<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________.
Commission file number 0-22170
EPOCH PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 91-1311592
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12277 134th Court N.E., Suite 110, Redmond, Washington 98052
- ------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(425) 821-7535
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(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding at July 15, 1999
- ---------------------------- ----------------------------
Common Stock, $.01 par value 14,929,127
Page 1 of 13 Pages
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EPOCH PHARMACEUTICALS, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets as of December 31, 1998
and June 30, 1999 (unaudited)...................................... 3
Statements of Operations (unaudited) for the three months and
six months ended June 30, 1998 and 1999............................ 4
Statements of Cash Flows (unaudited) for the three months and
six months ended June 30, 1998 and 1999............................ 5
Notes to Financial Statements (unaudited).......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations; Plan of Operations............ 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................... 12
Note: Items 1- 5 are omitted, as they are not applicable.
Signature ....................................................................... 13
</TABLE>
2
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EPOCH PHARMACEUTICALS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 658,363 $ 805,473
Receivables ............................................................ 38,303 102,627
Prepaid expenses ....................................................... 45,769 37,184
------------ ------------
Total current assets ................................................ 742,435 945,284
Equipment, net ............................................................. 173,831 340,494
Other assets ............................................................... 53,937 39,903
------------ ------------
Total assets ........................................................ $ 970,203 $ 1,325,681
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ....................................................... $ 215,813 $ 191,275
Accrued interest on note payable to related party ...................... 208,804 338,213
Accrued expenses for canceled relocation ............................... 391,042 103,645
Other accrued liabilities .............................................. 356,033 343,393
Deferred revenue - current portion ..................................... -- 350,000
Note payable to related party .......................................... -- 3,000,000
------------ ------------
Total current liabilities ........................................... 1,171,692 4,326,526
Note payable to related party .............................................. 3,000,000 --
Deferred revenue ........................................................... -- 1,950,000
Stockholders' deficit:
Preferred stock, par value $.01; 10,000,000 shares
authorized; no shares issued and outstanding ........................ -- --
Common stock, par value $.01; 50,000,000 shares
authorized; issued and outstanding: 14,824,227 at
December 31, 1998 and 14,895,589 at June 30, 1999 ................... 148,242 148,956
Additional paid-in capital ............................................. 54,460,706 54,513,829
Deferred compensation expense .......................................... (159,826) (135,850)
Deferred financing expense ............................................. (817,794) (484,452)
Accumulated deficit .................................................... (56,832,817) (58,993,328)
------------ ------------
Total stockholders' deficit ......................................... (3,201,489) (4,950,845)
------------ ------------
Contingency
Total liabilities and stockholders' deficit ................................ $ 970,203 $ 1,325,681
============ ============
</TABLE>
See accompanying notes to financial statements.
3
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EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTH ENDED
JUNE 30, JUNE 30,
------------------------------- ---------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Research contract revenue ..................... $ 43,589 $ 57,525 $ 84,372 $ 152,617
Operating expenses:
Research and development ...................... 699,040 653,215 1,402,187 1,297,816
General and administrative .................... 378,537 318,770 754,022 653,635
------------ ------------ ------------ ------------
Total operating expenses ................. 1,077,577 971,985 2,156,209 1,951,451
------------ ------------ ------------ ------------
Operating loss ........................... (1,033,988) (914,460) (2,071,837) (1,798,834)
Other income (expense):
Interest income ............................... 39,639 13,374 66,087 31,927
Interest and financing expense ................ (258,047) (233,039) (305,514) (463,604)
Other income .................................. 3,136 -- 23,091 --
------------ ------------ ------------ ------------
Loss from continuing operations .......... (1,249,260) (1,134,125) (2,288,173) (2,230,511)
Discontinued operations - gain on disposal
of discontinued operations .................. 30,000 30,000 60,000 70,000
------------ ------------ ------------ ------------
Net loss ................................. $ (1,219,260) $ (1,104,125) $ (2,228,173) $ (2,160,511)
============ ============ ============ ============
Loss per share from continuing
operations - basic and diluted .............. $ (0.08) $ (0.08) $ (0.15) $ (0.15)
Income per share from discontinued
operations - basic and diluted .............. -- -- -- --
------------ ------------ ------------ ------------
Net loss per share - basic and diluted ........ $ (0.08) $ (0.08) $ (0.15) $ (0.15)
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic and diluted ............. 14,814,793 14,872,838 14,814,793 14,851,762
</TABLE>
See accompanying notes to financial statements.
4
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EPOCH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $(2,228,173) $(2,160,511)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization .............................. 28,017 44,984
Amortization of deferred financing expense ................. 222,400 333,342
Amortization of deferred compensation expense .............. -- 23,976
Changes in operating assets and liabilities:
Receivables ............................................. 1,315 (64,324)
Prepaid expenses and other assets ....................... (30,873) 22,619
Accounts payable ........................................ 20,234 (24,538)
Accrued interest on note payable to related party ....... 82,377 129,409
Accrued expenses for canceled relocation ................ -- (287,397)
Deferred revenue ........................................ -- 2,300,000
Other accrued liabilities ............................... 45,881 (12,640)
----------- -----------
Net cash provided by (used in) operating activities . (1,858,822) 304,920
----------- -----------
Cash used in investing activities - acquisition of equipment ...... (73,957) (211,647)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable .................................... 3,000,000 --
Exercise of stock options ..................................... 4,861 53,837
----------- -----------
Net cash provided by financing activities .................. 3,004,861 53,837
----------- -----------
Net increase in cash and cash equivalents ......................... 1,072,082 147,110
Cash and cash equivalents at beginning of period .................. 1,485,483 658,363
----------- -----------
Cash and cash equivalents at end of period ........................ $ 2,557,565 $ 805,473
=========== ===========
Supplemental disclosure of non-cash financing
activities - warrants issued in debt financing .................. $ 1,333,361 $ --
=========== ===========
Supplemental disclosure of cash flow information - cash
payments made during the period for interest .................... $ 737 $ 852
=========== ===========
</TABLE>
See accompanying notes to financial tatements.
5
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EPOCH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
NOTE (1) BASIS OF PRESENTATION
The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required to be presented for complete financial
statements. The accompanying financial statements include all adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Certain 1998 balances have been reclassified to conform with
the 1999 presentation.
The financial statements and related disclosures have been prepared
with the presumption that users of the interim financial information have read
or have access to the audited financial statements for the preceding fiscal
year. Accordingly, these financial statements should be read in conjunction with
the audited financial statements and the related notes thereto included in the
Company's Annual Report on Form 10-KSB as filed with the Securities and Exchange
Commission on April 15, 1999.
NOTE (2) NATURE OF BUSINESS
Epoch Pharmaceuticals, Inc. ("Epoch" or the "Company") is a biomedical
company utilizing nucleoside and nucleotide chemistry to develop molecular tools
for genetic analysis. Utilizing unique and proprietary technology in the
rational design, synthesis and chemical modification of oligonucleotides, the
Company has positioned itself to provide products and techniques for high
throughput genetic sequence analysis that are in increasing demand in the
rapidly expanding field of genetic pharmacology.
Previously, Epoch's therapeutic research and development program had
focused on the modification of gene expression by altering cellular genomic DNA
using oligonucleotide targeting technology combined with chemical reactivity.
The Company's technology is based on its expertise in designing and synthesizing
oligonucleotides bearing modifications that selectively bind to and interact
with the target genes.
Recently, Epoch 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.
NOTE (3) LICENSE AND SUPPLY AGREEMENT
In January 1999, the Company and the PE Biosystems Division of The
Perkin-Elmer Corporation ("Perkin-Elmer") entered into a License and Supply
Agreement pursuant to which the Company licensed certain of its enabling genetic
analysis technology to Perkin-Elmer. Under the terms of the agreement,
Perkin-Elmer will make payments to the Company consisting of initial fees for
licensed technology and proprietary know how, and ongoing payments for chemical
intermediate purchases as well as royalties on sales of product which uses the
licensed technology. The agreement also requires Perkin-Elmer to purchase annual
minimum amounts of proprietary chemical intermediates from the Company.
6
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In order to secure any unused portion of the purchased product
prepayments, the Company granted to Perkin-Elmer a security interest in the
Company's patents related to its enabling genetic technology (the "Patents")
under the terms of a Security Agreement (the "Security Agreement"). The security
interest automatically terminates when any unused portion of the purchased
product prepayments is $50,000 or less. Although no security interest was
granted with respect to the royalty prepayments, if such royalty payments do not
become due under the agreement, the Company will also be required to refund any
unused prepayments to Perkin-Elmer.
Under the terms of the agreement, if Perkin-Elmer terminates the
agreement upon 60 days written notice to the Company, or if the Company
terminates the agreement following a material breach by Perkin-Elmer,
Perkin-Elmer will release its security interest in the Patents and forfeit any
unused portion of the prepayments. However, if the Company and Perkin-Elmer
mutually agree to terminate the agreement, or if Perkin-Elmer terminates the
agreement as a result of a material breach by the Company, the Company must
reimburse Perkin-Elmer the difference between the unused portion of the
purchased product prepayments and $50,000.
Through February 1999, the Company received $2,300,000 under the
agreement, a portion of which represents prepayments to be credited against
future product purchases and royalty payments. There have been no further
receipts through July 1999.
NOTE (4) LOSS PER SHARE
Basic earnings per share (EPS) is computed based on weighted average
shares outstanding and excludes any potential dilution. Diluted EPS reflects
potential dilution from the exercise or conversion of securities into common
stock or from other contracts to issue common stock. The capital structure of
the Company includes stock options and stock warrants. At June 30, 1999, there
were 1,398,624 options outstanding to purchase the common stock of the Company
with exercise prices ranging from $0.30 to $5.88. Also outstanding at June 30,
1999 were 7,798,875 warrants to purchase the common stock of the Company with
exercise prices ranging from $0.30 to $9.21 per share. At June 30, 1998, there
were 1,107,016 options outstanding to purchase the common stock of the Company
with exercise prices ranging from $0.30 to $10.00. Also outstanding at June 30,
1998 were 8,470,050 warrants to purchase the common stock of the Company with
exercise prices ranging from $0.30 to $10.40 per share. The assumed conversion
and exercise of these securities have been excluded from Diluted EPS as their
effect is anti-dilutive.
NOTE (5) LIQUIDITY
The Company has experienced recurring losses from operations and has a
total stockholders' deficit of approximately $4,951,000 at June 30, 1999 and
cash of approximately $805,000 which management estimates will be sufficient to
operate into the third quarter 1999. Additionally, the note payable of
$3,000,000 is due in February 2000, at which time the Company will be required
to retire or refinance the debt.
To continue operations, the Company will be required to sell additional
equity securities, borrow additional funds, or obtain additional financing
through licensing, joint venture, or other collaborative arrangements. The
Company is pursuing other financing arrangements but has no commitments for such
financing and there can be no assurance that such financing will be available on
satisfactory terms, if at all. If additional funds are not available, the
Company will be required to delay, reduce, or eliminate expenditures for certain
or all of its programs or products.
7
<PAGE> 8
NOTE (6) DEFERRED REVENUE
Deferred revenue represents unrecognized license and technology fees,
prepaid royalties, and prepayments for product purchases related to the
Perkin-Elmer license and supply agreement. License fees, technology fees, and
prepayments for product purchases will be recognized as revenue based upon
minimum sales of products sold to the licensee by the Company as specified over
the term of the agreement. Prepaid royalties will be recognized as revenue based
upon sales of the licensed product by the licensee as specified in the
agreement.
As a general policy, revenues are not recognized if amounts received
are refundable or the Company has related future performance obligations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS; PLAN OF OPERATIONS
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements that are based on current expectations. In light of the important
factors that can materially affect results, including those set forth below and
elsewhere in this Quarterly Report on Form 10-QSB, the inclusion of
forward-looking information herein should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company will
be achieved. The Company may encounter competitive, technological, financial and
business challenges making it more difficult than expected to continue to
develop therapeutic technologies and products; the market may not accept the
Company's therapeutic products; the Company may be unable to retain existing key
management personnel; and there may be other material adverse changes in the
Company's operations or business. Certain important factors affecting the
forward-looking statements made herein include, but are not limited to (i) the
successful development of viable therapeutic technologies and products, (ii)
accurately forecasting capital expenditures, and (iii) obtaining new sources of
external financing. Assumptions relating to budgeting, product development and
other management decisions are subjective in many respects and thus susceptible
to interpretations and periodic revisions based on actual experience and
business developments, the impact of which may cause the Company to alter its
operating, capital expenditure or other budgets, which may in turn affect the
Company's financial position and results of operations.
Future operating results may be impacted by a number of factors that
could cause actual results to differ materially from those stated herein, which
reflect management's current expectations. These factors include industry
specific factors, the Company's ability to maintain access to external financing
sources and its financial liquidity, the Company's ability to timely develop and
produce commercially viable therapeutic products and the Company's ability to
manage expense levels.
RESULTS OF OPERATIONS
Research Contract Revenue. Research contract revenue reflects revenue
from U.S. government grants and contracts, and subcontracts.
Research and Development. The decreases in research and development
expenses of $46,000 for the quarter and $104,000 for the six months ended June
30, 1999, respectively, in relation to comparable 1998 periods, are primarily
the result of reduced rent and building expenses in 1999, as the new facility is
smaller than the previous facility. Additional variations in research and
development expense are the result of normal business fluctuations.
8
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General and Administrative. General and administrative expenses
decreased $100,000 in the six month period ended June 30, 1999 compared to the
respective prior year period. This decrease in expenditures is primarily the
result of a decrease in expenditures for the filing of patents on new
technologies. During the first six months of 1998, the Company expended $115,000
for patent filings on new technologies, as compared to $47,000 in the comparable
period of the current year. Similarly, the Company expended $44,000 less in the
quarter ended June 1999 than in the comparable second quarter of 1998. We
believe that these patents, if issued, will improve the Company's proprietary
position with regard to its genetic analysis technologies. However, there can be
no assurance that the Company's patent applications will result in further
issued patents or that such issued patents will offer protection against
competitors with similar technology. Additionally, there can be no assurance
that any manufacture, use or sale of the Company's technology or products will
not infringe on patents or proprietary rights of others, and the Company may be
unable to obtain licenses or other rights to these other technologies that may
be required for commercialization of the Company's proposed products. Further
variances in the results for the three and six month periods ended June 30, 1999
are the result of normal business fluctuations.
Interest Income. Interest income in the 1999 periods is less than the
1998 comparable periods due to lower cash balances available for investment.
Interest and Financing Expense. Interest and financing expense
represents the costs associated with the $3,000,000 note payable to a related
party which was funded at the end of February 1998. The increase in the six
month period of 1999 results from six months of expense in 1999 versus four
months in 1998. Interest expense in the three month period ended June 30, 1998
was higher than the comparable period of 1999 as a result of an adjustment to
the amortization of deferred financing expense in 1998 from a five year term to
a two year term.
Other Income. Other income in 1998 represents payments received from a
sublease and administrative support agreement. As of April 1998, this agreement
was terminated and, consequently, there is no further income from this source
beyond April 1998.
Gain on Disposal. The gain on disposal of discontinued operations
represents only that portion of the gain for which cash payments were received
during the reporting periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of
$805,000, which resulted primarily from $2,300,000 received in January and
February of 1999 under a license and supply agreement with Perkin-Elmer less
normal expenditures for operations.
In January 1999, the Company and Perkin-Elmer entered into a License
and Supply Agreement pursuant to which the Company licensed certain of its
enabling genetic analysis technology to Perkin-Elmer. Under the terms of the
agreement, Perkin-Elmer is making payments to the Company consisting of initial
fees for licensed technology and proprietary know how, and ongoing payments for
chemical intermediate purchases as well as royalties on sales of product which
uses the licensed technology. The agreement also requires Perkin-Elmer to
purchase annual minimum amounts of proprietary chemical intermediates from the
Company.
In order to secure any unused portion of the purchased product
prepayments, the Company granted to Perkin-Elmer a security interest in the
Company's patents related to its enabling genetic technology (the "Patents")
under the terms of a Security Agreement (the "Security Agreement"). The security
interest automatically terminates when any unused portion of the purchased
product prepayments is $50,000 or less. Although no security interest was
granted with respect to the royalty prepayments, if such royalty payments do not
become due under the agreement, the Company will also be required to refund any
unused prepayments to Perkin-Elmer.
9
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Under the terms of the agreement, if Perkin-Elmer terminates the
agreement upon 60 days written notice to the Company, or if the Company
terminates the agreement following a material breach by Perkin-Elmer,
Perkin-Elmer will release its security interest in the Patents and forfeit any
unused portion of the prepayments. However, if the Company and Perkin-Elmer
mutually agree to terminate the agreement, or if Perkin-Elmer terminates the
agreement as a result of a material breach by the Company, the Company must
reimburse Perkin-Elmer the difference between the unused portion of the
purchased product prepayments and $50,000.
Through February 1999, the Company received $2,300,000 under the
agreement, a portion of which represents prepayments to be credited against
future product purchases and royalty payments. There have been no further
receipts through July 1999.
Management estimates that its existing cash balance as of June 30, 1999
of $805,000, which includes the Perkin-Elmer receipts, provides sufficient
working capital to operate into the third quarter 1999.
Using the proceeds of the Perkin-Elmer licensing agreement 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 is focused on the development of its products with the goal
of entering into corporate partnering arrangements to further commercialize the
technology. Our primary future needs for capital are for continued research and
development, repayment of the note payable due in February 2000 and relocation
expenses anticipated to be incurred in a move to new facilities, if our Company
is unable to negotiate a new lease at its existing facility. The Company's
working capital requirements may vary depending upon numerous factors including
the progress of our research and development, competitive and technological
advances, possible relocation expenses and other factors. We anticipate
operating with approximately 25 employees.
To continue operations, the Company will be required to sell additional
equity securities, borrow additional funds, or obtain additional financing
through licensing, joint venture, or other collaborative arrangements. The
Company is pursuing other financing arrangements but has no commitments for such
financing and there can be no assurance that such financing will be available on
satisfactory terms, if at all. If additional funds are not available, the
Company will be required to delay, reduce, or eliminate expenditures for certain
or all of its programs or products.
Cash increased by $147,000 during the first half of 1999 as a result of
the net of $2,300,000 received from Perkin-Elmer offset by normal expenditures
on the Company's operations, the acquisition of $212,000 of equipment used in
research and development, and payment of $287,000 on the canceled building
facility project discussed below. The comparable period of the prior year had a
cash increase of $1,072,000, the net result of proceeds from a $3,000,000 note
payable offset by normal operating expenditures on the Company's operations.
Prior to September 1998, the Company had been in negotiations for a
lease on approximately 21,000 square feet in the general vicinity of its then
current facility in Bothell, Washington. A design build team had been selected
and was working on plans for the new space. In September 1998, the project was
canceled in favor of an already existing space. Costs for architectural fees and
long lead equipment items incurred prior to cancellation of the project are
estimated at $472,000, which were included in general and administrative
expenses in the year ended 1998. Cash payments of $287,000 were distributed
during the first quarter of 1999. There were no cash expenditures toward this
obligation in the second quarter of 1999. $104,000 remains in accrued
liabilities. The remaining liability is expected to be resolved by the end of
third quarter of 1999.
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Receivables are $64,000 higher at the end of June 1999 than in the
prior year primarily as a result of increased revenues from grant work.
Variances in accounts payable and other accrued liabilities in 1999 and
1998 are the result of normal business fluctuations.
The note payable to related party is due in February 2000, at which
time the balance will need to be repaid or refinanced.
SUBSEQUENT EVENT
In July 1999, the Company announced that it has licensed its
proprietary probe design software to Perkin-Elmer. This agreement increases the
scope of the licensing agreement that it entered into in January 1999 with
Perkin-Elmer to include software that allows for the efficient custom design of
Taqman(R) probes by the end user. The software will be incorporated into
Perkin-Elmer's Primer Express(TM) software which is sold with its 7700 Sequence
Detection System. In addition to license fees, Epoch shall receive a royalty on
all products that Perkin-Elmer sells which incorporate the software.
YEAR 2000 COMPLIANCE
Many existing information technology (IT) systems, such as computer
systems and software products, as well as non-IT systems that include embedded
technology, were not designed to correctly process dates after December 31,
1999. We have assessed the impact of such "Year 2000" issues on our products,
our internal IT and non-IT systems, as well as on our suppliers and service
providers. We have determined that our business systems are not Year 2000 ready.
We have developed a plan to replace these systems in a timely fashion at a cost
of approximately $30,000 by December 1999. We are also discussing with our
significant suppliers and service providers their plans to investigate, identify
and fix their Year 2000 issues. We believe that most of our significant
suppliers and service providers will cooperate in resolving any Year 2000
problems. However, we are also dependent on certain utility companies,
telecommunication service companies and other service providers that are outside
our control. Therefore, it may be difficult for us to obtain assurances of Year
2000 readiness from such third parties. We believe that we will have identified
all of our material Year 2000 issues. However, given the pervasiveness of Year
2000 issues and the complex interrelationships among Year 2000 issues both
internal and external to us, we cannot guarantee that we will be able to
identify and accurately evaluate all such issues.
If any supplier or service provider fails to appropriately address
their Year 2000 issues, our business, financial condition and operating results
could be significantly hurt. For example, if a supplier or service provider
experiences a Year 2000 problem which results in or contributes to delays or
interruptions in delivering products or services to us, our business, financial
condition and operating results could be significantly hurt. Finally, general
economic disruption resulting from Year 2000 issues could also significantly
hurt us.
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In preparation for the Year 2000, we are developing contingency plans
in case we fail to complete our remediation programs in a timely manner and in
the event that any third party who provides goods or services essential to our
business fails to appropriately address their Year 2000 issues. We expect to
finalize these contingency plans during the third quarter of 1999. Even if we
complete these plans on time and put them in place, we cannot guarantee that
such plans will be sufficient to address any third party failures or that
unresolved or undetected internal and external Year 2000 issues will not
significantly hurt our business, financial condition and operating results.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.21.1 First Amendment to the License and Supply Agreement between the
Registrant and Perkin-Elmer Corporation dated January 11, 1999.
(Portions of this Exhibit are omitted and were filed separately
with the Secretary of the SEC pursuant to the Registrant's
application requesting confidential treatment under Rule 406 of
the Securities Act.)
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8K
None
12
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Epoch Pharmaceuticals, Inc.
Date: August 9, 1999 By: /s/ SANFORD S. ZWEIFACH
---------------------------------
Sanford S. Zweifach
President/Chief Financial Officer
13
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.21.1 First Amendment to the License and Supply Agreement between the
Registrant and Perkin-Elmer Corporation dated January 11, 1999.
(Portions of this Exhibit are omitted and were filed separately
with the Secretary of the SEC pursuant to the Registrant's
application requesting confidential treatment under Rule 406 of
the Securities Act.)
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.21.1
CONFIDENTIAL PORTIONS HAVE BEEN OMITTED
BASED UPON A REQUEST FOR CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934 AND
HAVE BEEN SEPARATELY FILED WITH THE COMMISSION
FIRST AMENDMENT TO THE LICENSE AND SUPPLY AGREEMENT
BETWEEN EPOCH AND PERKIN-ELMER HAVING AN EFFECTIVE DATE
OF JANUARY 5, 1999
This First Amendment to the License and Supply Agreement ("First Amendment")
dated as of the 30th day of June, 1999 ("Effective Date of First Amendment") is
between EPOCH PHARMACEUTICALS, INC., 12277 134th Court NE, Suite 100, Redmond,
WA ("Epoch") and THE PERKIN-ELMER CORPORATION, having its PE Biosystems Division
at 850 Lincoln Centre Drive, Foster City, CA 94404 ("Perkin-Elmer").
WHEREAS, Epoch and Perkin-Elmer have entered into a License and Supply Agreement
having an Effective Date of January 5, 1999 ("License and Supply Agreement").
WHEREAS, both Epoch and Perkin-Elmer desire to amend the License and Supply
Agreement so as to provide for the transfer of certain know-how relating to the
prediction of the melting temperature of MGB Oligonucleotides from Epoch to
Perkin-Elmer for the purpose of incorporating such know how into certain
Perkin-Elmer software products. e.g., Perkin-Elmer's Primer Express software
product.
NOW THEREFORE, in consideration of the mutual covenants and promises contained
in this First Amendment, the Parties agree as follows:
1. Unless otherwise defined herein, capitalized terms will have the
meaning ascribed to them in the License and Supply Agreement.
2. DELETE existing Section 2.21 (Licensed Know-How) of the License and
Supply Agreement and REPLACE with the following amended Section 2.21:
2.21 "Licensed Know-How" means trade secrets, technical
information, experimental data, software and other knowledge
now existing and controlled by Epoch relating to (1) the
chemical synthesis and purification of MGB Oligonucleotide
using MGB Intermediate, and (2) algorithms and related
software for determining the melting temperature of MGB
Oligonucleotide, as described in Section 5.04 and Exhibit C,
to the extent that such technical information, experimental
data, software and other knowledge is not publicly available.
-1-
<PAGE> 2
3. ADD the following to the end of existing Section 3.04 (Restrictions) of
the License and Supply Agreement:
Licensed Products comprising Licensed Know-How in the form of
software embodying algorithms for determining the melting
temperature of MGB Oligonucleotide, as described in Section
5.04 and Exhibit C, will only be sold or marketed pursuant to
a limited-use non-exclusive license agreement consistent with
Perkin-Elmer's normal practice for the sale and marketing of
like software products.
4. ADD the following to the table of existing Section 4.02 (Royalties) of
the License and Supply Agreement:
software [*]
5. ADD the following to existing Section 4.03 (Payment for Know-How) of
the License and Supply Agreement:
Perkin-Elmer will pay to Epoch, as additional consideration
for the transfer of and license under Licensed Know-How, [*]
per month for the period between June 15, 1999 and the first
New Product Release of a Licensed Product provided that Epoch
makes available at least source code embodying algorithms for
determining the melting temperature of MGB Oligonucleotide as
described in Subsection 3 of amended Exhibit C within ten (10)
days of the Effective Date of First Amendment; where as used
herein, the term "New Product Release" means that point in a
Perkin-Elmer product development program at which a product is
released for unrestricted manufacture and sale to customers
under PE Biosystems ISO 9001 Product Development Procedures.
In the event that the period between June 15, 1999 and the
first New Product Release includes a fractional month,
payments due for that fractional month will be determined on a
pro rata basis. As yet additional consideration for the
transfer of and license under Licensed Know-How, Perkin-Elmer
will give to Epoch an ABI PRISM(TM) Model 7700 Sequence
Detection System instrument (p/n 7700-01-200/208) [*]. The
instrument provided hereunder will include all installation
services and warranties typically provided to customers in
connection with the purchase of such instrument. However,
Perkin-Elmer will not provide an optional service contract
covering the instrument. All reagents will be purchased by
Epoch using conventional retail distribution channels.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.
-2-
<PAGE> 3
6. DELETE existing Section 5.04 (Transfer of Know-How) of the License and
Supply Agreement and REPLACE with the following amended Section 5.04:
5.04 Epoch will transfer Licensed Know-How to Perkin-Elmer to the
extent necessary for Perkin-Elmer to make full use of MGB
Intermediates and MGB Oligonucleotides. Such Licensed Know-How
will include, but not be limited to, that information
specified in Exhibit C. All Licensed Know-How is considered
Confidential Information and will only be used by Perkin-Elmer
in connection with the exploitation of the license rights
granted in Article III. All Licensed Know-How will remain
owned by Epoch.
7. ADD the following to Exhibit C (Licensed Know-How) of the License and
Supply Agreement:
3. Algorithms, object code, source code and any other embodiments
of methods or processes useful for predicting the melting
temperature of MGB Oligonucleotides, whether patented,
copyrighted or not.
IN WITNESS WHEREOF, the Parties, through their authorized officers, have
executed this First Amendment as of the Effective Date of First Amendment.
EPOCH PHARMACEUTICALS, INC. THE PERKIN-ELMER CORPORATION,
THROUGH ITS PE BIOSYSTEMS DIVISION
By: /s/ Sanford S. Zweifach By: /s/ Elaine Heron
--------------------------------- ---------------------------------
Name: Sanford S. Zweifach Name: Elaine Heron
------------------------------- -------------------------------
Title: President Title: Vice President
------------------------------ The Perkin-Elmer Corporation
Date: July 1, 1999 ------------------------------
------------------------------- Date: June 30, 1999
-------------------------------
-3-
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