used to pay off debt. Additionally, 1996 included amortization of
$122,000 of discount on notes payable due to repricing of warrants associated
with a bridge financing which was completed in 1995.
Other income in 1997 includes $116,000 received from Saigene Corporation
("Saigene") as payment for administrative support functions as well as for
rented lab and office space. As of March 1998, Saigene has secured separate
facilities and plans to relocate in April 1998. These administrative support
functions are not expected to continue beyond April 1998.
The income (loss) 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, $67,000 and $130,000, for which cash payments were received during
1996 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents of
$1,485,000. On February 26, 1998, the Company received $3,000,000 from Bay City
Capital as a bridge to the earlier of a public rights offering that the Company
plans to undertake, or other financing. Combined, these cash and cash
equivalents provide sufficient working capital to operate until early 1999,
based on the Company's current plan of operation. Additionally, the Company
anticipates cash receipts of $388,000 over three years under the Virginia Mason
subcontract. See "Business -
15
<PAGE> 17
Therapeutic Research and Development." The Company's current operations do not
generate sufficient working capital to meet current and anticipated future
obligations.
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 its then existing diagnostics division in 1995. 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 has
no commitments for such financing and there can be no assurance that such
financing will be available on satisfactory terms, if at all.
Cash decreased by $3,405,000 from December 31, 1996 to December 31, 1997
primarily due to normal expenditures on the Company's operations. The comparable
period of the prior year, December 31, 1995 to December 31, 1996, had a cash
increase of $1,151,000 due to the net cash generated by the sale of shares and
warrants offset by normal expenditures on the Company's operations.
The changes in accounts payable and accrued liabilities in 1997 and 1996
are the result of normal business fluctuations.
Plan of Operations and Capital Requirements
Following the consummation of the Sale of its then existing diagnostics
division in November 1995, the Company has focused substantially all of its
resources on the development of its therapeutic products with the goal of
entering into corporate partnering arrangements to further commercialize the
technology. See "Business-Therapeutic Research and Development." The Company,
however, has recently discovered that its compounds and techniques 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. From the proceeds of the Bridge Financing and any future
financing the Company plans to further develop and verify applicability of its
compounds and techniques in the developing fields of molecular diagnostics and
genomics and to determine how its technology may be exploited.
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 anticipates operating with approximately 23
employees.
The Company is focused on the development of its products with the goal
of entering into corporate partnering arrangements to further commercialize the
technology. See "Business-Therapeutics." The Company's primary future needs for
capital are for continued research and
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<PAGE> 18
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, relocation expenses and
other factors. The Company anticipates operating with approximately 23 employees
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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company required by this item begin on
Page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a)OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Fred Craves, Ph.D. 52 Chairman of the Board of Directors and
Chief Executive Officer
Richard Dunning 52 Director
Kenneth L. Melmon, M.D. 63 Director
Rich B. Meyer, Ph.D. 54 Vice President, Research and Development,
Chief Scientific Officer
Robert Wydro, Ph.D. 49 Vice President, Research Management
Sanford S. Zweifach 42 President, Chief Financial Officer, and
Director
</TABLE>
Dr. Craves joined the Company as Chairman of the Board of Directors in
July 1993 and became Chief Executive Officer in April 1994. Since January 1997
Dr. Craves has been a principal of the consulting firm of The Craves Group. From
January 1994 until January 1997, Dr. Craves was a principal of the consulting
firm, Burrill & Craves. From January 1991 to May 1993, he was President and
Chief Executive Officer of Berlex Biosciences, a division of Schering A.G., and
Vice President of Berlex Laboratories, Inc., the U.S. subsidiary of Schering
A.G. From 1981 to 1982, Dr. Craves was Chief Executive Officer and, from 1982 to
June 1990, was Chairman, Chief Executive Officer and President of Codon, a
biotechnology company. Following Codon's acquisition by Schering A.G., Dr.
Craves was President and Chief Executive Officer of Codon from June 1990 to
December 1990. From 1981 to 1983, Dr. Craves was also a co-founder and director
of Creative Biomolecules. From 1979 to 1981, he was a sales and marketing
representative for Millipore Corporation. Dr. Craves received his Ph.D. in
Pharmacology and Experimental Toxicology from the University of California, San
Francisco. Dr. Craves is also Chairman of the Board of Directors of NeoRx
Corporation and a director of InCyte Pharmaceuticals, Inc.
Mr. Dunning has been a Director of the Company since October 1996. Since
April 1996, Mr. Dunning has served as the President, Chief Executive Officer,
and as a Director of VIMRx Pharmaceuticals, Inc. From 1991 to 1996, Mr. Dunning
served as Executive Vice President and Chief Financial Officer of the Dupont
Merck Pharmaceutical Company. Mr. Dunning currently serves as a director of
several other companies, including Innovir laboratories, Inc. and Endorex Corp.
Dr. Melmon has been a Director of the Company since November 1991. Dr.
Melmon is Professor of Medicine at Stanford University School of Medicine, where
he joined the faculty in 1978. He was previously on the faculty at the
University of California, San Francisco, specializing
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<PAGE> 20
in clinical pharmacology. He is a member of the Institute of Medicine-National
Academy of Sciences, and a past president of the American Federation for
Clinical Research and the American Association of Clinical Investigation. He
holds an M.D. from the University of California Medical Center. He is also on
the Board of Directors of LLysis.
Dr. Meyer joined Epoch in October 1986 as Director of Nucleic Acid
Chemistry. He has been Vice President, Research and Development of the Company
since August 1991 and was appointed Chief Scientific Officer in June 1993. From
1985 to 1986, Dr. Meyer was a group leader at the Nucleic Acid Research
Institute, a joint venture of ICN Pharmaceuticals, Inc. and Eastman Kodak
Company. From 1980 to 1985 he was Associate Professor of Medicinal Chemistry and
in 1985, Acting Associate Dean for Research of the Graduate School at Washington
State University. From 1975 to 1980, he was Assistant Professor in the
Department of Pharmaceutical Chemistry at the University of California, San
Francisco. Dr. Meyer received his Ph.D. in Chemistry from the University of
California, Santa Barbara.
Robert M. Wydro, Ph.D joined Epoch in August 1996 as Vice President of
Research Management. Dr. Wydro worked for six years from 1981 to 1987, with
Integrated Genetics, Framingham, Massachusetts, and an additional four years,
through 1991, following Integrated Genetics being acquired by Genzyme
Corporation, Cambridge, Massachusetts. During the last two years at Genzyme, he
was Associate Director of Cardiovascular Research. From 1991 to 1995 Dr. Wydro
worked for Berlex BioSciences, Richmond, California as Director of Preclinical
Development and Head of one of the Strategic Research Units for Cardiovascular
Therapeutics. Dr. Wydro received his Bachelor of Arts degree in Biology from
Lycoming College. He received his Master of Science degree in Biology from
Indiana University and his Ph.D. in Microbiology from the University of Ottawa,
Ottawa, Ontario, Canada.
Mr. Zweifach joined the Company in January 1995 as President and Chief
Financial Officer. From July 1994 to September 1994, and since September 1996,
Mr. Zweifach also served as a director of the Company. Since July 1997, Mr.
Zweifach has served as the Chief Financial Officer of Bay City Capital and,
since January 1995, Mr. Zweifach has served as a Managing Director of The
Olmsted Group, L.L.C., a merchant banking firm. Mr. Zweifach was a Managing
Director of D. Blech & Co. from 1991 to September 1994, and prior to 1991, he
was a Vice President of J.S. Frelinghuysen & Co., Inc., a risk capital and
merchant banking firm. He is a Certified Public Accountant and holds an M.S. in
Human Physiology from the University of California, Davis.
Dr. Craves and Mr. Zweifach are also employed by other entities and,
although they devote a substantial portion of their time to the Company, they
also devote a portion of their time to their positions at the other entities.
Both Dr. Craves and Mr. Zweifach have been engaged by the Company pursuant to
Consulting Agreements.
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<PAGE> 21
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Based upon its review of the copies of reporting forms furnished to the
Company, the Company believes that all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934 applicable to its directors, officers and
any persons holding ten percent or more of the Company's Common Stock with
respect to the Company's fiscal year ended December 31, 1997, were satisfied.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation paid or accrued by the Company for services rendered during the
fiscal years ended December 31, 1996 and 1995, to the Company's Chief Executive
Officer, and the Company's two other most highly compensated executive officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
----------------------------------------------- Securities
Name and Other Annual Underlying
Principal Position Year Salary($)(1) Bonus($) Compensation($) Options(#) All Other
------------------ ---- ------------ -------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fred Craves 1997 $100,000 $ __ $ __ __ $ __
Chief Executive Officer(2) 1996 125,000
Sanford S. Zweifach 1997 140,625 0 __ __ __
President and 1996 135,000 5,625
Chief Financial Officer
Rich B. Meyer, Jr 1997 145,008 2,789 __ 14,900 __
Vice President, Research 1996 140,016 2,693
and Development
Robert Wydro 1997 140,106 2,693 __ 5,000 __
Vice President, Research 1996 52,506 2,693 100,000
Management
</TABLE>
(1) Includes amounts deferred during 1996 and 1997 under the Company's
401(k) employee savings and retirement plan. To date, the Company has
not made any matching contributions under that plan.
(2) Includes $25,000 payment earned in 1993, paid in 1996.
20
<PAGE> 22
OPTION MATTERS
Option / SAR grants in the last fiscal year
<TABLE>
<CAPTION>
Name Number of Securities % of Total Options/ Exercise Expiration Date(2)
Underlying Options / SARS Granted to or Base
SARs Granted (#) (1) Employees in Price
Fiscal Year
<S> <C> <C> <C> <C>
Rich B. Meyer, Jr. 14,900 5.5% $0.75 February 25, 2007
Robert Wydro 5,000 1.8% $0.75 February 25, 2007
</TABLE>
(1) The options vest 25% on February 26, 1998 and 2.083% on the 26th day of
each month thereafter until February 26, 2001.
(2) Options granted have a term of 10 years, subject to earlier termination
in certain circumstances related to termination of employment.
None of the Company's executive officers exercised options during the
fiscal year ended December 31, 1997.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Employment Agreements. Effective August 30, 1994, the Company entered
into a one-year employment agreement with Dr. Meyer. The Company and Dr. Meyer
have extended the agreement for successive periods and, most recently, the
agreement has been extended to December 31, 1998. Upon termination of Dr.
Meyer's services for reasons other than cause during the term of the agreement,
Dr. Meyer will be entitled to either notice or severance pay at his then current
salary, equal to the greater of the balance of the term or six months, subject
to reduction in certain circumstances. In the event of death or disability
during the term, Dr. Meyer will be entitled to six months salary (less any
amounts received from disability insurance). In addition, upon termination, Dr.
Meyer is subject to a five-year non-disclosure obligation and a six-month
non-competition obligation..
Consulting Agreements. In July 1993, the Company entered into a one-year
consulting agreement with Dr. Craves. The Company and Dr. Craves have extended
the consulting agreement for successive one year periods and, in conjunction
with the Bay City Bridge Loan, the agreement has been extended through February
24, 2000.
In January 1995, the Company entered into a consulting agreement with
Mr. Zweifach under which he received monthly payments of $11,250. In conjunction
with the Bay City Bridge Loan, the Company has extended the term of the contract
to run through February 24, 2000.
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<PAGE> 23
Dr. Melmon also serves as a consultant to the Company and as a member of
the Company's Scientific Advisory Board and receives compensation in those
capacities.
DIRECTORS' COMPENSATION
The Company pays all non-employee directors a fee of $1,000 for each
Board of Directors meeting attended in person. In July 1993, the Company adopted
a Non-Employee Directors Option Plan (the "Directors Plan") pursuant to which
the Company granted each non-employee director (except Dr. Craves) a
fully-vested 10-year option to purchase 10,000 shares of Common Stock at an
exercise price of $4.00 per share. In addition, upon each anniversary of the
inception of the Directors Plan each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join the
Board of Directors will receive, upon each anniversary of joining the Board of
Directors, fully-vested 10-year options to purchase 5,000 shares of Common Stock
at the then current fair market value.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1997 certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of its Common Stock, (ii) each director, (iii) each of the
executive officers named in the Summary Compensation Table, and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address Beneficially Owned (1) Outstanding Shares
- ---------------- ----------------------- ---------------------
<S> <C> <C>
Grace Brothers Ltd 5,121,193 34.6%
1560 Sherman Avenue
Evanston, Illinois 60201
Entities and Persons affiliated with 1,089,900 7.4%
Biotechnology Investment Group, L.L.C. (2)
c/o Collinson Howe Venture Partners
1055 Washington Blvd
Stamford, Connecticut 06901
The Edward Blech Trust (3) 925,000 6.2%
c/o Rabbi Mordechai Jofan
418 Avenue I
Brooklyn, New York 11230
VIMRx Pharmaceuticals, Inc.(4) 907,143 6.1%
2751 Centerville Road, Suite 210
Little Falls II
Wilmington, Delaware 19808
Fred Craves, Ph.D. (5) 852,500 5.8%
</TABLE>
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<PAGE> 24
<TABLE>
<S> <C> <C>
United Equities Commodities Company (6) 750,000 5.1%
c/o Phillippe D. Katz
160 Broadway
New York, New York 10038
The Olmsted Group (7) 345,000 2.3%
81 Main Street
White Planes, NY 10601
Rich Meyer, Jr., Ph.D. (8) 190,565 1.3%
Kenneth L. Melmon, M.D. (9) 75,999 *
Sanford Zweifach (10) 55,000 *
Richard C. Dunning (11) 5,000 *
All executive officers and directors as a group
(5 persons) (12) 1,152,064 7.8%
</TABLE>
* Less than one percent
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock.
(2) Biotechnology Investment Group, L.L.C. ("BIG") is a limited liability
company which invests in and otherwise deals with securities of biotechnology
and other companies. The members of BIG are (i) the managing member, Collinson
Howe Venture Partners, Inc. ("CHVP"), an investment management firm of which
Jeffrey J. Collinson is President, sole director and majority stockholder and
Timothy F. Howe is Vice President and a stockholder. (ii) The Edward Blech Trust
("EBT"), a trust for the benefit of the minor child of David Blech, a financial
advisor to the Company, and (iii) Wilmington Trust Company ("WTC"), as voting
trustee under a voting trust agreement (the "Voting Trust Agreement"), among
WTC, BIG and BIO Holdings, L.L.C. ("Holdings"). The managing member of BIG is
CHVP. Each of Citibank, N.A. ("Citibank") and Holdings has the right pursuant to
the Voting Trust Agreement to direct the actions of WTC as a member of BIG. WTC,
as the member holding a majority interest in Holdings, has the right to direct
the actions of Holdings under the Voting Trust Agreement. Citibank, pursuant to
a separate voting trust agreement among WTC, David Blech and Holdings, has the
right to direct the actions of WTC as a member of Holdings with respect to the
rights of Holdings under the Voting Trust Agreement. By virtue of their status
as members of BIG, each of CHVP and EBT may be deemed the beneficial owner of
all shares held of record by BIG (the "Biotechnology Group Shares"). By virtue
of his status as the majority owner and controlling person of CHVP, Jeffrey J.
Collinson may also be deemed and beneficial owner of the Biotechnology Group
Shares. Each of CHVP, EBT and Jeffrey J. Collinson disclaims beneficial
ownership of any Biotechnology Group Shares except to the extent, if any, of
such person's actual pecuniary interest therein. Includes 350,000 warrants
exercisable within 60 days.
(3) Includes 425,000 shares subject to warrants exercisable within 60 days.
23
<PAGE> 25
(4) Includes 450,000 shares subject to warrants exercisable within 60 days.
(5) Includes 491,666 shares subject to warrants and options exercisable within
60 days, including warrants to purchase 166,666 shares which are held by Burrill
& Craves, of which Fred Craves is a general partner. Fred Craves disclaims
beneficial ownership of such warrants and the shares underlying such warrants
except to the extent of his pecuniary interest in Burrill & Craves.
(6) Includes 250,000 shares subject to warrants exercisable within 60 days.
(7) Includes 230,000 shares subject to warrants exercisable within 60 days.
(8) Includes 133,894 shares subject to options exercisable within 60 days.
(9) Includes 75,999 shares subject to warrants and options exercisable within 60
days.
(10) Includes 30,000 shares subject to options and warrants exercisable within
60 days.
(11) Excludes 907,143 shares including warrants to purchase 450,000 shares of
Common Stock held by VIMRx Pharmaceuticals, Inc. Mr. Dunning is the President
and Chief Executive Officer of VIMRx Pharmaceuticals, Inc. and disclaims
beneficial ownership of all such shares. Includes 5,000 shares subject to
options exercisable within 60 days.
(12) Includes directors' and executive officers' shares listed above, including
731,543 shares subject to warrants and options exercisable within 60 days.
Excludes 907,143 shares including warrants to purchase shares of Common Stock
held by VIMRx Pharmaceuticals, Inc.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 16, 1996 the Company issued five year warrants to purchase
250,000 shares of Common Stock to Burrill & Craves, a consulting firm of which
Dr. Craves was a principal, and 345,000 shares of Common Stock to the Olmsted
Group, L.L.C., a merchant banking firm of which Mr. Zweifach is a Managing
Director , at an exercise price of $0.50 per share, in consideration for the
services performed by Burrill & Craves and The Olmsted Group, L.L.C.,
respectively, in connection with the sale of the Corporation's then existing
diagnostics division and other corporate matters. The warrants vest as follows:
(i) 33 1/3% at issuance; (ii) 33 1/3% upon June 30, 1997, and (iii) 33 1/3% on
January 1, 1999. All such warrants shall vest, to the extent not already vested,
upon a change of control.
In June 1996, the Company completed the Private Placement of Units, each
Unit consisting of one share of the Company's Common Stock and one warrant to
purchase 0.5 shares of the Company's Common Stock. The Company sold a total of 5
million Units, for an aggregate purchase price of $5 million to institutional
and accredited individual investors. The term of the warrants is five years, and
they are exercisable at $2.50 per share (or $1.25 per 0.5 shares). Each warrant
is redeemable by the Company at any time after eighteen months from the date
that they are issued at $0.05 per warrant, provided that the closing trading
price per share of Common Stock is at least $3.75 for twenty (20) consecutive
trading days.
24
<PAGE> 26
In connection with the Private Placement, pursuant to an agreement with
David Blech, its financial advisor on the Private Placement, the Company paid
fees of $350,000 to Mr. Blech. In addition, the Company canceled fifty percent
(50%) of the obligations of Mr. Blech arising in connection with the
transactions involving Ribonetics, including the "put" rights contained in an
agreement dated December 1, 1993 between the Company and Mr. Blech. The
aggregate amount canceled was $1,635,588. The balance is accruing interest at
the minimum applicable federal rate. As the obligation had been fully reserved,
and the remaining balance is fully reserved, neither the cancellation nor the
remaining obligation impacted the Company's results of operations. The Company
also issued to Mr. Blech five year warrants to purchase 500,000 shares of Common
Stock at $1.00 per share. The warrants are not exercisable for one year and are
held in escrow by the Company until the balance of the Ribonetics debt is
satisfied.
In February 1998, 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 that the Company intends to undertake, or
other financing. 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 and at a price of $0.90. 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-KSB:
(a) Exhibits:
(b) Reports on Form 8-K:
None
25
<PAGE> 27
EPOCH PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
NUMBER
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Independent Auditors' Report ......................... F-1
Balance Sheet as of December 31, 1997 ................ F-2
Statements of Operations for the years ended
December 31, 1996 and 1997 ...................... F-3
Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1997 ...................... F-4
Statements of Cash Flows for the years ended
December 31, 1996 and 1997 ...................... F-5
Notes to Financial Statements ........................ F-6
</TABLE>
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Epoch Pharmaceuticals, Inc.
We have audited the accompanying balance sheet of Epoch Pharmaceuticals, Inc.
(formerly MicroProbe Corporation) as of December 31, 1997, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the financial position of Epoch Pharmaceuticals, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 1997 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
February 27, 1998
F-1
<PAGE> 29
EPOCH PHARMACEUTICALS, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-----------------
<S> <C>
Current assets:
Cash and cash equivalents ............................ $ 1,485,483
Receivables .......................................... 63,287
Prepaid expenses ..................................... 38,801
------------
Total current assets .............................. 1,587,571
Equipment and leasehold improvements, net .................. 160,011
Other assets ............................................... 65,064
------------
Total assets ........................................ $ 1,812,646
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 236,970
Accrued liabilities .................................. 226,549
------------
Total current liabilities .......................... 463,519
------------
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 ................................. 148,148
Additional paid-in capital ........................... 52,930,787
Accumulated deficit .................................. (51,729,808)
------------
Total stockholders' equity ......................... 1,349,127
------------
Commitments, contingency and subsequent events
Total liabilities and stockholders' equity ................. $ 1,812,646
============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 30
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Research contract revenue ............................ $ 37,029 $ 187,737
------------ ------------
Operating expenses:
Research and development ....................... 2,148,615 2,682,269
Selling, general and administrative ............ 1,256,495 1,513,955
------------ ------------
Total operating expenses .................. 3,405,110 4,196,224
------------ ------------
Operating loss ............................ (3,368,081) (4,008,487)
Other income (expense):
Interest income ................................ 189,813 157,215
Interest and financing expense ................. (183,371) (3,835)
Other income ................................... 35,795 120,300
------------ ------------
Loss from continuing operations ........... (3,325,844) (3,734,807)
Discontinued operations:
Income (loss) from operations
of Diagnostics Division ................... (193,386) --
Gain on disposal of Diagnostics Division ....... 67,072 130,000
------------ ------------
Net (loss) ................................ (3,452,158) (3,604,807)
============ ============
Loss per share from continuing operations -
basic and diluted .............................. $ (0.31) $ (0.25)
Income (loss) per share from discontinued operations -
basic and diluted .............................. (0.01) 0.01
============ ============
Net (loss) per share - basic and diluted .. $ (0.32) $ (0.24)
============ ============
Weighted average number of common
shares outstanding -
basic and diluted ......................... 10,854,993 14,755,462
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 31
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Stock Additional Deferred Accumulated Stockholders
Shares Amount Paid-In Capital Compensation Deficit Equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,023,400 70,234 46,860,059 (99,512) (44,672,843) 2,157,938
Private placement of stock 5,000,000 50,000 4,582,500 4,632,500
Sale of shares to VIMRx 457,143 4,571 795,429 800,000
Exercise of stock options 43,313 434 16,561 16,995
Exercise of warrants 2,200,000 22,000 638,000 660,000
Amortization of deferred compensation 60,483 60,483
Net loss for the year ended December 31, 1996 (3,452,158) (3,452,158)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 14,723,856 147,239 52,892,549 (39,029) (48,125,001) 4,875,758
Exercise of stock options 90,937 909 38,238 39,147
Amortization of deferred compensation 39,029 39,029
Net income
Net loss for the year ended December 31, 1997 (3,604,807) (3,604,807)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 14,814,793 148,148 52,930,787 -- (51,729,808) 1,349,127
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 32
EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) ............................................. $(3,452,158) $(3,604,807)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization ..................... 201,963 196,339
Amortization of discount on notes payable ......... 122,326 --
Changes in operating assets and liabilities:
Other assets ................................. 90,425 (17,271)
Accounts payable and accrued liabilities ..... (462,288) 71,756
----------- -----------
Net cash used in operating activities ............. (3,499,732) (3,353,983)
----------- -----------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (132,816) (78,851)
Proceeds from disposal of assets .................. 3,400
----------- -----------
Net cash used in investing activities ............. (129,416) (78,851)
----------- -----------
Cash flows from financing activities:
Principal payments on notes payable ............... (1,329,133) (11,188)
Proceeds from sale of common stock ................ 5,432,500 --
Exercise of warrants and stock options ............ 676,995 39,147
----------- -----------
Net cash provided by financing activities ......... 4,780,362 27,959
----------- -----------
Net increase (decrease) in cash and cash equivalents ... 1,151,214 (3,404,875)
Cash and cash equivalents at beginning of year ......... 3,739,144 4,890,358
----------- -----------
Cash and cash equivalents at end of year ............... $ 4,890,358 $ 1,485,483
=========== ===========
Supplemental disclosure of cash flow information -
cash payments made during the year for interest .. $ 89,853 $ 3,836
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 33
EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
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 then existing diagnostics assets to Becton,
Dickinson and Company (see note 8). The Company's continuing activities are
focused on the development of therapeutic technologies and products. The
Company's revenues from continuing operations to date are primarily from Federal
government and other research grants and contracts.
Discontinued Operations
In 1995, the Company sold its then existing diagnostics division and in
1996 sold its remaining diagnostic technologies (see note 8). Accordingly,
amounts related to the diagnostics division have been reported as discontinued
operations.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are provided on the straight-line method over the shorter of
the assets' estimated useful lives, generally three to five years, or the lease
term.
For long-lived assets, including equipment and leasehold improvements,
the Company evaluates the carrying value of the assets by comparing the
estimated future cash flows generated from the use of the asset and its eventual
disposition with the assets reported net book value. The carrying value of
assets are evaluated for impairment when events or changes in circumstances
occur which may indicate the carrying amount of the asset may not be
recoverable.
Revenue Recognition
Research contract revenue is recognized as research and development
activities are performed under the terms of related agreements.
F-6
<PAGE> 34
Income Taxes
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on the deferred
tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date. A valuation allowance is recorded for deferred
tax assets when it is more likely than not that such deferred tax assets will
not be realized.
Stock-Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees and related Interpretations in measuring compensation costs for its
stock option plans. The Company discloses proforma net income (loss) and net
income (loss) per share as if compensation cost had been determined consistent
with Statement of Financial Accounting Standard (FAS) No. 123, Accounting for
Stock-Based Compensation.
Net 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
diluted EPS. Basic EPS and diluted EPS have been restated for the year ended
December 31, 1996. 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.
Financial Instruments
The Company has financial instruments consisting of cash and cash
equivalents, receivables, and accounts payable. The fair value of the Company's
financial instruments based on their short term nature and current market
indicators approximates their carrying amount.
Cash Equivalents
All highly liquid investments with a maturity of three months or less at
date of purchase are considered to be cash equivalents.
F-7
<PAGE> 35
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<S> <C>
Machinery and equipment ...................... $ 1,759,418
Furniture and fixtures ....................... 329,422
Leasehold improvements ....................... 145,723
-----------
$ 2,234,563
Less accumulated depreciation and amortization (2,074,552)
-----------
Equipment and leasehold improvements, net .... $ 160,011
===========
</TABLE>
(3) RETIREMENT SAVINGS PLAN
The Company has a profit sharing plan, which is qualified under
Section 401(k) of the United States Internal Revenue Code. The plan allows
eligible employees to contribute up to 20% of their salary. The Company, at its
discretion, makes matching contributions to the plan. No matching contributions
were made to the plan in 1996 or 1997.
(4) EQUITY
The Company's three stock based compensation plans are as follows:
The 1991 Plan
In August 1991, the Company established the 1991 Incentive Stock
Option Plan, Nonqualified Stock Option and Restricted Stock Purchase Plan (the
"1991 Plan"). The 1991 Plan provides for the granting of options or rights to
purchase up to 1,436,470 shares of common stock. Incentive stock options were
granted at the fair market value on the date of grant and nonqualified options
were granted at not less than 85% of the fair market value on the date of the
grant. All options generally expire 10 years from the date of grant. At December
31, 1997, there were 366,914 shares available for grant under this plan.
F-8
<PAGE> 36
The 1993 Plan
In July 1993, the Company established the 1993 Incentive Stock
Option, Nonqualified Stock Option and Restricted Stock Purchase Plan (the "1993
Plan"). The 1993 Plan provides for the grant of options or rights to purchase up
to 500,000 shares of Common Stock to employees, officers, directors and
consultants of the Company. Under the 1993 Plan, incentive stock options must
have an exercise price at least equal to the fair market value of the Common
Stock on the date of grant. Nonqualified stock options and rights to purchase
restricted stock must have an exercise price at least equal to 85% of the fair
market value of the Common Stock on the date of grant. Options are exercisable
over a period of ten years and vest over a period of three years after the date
of grant. At December 31, 1997 there were 220,619 shares available for grant
under this plan.
The Directors Plan
In July 1993, the Company adopted a Non-Employee Directors Option
Plan (the "Directors Plan") pursuant to which the Company granted each
non-employee director who was a director prior to July 27, 1993, a fully-vested
10-year option to purchase 10,000 shares of Common Stock at an exercise price of
$4.00 per share for a total of 60,000 shares. In addition, upon each anniversary
of the inception of the Directors Plan, each non-employee director will receive
fully-vested 10-year options to purchase 5,000 shares of Common Stock at the
then current fair market value. Non-employee directors who subsequently join the
Board of Directors will receive, upon each anniversary of joining the Board of
Directors, fully-vested 10-year options to purchase 5,000 shares of Common Stock
at the then current fair market value.
A summary of the status of the Company's three fixed stock option
plans follows.
<TABLE>
<CAPTION>
1996 1997
-------------------------- ---------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ............... 826,765 $1.96 1,307,758 $1.84
Granted ........................................ 667,879 1.33 271,999 0.77
Exercised ...................................... (43,313) 0.39 (90,937) 0.69
Forfeited ...................................... (143,573) 0.62 (365,304) 1.76
---------- ---------
Outstanding at end of year ..................... 1,307,758 1.84 1,123,516
========== =========
Options exercisable at year end ................ 696,016 2.06 636,052 1.80
Weighted - average fair value of options granted
during the year ................................ $ 0.28 $0.77
</TABLE>
F-9
<PAGE> 37
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- ----------------------------------------
RANGE OF EXERCISE NUMBER WEIGHTED-AVERAGE WEIGHTED NUMBER WEIGHTED-
PRICES OUTSTANDING REMAINING YEARS AVERAGE EXERCISABLE AVERAGE
AT 12-31-97 CONTRACTUAL LIFE EXERCISE PRICE AT 12-31-97 EXERCISE PRICE
- ------------------- ------------------- --------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C>
0.30 - 0.50 236,735 6.3 $ 0.43 193,939 $ 0.43
0.51 - 0.88 481,751 8.3 0.63 212,083 0.62
1.01 - 1.13 40,000 8.4 1.06 15,000 1.07
3.87 - 4.50 345,000 6.0 3.97 195,000 4.04
5.87 - 10.00 20,030 5.8 5.88 20,030 5.88
--------------- --------- ---------- -------------- ------------
0.30 - 10.00 1,123,516 7.1 $ 1.72 636,052 $ 1.79
=============== ========= ========== ============== ============
</TABLE>
Had compensation cost for the Company's three stock-based
compensation plans been determined consistent with FAS No. 123, the Company's
net (loss) and (loss) per share would have been increased to the pro forma
amounts below:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C> <C>
Loss from continuing operations As reported $ (3,325,844) $ (3,734,807)
Pro forma $ (3,512,468) $ (3,815,518)
Net (loss) per share from continuing operations As reported $ (0.31) $ (0.25)
Pro forma $ (0.33) $ (0.26)
Net (loss) As reported $ (3,452,158) $ (3,604,807)
Pro forma $ (3,638,782) $ (3,685,518)
Net (loss) per share - basic and diluted As reported $ (0.32) $ (0.24)
Pro forma $ (0.34) $ (0.25)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1997: dividend yield of 0.0 percent for
both years; expected volatility of 209% and 218% in 1996 and 123% in 1997; risk
free interest rates of 7.0% in 1996 and 1997; and expected lives of 5 and 10
years in both 1996 and 1997.
Stock Warrant Price Adjustment
In connection with notes payable to stockholders of the Company due
March 31, 1996, the Company issued for $220, 5-year warrants to purchase
2,400,000 shares of the Company's common stock. The warrants can be exercised
through October 1999 and had an exercise price of $0.50 per share. In May 1995,
in connection with the extension of these notes to March 31, 1996, the exercise
price of such warrants was reduced to $0.30 resulting in a discount on notes
payable of $480,000. The discount was amortized over the remaining term of the
notes. In June 1996, warrants to
F-10
<PAGE> 38
purchase 2,200,000 shares of the Company's common stock were exercised at a
price of $0.30 per share. At December 31, 1997, 200,000 of these warrants remain
outstanding.
Warrants to Purchase Common Stock
As of December 31, 1997, warrants were outstanding to purchase an
aggregate of 6,705,771 shares of common stock at exercise prices ranging from
$0.30 to $10.40 per share. These warrants have expiration dates that range to
2001. Commencing September 29, 1994, 1,875,000 warrants are redeemable, in whole
but not in part, for $.05 per warrant, at the option of the Company, upon 30
days written notice at any time after the last sale price of the Company's
common stock has been at least $9.10 for at least 30 consecutive business days
ending within 15 days of the date of the notice of redemption.
On January 16, 1996 the Company issued five year warrants to purchase
250,000 shares of Common Stock to Burrill & Craves, a consulting firm of which
Dr. Craves was a principal, and 345,000 shares of Common Stock to the Olmsted
Group, L.L.C., a merchant banking firm of which Mr. Zweifach is a principal, at
an exercise price of $0.50 per share, in consideration for the services
performed by Burrill & Craves and The Olmsted Group, L.L.C., respectively, in
connection with the sale of the Corporation's then existing diagnostics division
and other corporate matters. The warrants vest as follows: (i) 33 1/3% at
issuance; (ii) 33 1/3% upon the earlier of (1) June 30, 1997, or (2) the date on
which the Corporation enters into an agreement with a corporate partner; and
(iii) 33 1/3% on January 1, 1999. All such warrants shall vest, to the extent
not already vested upon a change of control.
In June 1996, the Company successfully completed a private offering
of Units, each Unit consisting of one share of the Company's Common Stock and
one warrant to purchase 0.5 shares of the Company's Common Stock. The Company
sold a total of 5 million Units, for an aggregate purchase price of $5 million
to institutional and accredited individual investors. The term of the warrants
is five (5) years, and they are exercisable at $2.50 per share (or $1.25 per 0.5
shares). Each warrant is redeemable by the Company at any time after eighteen
months from the date of issuance at $0.05 per warrant, provided that the closing
trading price per share of Common Stock is at least $3.75 for twenty consecutive
trading days.
In connection with the private offering, pursuant to an agreement
with David Blech, its financial advisor on the Private Placement, the Company
paid fees of $350,000 to Mr. Blech. In addition, the Company canceled fifty
percent (50%) of the obligations of Mr. Blech arising in connection with the
transactions involving Ribonetics GmbH, including "put" rights contained in an
agreement dated December 1, 1993 between the Company and Mr. Blech. The
aggregate amount canceled was $1,635,588. The balance is accruing interest at
the minimum applicable federal rate. As the obligation had been fully reserved,
and the remaining balance is fully reserved, neither the cancellation nor the
remaining obligation is reflected in the Company's financial statements. The
Company also issued to Mr. Blech five year warrants to purchase 500,000 shares
of Common Stock at $1.00 per share. The warrants are not exercisable for one
year and are held in escrow by the Company until the balance of the Ribonetics
debt is satisfied.
F-11
<PAGE> 39
In June 1996, the Company announced that it intended to exchange for
every two Redeemable Common Stock Purchase Warrants, which were issued in
conjunction with the Company's public offering in September 1993 at $6.50 per
share, one new warrant to purchase one share of the Company's Common Stock until
June 20, 2001, (the "Public Warrants"), that is exercisable at $2.50 per share
(the "Exchange Warrants"). In June 1997 this exchange of warrants was completed,
with 2,603,825 of the Public Warrants being exchanged for 1,301,912 of the
Exchange Warrants. Each Exchange Warrant is redeemable by the Company at any
time after eighteen months from the date that they were issued at $0.05 per
warrant, provided that the closing trading price per share of Common Stock is at
least $3.75 for twenty consecutive trading days.
In October 1996, the Company and VIMRx Pharmaceuticals, Inc.,
Wilmington, Delaware ("VIMRx") announced the establishment of an alliance
between the two companies to attempt to exploit the synergy's between their
respective technologies and markets, and a settlement of the outstanding dispute
between Epoch and VIMRx's German subsidiary, formerly known as Ribonetics. VIMRx
invested $800,000 in exchange for Epoch common stock at $1.75 per share. In
addition, VIMRx received 450,000 warrants to purchase common stock exercisable
at $2.00 and 450,000 warrants to purchase common stock exercisable at $3.00
which expire in October 1997 and 1998 respectively. The October 1997 warrants
were not exercised and have expired.
Underwriters Option
The underwriters of the Company's initial public offering were issued
an option to purchase up to 250,000 shares of Common Stock and/or 250,000
warrants with an exercise price of $10.40 and $0.16, respectively. The
underwriters options are exercisable through September 1998.
(5) INCOME TAXES
There was no income tax expense or benefit attributable to net income
or loss for 1996 and 1997. The difference between taxes computed by applying the
U.S. Federal corporate tax rate of 34% and the actual income tax provision in
1996 and 1997 is primarily the result of the utilization of net operating loss
carryforwards and limitations on utilizing net operating losses, respectively.
F-12
<PAGE> 40
The tax effects of temporary differences and carryforwards that give
rise to significant portions of the deferred tax assets at December 31, 1997 are
presented below:
<TABLE>
<S> <C>
Net operating loss carryforwards ........... $ 5,705,000
Research and development credit carryforward 1,663,000
Capitalized research and development ....... 1,757,000
Bad debt write-off ......................... 1,117,000
Accrued expenses ........................... 118,000
Other ...................................... 95,000
-----------
Total gross deferred tax assets ............ 10,455,000
Less deferred tax asset valuation allowance 10,455,000
-----------
Net deferred tax assets .................... $ --
===========
</TABLE>
The net change in the valuation allowance for 1996 and 1997 was a
decrease of approximately $2,620,000 and an increase of $2,431,000,
respectively, which were primarily due to the utilization of net operating
losses, and research and development expenses capitalized for tax purposes,
respectively.
At December 31, 1997, the Company had net operating loss
carryforwards for income tax purposes of approximately $16,779,000 and unused
research and development tax credits of approximately $1,663,000 available to
offset future taxable income and income taxes, respectively, expiring through
2012. The Company's net operating loss and credit carryforwards have been
reduced to reflect the limitations pursuant to the Tax Reform Act of 1986, due
to cumulative changes in stock ownership in excess of 50%.
(6) SALE OF TECHNOLOGY
In 1995 the Company sold its then existing diagnostics division and
in November 1996, the Company entered into an agreement with Saigene Corporation
(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 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.
No value was ascribed to the equity ownership of 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.
Due to the uncertainty of Saigene obtaining financing, the Company
has recorded as Gain on Disposal of Diagnostics Division only that portion of
the gain, $67,000 and $130,000, for which cash payments were received during the
1996 and 1997 periods, respectively. As of December 31, 1997,
F-13
<PAGE> 41
Saigene was current on all payments; however, there can be no assurance that
Saigene will be able to pay the note receivable when due.
(7) RESEARCH GRANTS AND CONTRACTS
At December 31, 1997, the Company, as a subcontractor to Virginia
Mason Research Center, had one active research contract. Under this agreement,
the Company conducts research and is reimbursed for its direct costs plus an
amount to cover indirect administrative costs. Epoch earned $159,000 of these
funds in 1997, and as of December 31, 1997, there was $388,000 remaining on this
contract.
(8) LIQUIDITY
At December 31, 1997, the Company had cash and cash equivalents of
approximately $1,485,000. On February 26, 1998, the Company received a
$3,000,000 8% loan from Bay City Capital LLC, ("Bay City Capital"), San
Francisco, California, as a bridge to the earlier of a public rights offering
that the Company plans to undertake, or other financing. Two of the Company's
executive officers are affiliated with Bay City Capital through ownership or
management positions. As compensation for the loan, Bay City Capital also
received warrants to purchase 2,000,000 shares of the Company's common stock at
a price of $0.90 per share. Additionally, the Company anticipates cash receipts
of $388,000, over three years, under a subcontract with Virginia Mason Research
Center. Management estimates this provides sufficient working capital to operate
until early 1999
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 its then existing 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. In addition to the Bay City
Capital financing, 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.
(9) CONSULTING AGREEMENTS
In July 1993, the Company entered into a one-year consulting
agreement with Dr. Craves under which he received monthly payments of $8,333.
The Company and Dr. Craves have extended the consulting agreement for successive
one year periods and, in conjunction with the Bay City Bridge Loan, the
agreement has been extended through February 24, 2000.
In January 1995, the Company entered into a consulting agreement with
Mr. Zweifach under which he received monthly payments of $11,250. In conjunction
with the Bay City Bridge Loan, the Company has extended the term of the contract
to run through February 24, 2000.
F-14
<PAGE> 42
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Fred
Craves and/or Sanford Zweifach, as attorney-in-fact, to sign in his behalf and
in each capacity stated below, and to file, all amendments and/or supplements to
this Annual Report on Form 10-KSB.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated:____________________ EPOCH PHARMACEUTICALS, INC.
(Registrant)
By: /s/ Sanford S. Zweifach
----------------------------------
Sanford S. Zweifach
President/Chief Financial
Officer
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ FRED CRAVES
- ---------------------------------------
Fred Craves Chairman of the Board of Directors and Chief
Executive Officer
/s/ RICHARD DUNNING
- ---------------------------------------
Richard Dunning Director
/s/ SANFORD S. ZWEIFACH
- ---------------------------------------
Sanford S. Zweifach President/Chief Financial Officer (Chief
Accounting Officer), and Director
- ---------------------------------------
Kenneth L. Melmon, M.D. Director
</TABLE>
F-15
<PAGE> 43
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this form 10-KSB:
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3 of the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1996)
3.2* Bylaws of the Company, as currently in effect
10.1* MicroProbe Corporation Incentive Stock Option, Nonqualified Stock
Option And Restricted Stock Purchase Plan--1991, as amended
10.2* Form of Indemnification Agreement entered into with officers and
directors of the Company
10.12* Letter Agreement between the Company and Fred Craves, dated August
3, 1993
10.13* Scientific Advisory Board Agreement between the Company and Kenneth
L. Melmon, M.D., dated September 4, 1991
10.14* Scientific Advisory Board Agreement between the Company and Roy
Page, Ph.D., D.D.S., dated September 4, 1991
10.15* Form of Scientific Advisory Board Agreement
10.16* Lease between the Company as Tenant and WRC Properties, Inc. for
premises located in Bothell, Washington, dated January 30, 1986, as
amended March 21, 1986, January 20, 1988, February 4, 1988, July 1,
1991, October 20, 1992 and February 8, 1993
10.16.1 Amendment to Lease between the Company and WRC Properties dated
November 15, 1995 (incorporated by reference to Exhibit 10.16.1 of
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995)
10.22* Form of Common Stock Warrant issued December 31, 1991
10.25* Second Amended and Restated Investment Agreement, dated April 28,
1992 among the Company and certain investors
10.26* Common Stock and Warrant Purchase Agreement, dated April 28, 1992
as amended June 30, 1992 and July 31, 1992 (with form of warrant)
among the Company and certain investors
II-1
<PAGE> 44
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.28* Sales Agency Agreement, dated December 14, 1992, as amended
February 3, 1993 between the Company and D. Blech & Company,
Incorporated, with form of Sales Agent Warrant
10.30* Form of Registration Agreement, dated February 12, 1993 among the
Company and certain investors
10.32* License Agreement between the Company and Yale University, dated
May 1, 1993. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to the
Company's application requesting confidential treatment under Rule
406 of the Securities Act of 1933)
10.33* Material Transfer Agreement between the Company and Yale
University, dated May 1, 1993. (Portions of this Exhibit are
omitted and were filed separately with the Secretary of the
Commission pursuant to the Company's application requesting
confidential treatment under Rule 406 of the Securities Act of
1933)
10.34* Consulting Agreement between the Company and Dr. Y. C. Cheng, dated
April 7, 1993. (Portions of this Exhibit are omitted and were filed
separately with the Secretary of the Commission pursuant to the
Company's application requesting confidential treatment under Rule
406 of the Securities Act of 1933)
10.36* Consulting Agreement between the Company and Dr. Arthur D. Broom,
dated October 1, 1992. (Portions of this Exhibit are omitted and
were filed separately with the Secretary of the Commission pursuant
to the Company's application requesting confidential treatment
under Rule 406 of the Securities Act of 1933)
10.39* MicroProbe Corporation Incentive Stock Option, Nonqualified Stock
Option and Restricted Stock Purchase Plan--1993
10.40* MicroProbe Corporation Non-Employee Directors Stock Option Plan
10.42** Warrant Agreement between the Company and American Stock Transfer &
Trust Company with Form of Warrant dated September 29, 1993
10.43** Underwriting Agreement by and among the Company, D. Blech &
Company, Incorporated and Commonwealth Associates dated September
28, 1993.
II-2
<PAGE> 45
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.45** Supply Contract dated as of January 21, 1994, by and among the
Company, Source Scientific Systems, Inc. and The Alton Group, Inc.
10.46** License Agreement dated as of January 21, 1994, by and among the
Company, Source Scientific Systems, Inc. and The Alton Group, Inc.
10.47** Purchase Agreement dated as of November 30, 1993, by and among the
Company, Animal Biotechnology Cambridge Limited, and Herbert
Stradler (without exhibits).
10.48** Put Agreement relating to Ribonetics GmbH dated as of December 1,
1993 between the Company and David Blech, as amended December 3,
1993 and February 18, 1994 (incorporated by reference to Exhibit
10.48 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1993).
10.48.1 Amendment dated April 1, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.1 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1993).
10.48.2 Amendment dated April 27, 1994 to Put Agreement (incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1994).
10.48.3** Amendment dated May 26, 1994 to Put Agreement
10.48.4 Amendment dated June 30, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.4 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1994).
10.48.5 Amendment dated July 27, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.5 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1994).
10.48.6 Amendment dated August 15, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.6 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994).
10.48.7 Amendment dated August 30, 1994 to Put Agreement (incorporated by
reference to Exhibit 10.48.7 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994).
10.48.8 Amendment dated September 14, 1994 to Put Agreement (incorporated
by reference to Exhibit 10.48.8 of the Company's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 1994).
II-3
<PAGE> 46
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.48.9 Exercise Notice dated September 27, 1994 to Put Agreement
(incorporated by reference to Exhibit 10.48.9 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1994).
10.50 Sublease between the Company as sublessee and Abbott Laboratories
as sublessor for premises located in Bothell, Washington, dated
November 12, 1993, as amended November 18, 1993 and January 28,
1994 (incorporated by reference to Exhibit 10.50 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1993).
10.51 Employment Agreement between the Company and Allan G. Cochrane,
dated August 30, 1994 (incorporated by reference to Exhibit 10.51
of the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1994).
10.53 Employment Agreement between the Company and Rich B. Meyer, Jr.,
dated August 30, 1994 (incorporated by reference to Exhibit 10.53
of the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1994).
10.55 Bridge Financing Agreement dated October 12, 1994 with form of note
and warrant (incorporated by reference to Exhibit 10.55 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1994).
10.55.1 Amendment to Bridge Financing Agreement dated May 22, 1995, with
form of note and warrant (incorporated by reference to Exhibit
10.55.1 of the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1995).
10.56 Security Agreement dated October 12, 1994 (incorporated by
reference to Exhibit 10.56 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994).
10.57 Registration Rights Agreement dated October 12, 1994 (incorporated
by reference to Exhibit 10.57 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994).
10.58 Purchase Price Adjustment, Royalty and Release Agreement dated as
of November 23, 1994 between MicroProbe Corporation and Alton
Group, Inc. (incorporated by reference to Exhibit 10.58 of the
Company's Current Report on Form 8-K filed December 7, 1994).
10.58.1 First Amendment to Purchase Price Adjustment, Royalty and Release
Agreement between MicroProbe Corporation and Alton Group, Inc.,
dated March 2, 1995 (incorporated by reference to Exhibit 10.58.1
of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
II-4
<PAGE> 47
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.59 Consulting Agreement between the Company and Sanford S. Zweifach,
dated January 18, 1995 (incorporated by reference to Exhibit 10.59
of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
10.60 Promissory Note executed by the Company in favor of Becton,
Dickinson and Company, dated March 14, 1995 (incorporated by
reference to Exhibit 10.60 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.61 Equipment Purchase Agreement between the Company and CELx
Corporation, effective as of January 6, 1995 (incorporated by
reference to Exhibit 10.61 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1995).
10.61.1 Letter Agreement between the Company and CELx Corporation dated
January 6, 1995 amending the Equipment Purchase Agreement of even
date (incorporated by reference to Exhibit 10.61.1 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31,
1995).
10.62 License Agreement between the Company and CELx Corporation,
effective as of January 6, 1995 (incorporated by reference to
Exhibit 10.62 of the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1995).
10.63 Amendment to License Agreement between Orca Research, Inc. and the
Company, dated September 20, 1995 (incorporated by reference to
Exhibit 10.63 of the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1995).
10.64 Asset Purchase Agreement between the Company and Becton, Dickinson
and Company, dated as of September 29, 1995 (incorporated by
reference to the form of such Asset Purchase Agreement filed with
the Company's Definitive Proxy Materials for its Special Meeting of
Stockholders held November 27, 1995).
10.65 Consulting Agreement with David Blech dated March 29, 1996
(incorporated by reference to Exhibit 10.65 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996).
10.66 Form of Subscription Agreement with Private Placement Investors
(incorporated by reference to Exhibit 4.1 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996).
II-5
<PAGE> 48
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.67 Warrant Agreement between the Company and American Stock Transfer
and Trust Company dated June 21, 1996, with form of Warrant
(incorporated by reference to Exhibit 4.2 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996).
10.68 Stock and Warrant Purchase Agreement dated as of October 1, 1996,
between the Company and VIMRx Pharmaceuticals, Inc. (incorporated
by reference to Exhibit 10.65 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1996).
10.69 Bridge Financing Agreement dated as of February 25, 1998, with form
of note and warrant between the Company and Bay City Capital, LLC.
21.0 Subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick
23.2 Consent of Stradling, Yocca, Carlson & Rauth (included on Exhibit
5)
25.0 Power of Attorney (included on the signature page)
27 Financial Data Schedule
- ----------------------
* Incorporated by reference to the same numbered exhibit of the Company's
Registration Statement on Form SB-2, No. 33-66742, effective on September 29,
1993.
** Incorporated by reference to the same numbered exhibit of the Company's
Registration Statement on Form SB-2, No. 33-76446, effective on July 7, 1994.
(b) Reports on Form 8-K:
None
II-6
<PAGE> 1
EXHIBIT 10.69
Dated as of February 25, 1998
BRIDGE FINANCING AGREEMENT
THE BAY CITY CAPITAL FUND I, L.P.,
a Delaware limited partnership
c/o Bay City Capital LLC
750 Battery Street, Suite 600
San Francisco, California 94111
Gentlemen:
The undersigned, EPOCH PHARMACEUTICALS, INC., a Delaware corporation
(the "Company") hereby agrees with you ("BCC") with respect to this Bridge
Financing Agreement (this "Agreement") as follows:
1. Authorization. The Company has authorized the issuance and sale to
BCC of a $3,000,000 principal amount secured note in the form attached hereto as
Exhibit A (the "Note") and a warrant in the form attached hereto as Exhibit B
(the "Warrant") to purchase shares of Common Stock of the Company. The Note, the
Warrant and the Common Stock purchasable under the Warrant are sometimes
collectively referred to herein as the "Securities."
2. Sale and Purchase of the Note and Warrant. Upon the terms and
conditions contained herein, the Company agrees to sell to BCC, and BCC agrees
to purchase from the Company, at the Closing (as hereinafter defined): (a) the
Note at a purchase price equal to the full principal amount of such Note; and
(b) the Warrant to purchase 2,000,000 shares of Common Stock. The purchase price
for the Warrant shall be equal to $0.0001 times the number of shares of Common
Stock which would be initially covered by such Warrant.
3. Closing. The closing of the sale to and purchase by BCC of the Note
and Warrant (the "Closing") shall occur at the offices of the Company at 1725
220th Street, S.E., Suite 104, Bothell, Washington 98021, at the hour of 10:00
a.m., P.S.T., on February 25, 1998 or as soon thereafter as all of the
conditions to Closing set forth in Section 8 have been satisfied (the "Closing
Date"). At the Closing, the Company shall deliver to BCC or its representative
the Note and Warrant, issued in the name of BCC or its nominee, against delivery
to the Company of payment, by check or by wire transfer in the aggregate amount
of $3,000,200.
4. Company Representations and Warranties. The Company represents and
warrants to BCC as follows:
(a) Organization and Standing; Articles and Bylaws. The Company
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Delaware, and has full power and authority and all
material licenses and approvals to own and operate its properties and assets and
to carry on its business as presently conducted. The Company is
<PAGE> 2
duly qualified and authorized to do business, and is in good standing as a
foreign corporation, in each jurisdiction where the nature of its activities and
of its properties (both owned and leased) makes such qualification necessary,
except where the failure to so qualify would not have a material adverse effect
upon the business and operations of the Company.
(b) Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the Security Agreement
(as defined in Section 7(a) below), the Note, the Warrant, the Registration
Rights Agreement (as defined in Section 7(a) below) and related documents
(collectively, the "Transaction Documents"), the performance of all the
Company's obligations hereunder and thereunder, and for the authorization,
issuance, sale and delivery of the Securities has been taken or will be taken
prior to the Closing. The Transaction Documents, when executed and delivered,
shall constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
subject to the availability of equitable remedies.
(c) Capitalization; Validity of Securities. The authorized
capital stock of the Company consists of thirty million (30,000,000) shares of
Common Stock, par value $.01 per share (the "Common Stock"), of which, as of
December 31, 1997, there were 14,814,793 shares of Common Stock outstanding, and
ten million (10,000,000) shares of Preferred Stock, par value $.01 per share
(the "Preferred Stock"), of which no shares are outstanding. The sale of the
Securities is not and will not be subject to any preemptive rights or rights of
first refusal that have not been waived; provided, however, that the Securities
may be subject to restrictions on transfer under state and/or federal securities
laws as set forth herein or therein or as otherwise required by such laws at the
time a transfer is proposed. The Common Stock issuable upon exercise of the
Warrant has been duly authorized and reserved for issuance and when issued and
delivered and upon payment therefor in accordance with the terms of the Warrant,
will be validly issued, fully paid and nonassessable, and will be free of any
liens or encumbrances. Except as set forth on Schedule 4(c) hereto, there are no
outstanding warrants, options, conversion privileges, or other rights or
agreements to purchase or otherwise acquire or issue any equity securities of
the Company.
(d) Reports of the Company; Changes. The Company has furnished
BCC with copies of its Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996 and its Quarterly Reports on Form 10-QSB and Current Reports
on Form 8-K filed by the Company with the Securities and Exchange Commission
("SEC") since the filing of such Form 10-KSB. Said reports, as of their
respective dates, were accurate and complete in all material respects and did
not omit any material information required to be set forth therein. The Company
has filed with the SEC all reports required to be filed by it since January 1,
1997, including, without limitation, all Current Reports on Form 8-K. To the
best of the Company's knowledge, since September 30, 1997, there has not been
any change in the assets, liabilities, financial condition or operating results
of the Company from that reflected in the SEC Filings, except (i) changes in the
ordinary course of business that have not been, in the aggregate, materially
adverse, and (ii) the Company's building lease expired on November 30, 1997 and
the Company is currently subleasing its premises on a month to month basis from
the new lessee of the premises, Darwin Molecular, and is in negotiations with
Darwin Molecular concerning the Company's right to continue to lease an
expansion portion of the premises and a part of the premises constituting the
lab, both of which portions the Company does not believe to be significant.
2
<PAGE> 3
(e) Intellectual Property Rights.
(i) To the best of its knowledge (but without having
conducted any special investigation or patent search), the Company has
sufficient title and ownership of all patents, trademarks, service marks, trade
names, copyrights, trade secrets, information, proprietary rights, and processes
(collectively, "Intellectual Property") necessary for its business as now
conducted and as proposed to be conducted to the Company's knowledge, without
any conflict with or infringement of the rights of others;
(ii) Except for agreements with its own employees or
consultants, there are not outstanding options, licenses, or agreements of any
kind relating to the matters listed in subsection (a) above or that grant rights
to any other person to manufacture, license, produce, assemble, market or sell
the Company's products, nor is the Company bound by or a party to any options,
licenses, or agreements of any kind with respect to the Intellectual Property of
any other person or entity;
(iii) the Company has not received any communications
alleging that the Company or its employees has violated or infringed or, by
conducting its business as proposed, would violate or infringe any of the
Intellectual Property of any other person or entity; and
(iv) the Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants, or commitments of
any nature) or other agreement, or subject to any judgment, decree, or order of
any court or administrative agency, that would interfere with the use of such
employee's best efforts to promote the interests of the Company with respect to
the Intellectual Property of the Company or otherwise or that would conflict
with the Company's business as proposed to be conducted.
(f) Security Documents. The Security Agreement, when executed
(and the filings required under the Uniform Commercial Code of the State of
Washington and U.S. Patent and Trademark Office, when completed), creates a
valid, binding, and effective first-priority security interest in the Collateral
(as defined in the Security Agreement) free from any other liens and
encumbrances.
(g) Compliance With Other Instruments and Laws. The Company in
not in violation or default in any material respect of any provision of its
certificate of incorporation or bylaws or in any material respect of any
provision of any material mortgage, indenture, agreement, instrument, or
contract to which it is a party of by which it is bound, or of any federal or
state judgment, order, writ, decree, or any federal or state statute, rule,
regulation or restriction applicable to the Company. The execution, delivery,
and performance by the Company of the Transaction Documents, and the
consummation of the transactions contemplated hereby and thereby, will not
result in any such violation or be in material conflict with or constitute, with
or without the passage of time or giving of notice, either a material default
under any such provision or an event that results in the creation of any
material lien, charge or encumbrance upon any assets of the Company or the
suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license,
3
<PAGE> 4
authorization, or approval applicable to the Company, its business or
operations, or any of its assets or properties.
(h) Litigation. There is no action, suit, proceeding, or
investigation pending or, to the best knowledge of the Company, threatened
against the Company that questions the validity of the Transaction Documents, or
the right of the Company to enter into such agreements, or to consummate the
transactions contemplated hereby or thereby, or that might result, either
individually or in the aggregate, in any material adverse change in the assets,
business properties, prospects or financial condition of the Company.
(i) Taxes. The Company has no material liability for any federal,
state or local taxes, except for taxes which have accrued and are not yet
payable or are being contested by the Company in good faith. The Company has
paid all payroll taxes required to be paid by it.
(j) Offering. Assuming the accuracy of the representations and
warranties of BCC contained in Section 5 hereof, the offer, issue, and sale of
the Securities is and will be exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933, as amended (the "1933
Act"), and has been registered or qualified (or are exempt from registration and
qualification) under the registration, permit, or qualification requirements of
all applicable state securities laws.
5. Representations and Warranties of BCC. BCC hereby represents and
warrants to the Company as follows:
(a) Legal Power. It has the requisite legal power to enter into
this Agreement, to purchase the Securities hereunder, to convert the Note and
exercise the Warrant, and to carry out and perform its obligations under the
terms of this Agreement.
(b) Due Execution. This Agreement has been duly authorized,
executed and delivered by it, and, upon due execution and delivery by the
Company, this Agreement will be a valid and binding agreement of it.
(c) Investment Representations.
(i) It is acquiring the Securities and will acquire any
security issued upon exercise thereof for its own account, not as nominee or
agent, for investment and not with a view to, or for resale in connection with,
any distribution or public offering thereof within the meaning of the 1933 Act.
(ii) It understands that (A) the Securities have not been
registered under the 1933 Act by reason of a specific exemption therefrom, that
the Securities must be held by it indefinitely, and that it must, therefore,
bear the economic risk of such investment indefinitely, unless a subsequent
disposition thereof is registered under the 1933 Act or is exempt form such
registration; (B) the Securities will be endorsed with the following legend:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR
4
<PAGE> 5
HYPOTHECATED UNLESS PURSUANT TO SEC RULE 144 OR THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT COVERING
SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF THE 1933 ACT."
and (C) the Company will instruct any transfer agent not to register the
transfer of any of the Securities unless the conditions specified in the
foregoing legend are satisfied; provided, however, that no such opinion of
counsel shall be necessary if the sale, transfer or assignment is made pursuant
to SEC Rule 144 and BCC provides the Company with evidence reasonably
satisfactory to the Company and its counsel that the proposed transaction
satisfies the requirements of Rule 144. The Company agrees to remove the
foregoing legend from any securities if the requirements of SEC Rule 144(k) (or
any successor rule or regulation) apply with respect to such securities and the
Company and its counsel are provided with reasonably satisfactory evidence that
the requirements of Rule 144(k) apply.
(iii) It is an investor in securities of companies in the
development stage and acknowledges that it is able to fend for itself, can bear
the economic risk of its investment and has such knowledge and experience in
financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Securities.
(iv) It is an "accredited investor" within the meaning of
SEC Rule 501 of Regulation D, as presently in effect.
(v) It understands that the Securities it is purchasing
are characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the 1933 Act, only in
certain limited circumstances, and it represents that it is familiar with SEC
Rule 144, as presently in effect, and understands the resale limitations imposed
thereby and by the 1933 Act.
(vi) BCC was not formed for the specific purpose of
acquiring the Securities offered hereunder.
(vii) Its principal business address is as set forth below
its name on the signature pages hereto and it does not reside in any state of
the United States other than the state so specified.
6. Warrant Separate. The Warrant will not be affected by payment of the
Note.
7. Conditions to Closing. The Closing shall be subject to the following
conditions:
(a) BCC shall have received the following documents, each
executed by a duly authorized officer of the Company, and each dated the date of
this Agreement and in form and substance satisfactory to BCC:
5
<PAGE> 6
(i) This Agreement;
(ii) The Note;
(iii) The Warrant;
(iv) A Security Agreement in the form attached hereto as
Exhibit C (the "Security Agreement") and the Confirmation and Grant of Security
Interests in Patents in the form attached hereto as Exhibit F;
(v) A Registration Rights Agreement in the form attached
hereto as Exhibit D;
(vi) Copies of employment agreements between the Company
and each of Frederick B. Craves, Ph.D. and Sanford S. Zweifach, extending the
term of their employment in accordance with Section 8(b) below; and
(vii) An opinion from Stradling Yocca Carlson & Rauth, a
Professional Corporation, counsel for the Company, in substantially the form
attached hereto as Exhibit E.
(b) The Company shall have received the purchase price for the
Note and Warrant upon the terms and conditions set forth in this Agreement.
8. Covenants of the Company and of BCC.
(a) Rights Offering.
(i) The Company shall use its best efforts to complete a
shareholders' rights offering by May 30, 1998. The rights shall be priced at a
thirty percent (30%) discount to the then current market price, which price
shall be the average closing bid price of the Common Stock over the twenty
trading days ending on the day prior to the closing of the rights offering.
(ii) In the event the rights offering is not fully
subscribed, BCC agrees to subscribe for up to one hundred percent (100%) of the
remaining unsubscribed shares, and shall pay for such remaining shares by
reducing the principal amount due under the Note by an amount equal to the price
it would otherwise pay for such remaining shares; provided that, as a condition
precedent to BCC's obligation to purchase any remaining unsubscribed shares, no
material adverse change in the assets, business, properties, prospects or
financial condition of the Company, shall have occurred since the Closing Date;
and provided further, that BCC's obligation to purchase the remaining shares
shall be capped at that number of remaining shares whose purchase price is equal
to the outstanding principal balance due under the Note at the time of the
completion of rights offering.
(b) Management Continuity. The Company shall enter into
agreements with Frederick B. Craves, Ph.D., currently the Chief Executive
Officer of the Company, and Sanford S. Zweifach, currently the President and
Chief Financial Officer of the Company, extending the term of their employment
with Company in their respective capacities at least until the earlier of (i)
two years from the date hereof, or (ii) the closing of the acquisition of the
Company (whether by merger, purchase of all or a controlling interest in stock,
purchase of substantially all assets or otherwise);
6
<PAGE> 7
provided, that the parties hereto agree to negotiate in good faith the hiring of
permanent senior management to replace Dr. Craves and Mr. Zweifach if an
opportunity to do so is presented to the Company.
9. Miscellaneous.
(a) This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns.
(b) This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all prior and
contemporaneous agreements, whether written or oral, and shall not be modified
except by a writing signed by the Company and BCC.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
(d) The headings in this Agreement are for convenience only and
shall not alter or otherwise affect the meaning hereof.
(e) No waiver of any of the provisions contained in this
Agreement shall be valid unless made in writing and executed by the waiving
party. It is expressly understood that in the event any party shall on any
occasion fail to perform any term of this Agreement and the other party shall
not enforce that term, the failure to enforce on that occasion shall not prevent
enforcement of that or any other term hereof on any other occasion.
(f) If any section of this Agreement is held invalid by any law,
rule, order, regulation, or promulgation of any jurisdiction, such invalidity
shall not affect the enforceability of any other sections not held to be
invalid.
(g) This Agreement and any amendment thereof may be executed in
two or more counterparts, each of which shall be deemed an original for all
purposes.
(h) The Company agrees to execute and deliver such further acts
and documents as BCC from time to time reasonably requires for the assuring and
confirming of its rights hereby created or intended now or hereafter to be
created.
7
<PAGE> 8
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this Agreement and return the same to
the undersigned, whereupon this Agreement shall become a valid and binding
contract between you and the undersigned.
Very truly yours,
EPOCH PHARMACEUTICALS, INC.,
a Delaware corporation
By:
----------------------------------------
Its:
----------------------------------------
The foregoing Agreement is hereby accepted as of the date first written
above:
THE BAY CITY CAPITAL FUND I, L.P.
a Delaware limited partnership
By: Bay City Capital Management LLC
Its: General Partner
By:
-----------------------------------
Its:
-----------------------------------
8
<PAGE> 9
EXHIBIT A
---------
THE SECURITIES EVIDENCED BY THIS PROMISSORY NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR OTHERWISE DISPOSED
OF UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT COVERING SUCH SECURITIES OR THE ISSUER RECEIVES AN OPINION OF
COUNSEL STATING THAT SUCH DISPOSITION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
SECURED PROMISSORY NOTE
-----------------------
$3,000,000 February 25, 1998
FOR VALUE RECEIVED, receipt of which is hereby acknowledged, EPOCH
PHARMACEUTICALS, INC., a Delaware corporation (the "Company") hereby promises to
pay to the order of THE BAY CITY CAPITAL FUND I, L.P., a Delaware limited
partnership (the "Lender"), the principal sum of Three Million Dollars
($3,000,000), in cash in lawful money of the United States of America, together
with interest at the rate of eight percent (8%) per annum from the date hereof
on all unpaid principal of this Note. Interest shall accrue and be payable on
the Maturity Date.
This Note is issued pursuant to that certain Bridge Financing Agreement
dated as of February 25, 1998 (the "Agreement") by and among the Company and the
Lender and is subject to and entitled to the benefits of the Agreement.
Principal and all accrued interest on this Note shall become due and payable
upon the earliest date (the "Maturity Date") upon which any of the following
events occurs: (i) the closing of the acquisition of the Company (whether by
merger, purchase of all or a controlling interest in stock, purchase of
substantially all assets or otherwise), (ii) the completion of a shareholder
rights offering or other equity offering, the net proceeds of which exceed $4
million and (iii) the second anniversary of the date of this Note.
1. Prepayment. The Company shall be entitled at any time to prepay any
portion or all of the indebtedness owed hereunder without penalty. Each
prepayment hereunder shall be credited first to accrued interest and then to
principal. Interest shall thereupon cease to accrue upon the principal so paid.
2. Security Agreement. The obligations of the Company under this Note
are secured pursuant to and this Note is entitled to the benefits and subject to
the conditions of that certain Security Agreement of even date herewith, among
the Company and Lender, as the same may be amended from time to time (the
"Security Agreement"), and Lender, and its successors and assigns, by its
acceptance hereof, agrees to be bound by the provisions of the Security
Agreement.
A-1
<PAGE> 10
3. Default. If any of the following events (hereafter called "Events of
Default") shall occur:
(a) If the Company shall default in the payment of any principal
or interest due under this Note when the same shall become due and payable,
whether at maturity or by acceleration or upon demand or otherwise; or
(b) If the Company shall fail to pay any principal of, premium,
fee or interest on, or any amount payable in respect of, any debt of the Company
(other than with respect to the Note) and if the effect of such failure is to
accelerate the maturity of such debt; or
(c) If the Company shall make a general assignment for the
benefit of creditors; or
(d) If the Company should breach any of the covenants,
representations, warranties, terms or conditions of this Note, Security
Agreement, or the Agreement or contained in any statement or certificate at any
time given or made to Lender pursuant thereto or in connection therewith;
(e) If the Company shall file a voluntary petition in bankruptcy,
or shall be adjudicated a bankrupt or insolvent, or shall file any petition or
answer seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under the present or any future
Federal Bankruptcy Act or other applicable federal, state or other statute, law
or regulation, or shall file any answer admitting the material allegation of a
petition filed against the Company in such proceeding, or shall seek or consent
to or acquiesce in the appointment of any trustee, receiver or liquidator of the
Company of all or any substantial part of the properties of the Company, or the
Company shall commence the winding up or the dissolution or liquidation of the
Company; or
(f) If, within sixty (60) days after a court of competent
jurisdiction shall have entered an order, judgment or decree approving any
complaint or petition against the Company seeking reorganization, dissolution or
similar relief under the present or any future Federal Bankruptcy Act or other
applicable federal, state or other statute, law or regulation, such order,
judgment or decree shall not have been dismissed or stayed pending appeal, or
if, within sixty (60) days after the appointment, without the consent or
acquiescence of the Company, of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated or stayed pending appeal, or if, within
sixty (60) days after the expiration of any such stay, shall not have been
vacated;
then, in the case of (a), (b), (c), or (d) above, the Lender may by notice in
writing to the Company declare all amounts under this Note to be forthwith due
and payable and thereupon the balance shall become so due and payable, without
presentment, protest or further demand or notice of any kind, all of which are
hereby expressly waived, and, in the case of (e) or (f) above, all amounts under
this Note shall automatically be due and payable and thereupon the balance shall
become so due and payable, without presentment, protest or further demand or
notice of any kind, all of which are expressly waived.
A-2
<PAGE> 11
If an action is brought for collection under this Note, the holder
hereof shall be entitled to receive all costs of collection, including, without
limitation, its reasonable attorneys' fees.
This Note shall be construed in accordance with and governed by the
internal laws of the State of Washington, and where applicable and except as
otherwise defined herein, terms used herein shall have the meanings given them
in the Washington Uniform Commercial Code.
EPOCH PHARMACEUTICALS, INC.
By:
----------------------------------------
Its:
----------------------------------------
A-3
<PAGE> 12
EXHIBIT B
---------
THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR OTHERWISE DISPOSED OF
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT COVERING SUCH SECURITIES OR THE ISSUER RECEIVES AN OPINION OF
COUNSEL STATING THAT SUCH DISPOSITION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
Warrant No. ______ February 25, 1998
WARRANT TO PURCHASE COMMON STOCK
OF EPOCH PHARMACEUTICALS, INC.
This certifies that The Bay City Capital Fund I, L.P. (the "Holder") and
the Holder's registered successors and assigns are entitled, subject to the
terms and conditions set forth below, to subscribe for and purchase from Epoch
Pharmaceuticals, Inc. (the "Company") Two Million (2,000,000) shares of the
Common Stock of the Company.
The "Exercise Price" per Warrant Share (as hereinafter defined) shall be
$0.90 per share. The Exercise Price and the character of the Warrant Shares are
subject to adjustment as provided herein. The term "Warrant Shares" as used
herein includes the shares of the Company's Common Stock (and such other
securities or property into which such shares of Common Stock may hereafter be
changed) which are at the time receivable by the Holder upon exercise of this
Warrant. This Warrant (as hereinafter defined) is being issued under that
certain Bridge Financing Agreement between Company and Holder of even date
herewith and is subject to the provisions thereof. A copy of such Bridge
Financing Agreement may be obtained from the Company at the address given below.
The term "Warrant" as used herein shall include this Warrant and any Warrant
delivered in substitution or exchange herefor, as provided herein.
1. Exercise and Expiration. This Warrant may be exercised in whole or in
part at any time or times, but must be exercised prior to the fifth anniversary
of the date hereof, at which time this Warrant shall expire. This Warrant shall
be exercised by surrender hereof together with delivery of a signed Subscription
Agreement in the form attached hereto as Annex I specifying the number of shares
to be purchased. Payment of the purchase price for the shares to be purchased
shall be made upon the delivery of certificates evidencing the shares to be
purchased, and shall be made in cash, or by wire transfer or certified check, or
by cancellation of all or part of the amounts owing under that certain Secured
Promissory Note, including accrued but unpaid interest, issued to the original
holder of this Warrant pursuant to the Bridge Financing Agreement.
B-1
<PAGE> 13
2. Adjustment of Exercise Price and Number of Shares.
The Exercise Price and the number of shares purchasable upon the
exercise of this Warrant shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 2 below.
(a) Stock Dividends, Splits. If the Company shall (i) pay a
dividend or make a distribution in shares of capital stock (whether shares of
Common Stock or capital stock of any other class), (ii) effect a stock split or
subdivide its outstanding Common Stock, (iii) effect a reverse stock split or
combine its outstanding Common Stock into a smaller number of shares, or (iv)
effect any other reclassification or recapitalization, the Exercise Price in
effect immediately prior thereto shall be adjusted so that upon the subsequent
exercise of this Warrant the Holder hereof shall be entitled to receive the
number of shares of capital stock of the Company which the Holder hereof would
have owned or have been entitled to receive after the happening of any of the
events described above had such Warrant been exercised immediately prior to the
happening of such event. An adjustment made pursuant to this Section 2(a) shall
become effective immediately after the record date for any event requiring such
adjustment or shall become effective immediately after the effective date of
such event if no record date is set.
(b) Distribution of Assets. In case the Company shall distribute
to all holders of its Common Stock evidences of its indebtedness or assets
(including cash dividends or distributions paid from retained earnings of the
Company in respect of its Common Stock) or rights or warrants to subscribe or
purchase (excluding those referred to in Section 2(c) below), then in each such
case the Exercise Price shall be adjusted so that the Exercise Price shall equal
the price determined by multiplying the Exercise Price in effect immediately
prior to the record date for such distribution by a fraction of which the
numerator shall be the then current market price per share (as defined in
Section 2(d) below) of the Common Stock on the record date for such event less
the then fair market value (as reasonably determined by the Board of Directors
of the Company, which determination shall be conclusive) of the portion of the
assets or evidences of indebtedness so distributed or of such rights or warrants
applicable to one share of the Common Stock outstanding as of such record date,
and the denominator shall be the then current market price per share (as defined
in Section 2(d) below) of the Common Stock. Such adjustment shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such distribution.
(c) Dilutive Issuances. In case the Company shall sell or issue
shares of Common Stock (other than Excluded Stock, as defined hereinafter) for a
consideration per share less than the Exercise Price then in effect, then, upon
such sale or issuance, the Exercise Price shall be adjusted downward so that the
Exercise Price shall equal the price determined by dividing the aggregate amount
of consideration, if any, received, or to be received, by the Company upon such
issuance or sale by the number of shares sold, issued or issuable.
(i) For purposes of this Section 2(c)(i), the sale or
issuance by the Company of rights, warrants or options to purchase Common Stock
or securities convertible into Common Stock shall be deemed to be the sale or
issuance of shares of Common Stock (in which event the subsequent exercise
thereof shall not be deemed to be a separate sale or issuance for
B-2
<PAGE> 14
purposes of this Section 2(c)), and the consideration therefor shall (i) in the
case of rights, warrants or options, consist of the consideration received by
the Company upon such issuance plus any consideration to be received upon the
exercise thereof, and (ii) in the case of convertible securities, consist of the
stock purchase price per share.
(ii) For purposes of this Section 2(c)(ii), "Excluded Stock"
shall mean (i) all shares issuable upon the exercise of currently outstanding
warrants, (ii) all shares issued or issuable pursuant to any incentive plan or
arrangement approved by the Board of Directors for the benefit of the Company's
employees, officers, directors, consultants or others with important business
relationships with the Company, and (iii) all shares issued in connection with
the rights offering as contemplated in Section 8 of the Bridge Financing
Agreement.
(iii) In the event of any change in the Exercise Price as a
result of the issuance of such rights, warrants or options or such convertible
securities, the Exercise Price shall be recomputed to reflect such change, but
no further adjustment shall be made for the actual issuance of Common Stock or
any payment of such consideration upon the exercise of any such rights, warrants
or options or the conversion of such securities.
(iv) Upon the expiration of any such rights, warrants or
options or the termination of any such rights to convert convertible the
Exercise Price, to the extent in any way affected by or computed using such
rights, warrants or options or convertible securities, shall be recomputed to
reflect the issuance of only the number of shares of Common Stock actually
issued upon the exercise of such rights, warrants or options or upon the
conversion of such securities.
(d) Definitions. For the purposes of any computation under
Section 2(b) above:
(i) The current market price per share on any record date or
other date for determination of value shall be deemed to be the average of the
closing price per share on the ten (10) trading days before such record or
determination date. For the purpose of all relevant provisions of this Warrant,
the closing price for each day shall be the last sale price regular way or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices regular way, in either case on the New York Stock Exchange, or, if
the shares are not listed or admitted to trading on such exchange, on the
principal national securities exchange on which the shares are listed or
admitted to trading, or if the shares are not listed or admitted to trading on
any national securities exchange, the last reported sale price as reported by
NASDAQ, or if no such sales are then being reported, the average of the highest
reported bid and lowest reported asked prices as furnished by the National
Association of Securities Dealers, Inc., through NASDAQ or a other organization
if NASDAQ is no longer reporting such information. If no price is determinable
as described above for the purposes required herein, the fair value of such
shares, as reasonably determined by the Board of Directors of the Company, shall
be used.
(ii) Shares outstanding shall mean the aggregate of all
shares of Common Stock of the Company outstanding and all shares of Common Stock
issuable upon the exercise of all outstanding rights, warrants or options to
subscribe for or purchase Common Stock (or securities convertible into Common
Stock) and the conversion of all outstanding indebtedness or equity securities
convertible into or exchangeable for shares of Common Stock.
B-3
<PAGE> 15
(e) De Minimis Change. No adjustment in the Exercise Price shall
be required unless such adjustment would require an increase or decrease of at
least one cent ($0.01) in such price; provided, however, that any adjustments
which by reason of this Section 2 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 2 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Anything in this Section 2 to the
contrary notwithstanding, the Company shall be entitled to make such reductions
in the Exercise Price, in addition to those required by this Section 2, as it in
its discretion shall determine to be advisable.
(f) Adjustment of Warrant Shares. Upon each adjustment of the
Exercise Price pursuant to this Section 2, the holder of this Warrant shall
thereafter be entitled to purchase, at the Exercise Price resulting from such
adjustment, the number of Warrant Shares obtained by multiplying the Exercise
Price in effect immediately prior to such adjustment by the number of Warrant
Shares purchasable pursuant hereto immediately prior to such adjustment; and
dividing the product thereof by the Exercise Price resulting from such
adjustment.
(g) Notice. Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly prepare a notice of such adjustment of the
Exercise Price setting forth the adjusted Exercise Price, the number of shares
issuable upon exercise of the Warrant and the date on which such adjustment
becomes effective and shall mail such notice of such adjustment of the Exercise
Price to the holder of this Warrant at the address of such Holder as in the
records of the Company.
(h) Deferrals. In any case in which this Section 2 provides that
an adjustment shall become effective immediately after a record date for an
event, the Company may elect to defer until the occurrence of such event (i)
issuing to the Holder of this Warrant exercised after such record date and
before the occurrence of such event the additional shares of Common Stock
issuable upon such exercise before giving effect to such adjustment and (ii)
paying to the Holder any amount in cash in lieu of any fractional share.
(i) Effect of Reclassification, Consolidation, Merger or Sale. If
any of the following events occur, namely (i) any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of this Warrant (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), (ii) any
consolidation or merger to which the Company is a party other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification or change (other than a change in
par value, or from par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination) in outstanding shares of Common
Stock, or (iii) any sale or conveyance of the properties and assets of the
Company as, or substantially as, an entirety; then the Company or such successor
or purchaser, as the case may be, shall execute a new Warrant providing that the
new Warrant shall be convertible only into the kind and amount of shares of
stock and other securities, cash or property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of shares of Common Stock issuable upon conversion of such Warrant
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance. The above provisions of this Section shall similarly apply to
successive reclassifications, consolidations, mergers and sales.
B-4
<PAGE> 16
(j) No Impairment. The Company will not, by amendment of its
Certificate of Incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms herein, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate in order to protect the rights of the Holders of this
Warrant against dilution or other impairment.
3. Registration Rights. The Holders may request registration of the
Warrant Shares under that certain Registration Rights Agreement dated as of the
date hereof by and between the Company and the Holder, and any and all
amendments thereto shall apply to the Warrant Shares issued or issuable upon
exercise of this Warrant.
4. Transfer of Warrant. This Warrant shall be registered on the books of
the Company and shall be transferable in whole or in part on such books by the
registered Holder hereof in person or by duly authorized attorney separately
from any transfer of the Secured Promissory Note issued in connection with the
Bridge Financing Agreement.
5. Reservation of Common Stock. The Company hereby covenants and agrees
that it shall at all times reserve and keep authorized and available for
issuance, free of any preemptive rights or rights of first refusal, a sufficient
number of Warrant Shares for the purpose of issuance upon exercise of this
Warrant to permit the exercise of this Warrant in whole.
B-5
<PAGE> 17
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and delivered by its duly authorized officers as of the __ day of
February, 1998.
EPOCH PHARMACEUTICALS, INC.
By:
----------------------------------------
Its:
----------------------------------------
B-6
<PAGE> 18
ANNEX I TO WARRANT
SUBSCRIPTION AGREEMENT
The undersigned holder of the Warrant to which this Subscription
Agreement is attached as Annex I hereby (i) subscribes for ___________________
Warrant Shares (as defined in the Warrant) which the undersigned is entitled to
purchase pursuant to the terms of the Warrant, and (ii) directs that the
certificates evidencing such shares of Common Stock be issued and delivered to
_______________________________. Payment of the Exercise Price will be made upon
delivery of such certificates.
Date: ________________
Signature:
---------------------------------
Type or Print Name:
---------------------------------
Street Address:
---------------------------------
City, State & Zip Code:
---------------------------------
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
The Board of Directors
Epoch Pharmaceuticals, Inc.:
We consent to incorporation by reference in the registration statement
(No. 33-66742) on Form S-3 of Epoch Pharmaceuticals, Inc. of our report dated
February 27, 1998, relating to the balance sheet of Epoch Pharmaceuticals, Inc.
as of December 31, 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1997, which report appears in the December 31, 1997,
annual report on Form 10-KSB of Epoch Pharmaceuticals, Inc.
KPMG Peat Marwick LLP
Seattle, Washington
April 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,485,483
<SECURITIES> 0
<RECEIVABLES> 63,287
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,587,571
<PP&E> 160,011
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,812,646
<CURRENT-LIABILITIES> 463,519
<BONDS> 0
0
0
<COMMON> 148,148
<OTHER-SE> 1,200,979
<TOTAL-LIABILITY-AND-EQUITY> 1,812,646
<SALES> 0
<TOTAL-REVENUES> 187,737
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,196,224
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