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U.S. SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004. o
    
    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 Biosciences, Inc. (Exact name of Registrant as specified in its charter)
 Delaware
    
    91-1311592(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 21720 23rd Drive SE, #150, Bothell, WA 98021(Address of principal executive office, including zip code) (425) 482-5555(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  o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES  o     NO  x 28,635,671 shares of Common Stock were outstanding at May 5, 2004.




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Epoch Biosciences, Inc.
Index To Form 10-Q  
 Page NumberPart I. Financial InformationItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4: Controls and Procedures
    
    
    21Part II. Other InformationItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    22Item 6. Exhibits and Reports on Form 8-K
    
    
    23Note: Items 1, 3, 4, and 5 are omitted, as they are not applicable.Signature
    
    
    24EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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Part I. Financial Information Epoch Biosciences, Inc.
Balance Sheets
(unaudited) December 31,
    
    March 31,2003
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,415,298
    
    
    $
    9,674,717Accounts receivable, net of allowance of $63,311 and $69,602
    
    
    1,342,377
    
    
    
    1,370,825Inventory
    
    
    97,540
    
    
    
    92,203Prepaid expenses and other assets
    
    
    216,547
    
    
    
    151,852Total current assets
    
    
    6,071,762
    
    
    
    11,289,597Property and equipment, net
    
    
    2,569,552
    
    
    
    2,456,190Identifiable intangible assets, net
    
    
    867,647
    
    
    
    852,941Restricted cash
    
    
    653,723
    
    
    
    663,442Other assets
    
    
    10,000
    
    
    
    5,000Total assets
    
    $
    10,172,684
    
    
    $
    15,267,170Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term obligations
    
    $
    524,562
    
    
    $
    472,846Accounts payable and accrued liabilities
    
    
    1,452,733
    
    
    
    1,426,769Deferred revenue  current portion
    
    
    451,338
    
    
    
    371,672Common stock warrants
    
    
    
    
    
    
    1,091,684Total current liabilities
    
    
    2,428,633
    
    
    
    3,362,971Long-term obligations, less current portion
    
    
    358,764
    
    
    
    249,172Deferred revenue, less current portion
    
    
    2,510,548
    
    
    
    2,680,628Deferred rent
    
    
    332,984
    
    
    
    350,742Stockholders equity: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; shares issued and outstanding: 26,155,484 at December 31, 2003 and
28,635,671 at March 31, 2004
    
    
    261,555
    
    
    
    286,357Additional paid-in capital
    
    
    83,191,731
    
    
    
    87,073,841Accumulated deficit
    
    
    (78,911,531
    )
    
    
    (78,736,541
    )Total stockholders equity
    
    
    4,541,755
    
    
    
    8,623,657Total liabilities and stockholders equity
    
    $
    10,172,684
    
    
    $
    15,267,170
 See accompanying notes to financial statements. 3




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Epoch Biosciences, Inc.
Statements of Operations
(unaudited) Three Months EndedMarch 31,2003
    
    2004Revenues:Product sales
    
    $
    748,429
    
    
    $
    566,536License fees and royalty income
    
    
    1,318,069
    
    
    
    1,366,582Contract research revenue
    
    
    349,000
    
    
    
    Total revenues
    
    
    2,415,498
    
    
    
    1,933,118Operating expenses:Cost of product sales
    
    
    739,737
    
    
    
    391,922Research and development
    
    
    1,257,207
    
    
    
    927,814Selling, general and administrative
    
    
    1,300,130
    
    
    
    1,211,738Total operating expenses
    
    
    3,297,074
    
    
    
    2,531,474Operating loss
    
    
    (881,576
    )
    
    
    (598,356
    )Interest income, net
    
    
    7,148
    
    
    
    10,961Warrant valuation adjustment
    
    
    
    
    
    
    762,385Net income (loss)
    
    $
    (874,428
    )
    
    $
    174,990Net income (loss) per share  basic and diluted
    
    $
    (0.03
    )
    
    $
    0.01Weighted average number of common shares
outstanding  basic
    
    
    25,729,582
    
    
    
    27,141,133Weighted average number of common shares
outstanding  diluted
    
    
    25,729,582
    
    
    
    27,569,183
 See accompanying notes to financial statements. 4




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Epoch Biosciences, Inc.
Statements of Cash Flows
(unaudited) Three Months EndedMarch 31,2003
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    (874,428
    )
    
    $
    174,990Adjustments to reconcile net income (loss) to net
cash used in operating activities:Depreciation and amortization:Property and equipment
    
    
    238,454
    
    
    
    161,620Intangible assets
    
    
    73,875
    
    
    
    14,706Issuance of common stock warrants for services
    
    
    578
    
    
    
    600Warrant valuation adjustment
    
    
    
    
    
    
    (762,385
    )Interest accrued on restricted cash
    
    
    (9,612
    )
    
    
    (9,719
    )Deferred revenue
    
    
    (135,031
    )
    
    
    90,414Deferred rent
    
    
    21,135
    
    
    
    17,758Changes in operating assets and liabilities:Accounts receivable
    
    
    600,036
    
    
    
    (28,448
    )Inventory
    
    
    106,722
    
    
    
    5,337Prepaid expenses and other assets
    
    
    118,104
    
    
    
    69,695Accounts payable and accrued liabilities
    
    
    (377,091
    )
    
    
    (25,964
    )Net cash used in operating activities
    
    
    (237,258
    )
    
    
    (291,396
    )Cash flows from investing activities:Acquisition of property and equipment
    
    
    (89,433
    )
    
    
    (48,258
    )Net cash used in investing activities
    
    
    (89,433
    )
    
    
    (48,258
    )Cash flows from financing activities:Proceeds from bank loan
    
    
    77,142
    
    
    
    Repayment of long-term obligations
    
    
    (70,612
    )
    
    
    (161,308
    )Proceeds from exercise of stock options
    
    
    50,361
    
    
    
    12,284Proceeds from the issuance of common stock and warrants
    
    
    
    
    
    
    5,748,097Net cash provided by financing activities
    
    
    56,891
    
    
    
    5,599,073Net increase (decrease) in cash and cash equivalents
    
    
    (269,800
    )
    
    
    5,259,419Cash and cash equivalents at beginning of period
    
    
    3,507,645
    
    
    
    4,415,298Cash and cash equivalents at end of period
    
    $
    3,237,845
    
    
    $
    9,674,717Supplemental disclosure of cash flow information Interest payments
    
    $
    8,344
    
    
    $
    9,240Non-cash financing activities -Fair value of common stock warrants classified as liability
    
    
    
    
    
    
    1,091,684
 See accompanying notes to financial statements. 5




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Epoch Biosciences, Inc.
Notes to Financial Statements
March 31, 2004
(unaudited) 1. Summary of Significant Accounting Policies  (a)
    
    Nature of Business Epoch Biosciences, Inc. is a biotechnology company developing technologies
and products to help scientists, clinicians, and physicians around the world
perform genetic research to improve our lives and our environment. Genetic
analysis has become a pervasive activity in academic, biopharmaceutical,
clinical, agricultural, veterinary and forensic laboratories. Our technologies
facilitate rapid, accurate and cost-effective genetic analysis at the scale
necessary to generate the massive amounts of genetic information being studied
today. As the human genome and other animal and plant genomes are sequenced, the
task of understanding the structure and function of genes lies before us.
Researchers want to know when and why a gene switches on and begins producing
its protein (gene expression) and what the genes protein does in the body
(proteomics); they also want to know what the genetic differences among
individuals mean for their health and susceptibility to disease. For example,
single nucleotide polymorphisms, or SNPs, are tiny differences in our DNA that
make humans different from one another. SNPs have been linked to
susceptibility to diseases, and to peoples response to medications. Because of the importance of understanding the structure and function of
genes, companies have moved quickly to design and manufacture automated genetic
analysis systems. We develop patented technologies that improve the output of
these systems and that are compatible with many of the genetic analysis systems
currently in use or in development. Just as microprocessors are found in
essentially all electronic appliances, our chemistries and technologies have
the potential to be incorporated in nearly all genetic analysis systems. Our technologies are useful in genetic research, drug development,
prenatal testing, clinical diagnostics, including infectious disease, oncology,
genetic disease and population screening to assess our risk of disease or to
predict our response to drugs. Epochs products also have application in
forensics, food testing, and environmental testing, including bio-warfare and
bioterrorism.  (b)
    
    Basis of Presentation The unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q. 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 2003
balances have been reclassified to conform with the 2004 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 included in Epochs 2003
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission. 6




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(c)
    
    Stock-Based Compensation We apply APB Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations in measuring compensation costs for its employee
stock option plans. We disclose proforma net loss and net loss per share as if
compensation cost had been determined consistent with Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation.
Stock options and warrants issued to non-employees are accounted for using the
fair value method prescribed by SFAS 123 and Emerging Issues Task Force 96-18. Had we determined compensation cost based on the fair value of our stock
options on the grant date under SFAS 123, our net income (loss) and net income
(loss) per share would have been the pro forma amounts indicated below: Three months ended March 31,2003
    
    2004Net income (loss):As reported
    
    $
    (874,428
    )
    
    $
    174,990Add: Stock-based employee compensation
expense included in reported net income
(loss)
    
    
    
    
    
    
    Deduct: Stock-based employee
compensation determined under fair value
based method for all awards
    
    
    (235,466
    )
    
    
    (261,960
    )Pro forma
    
    $
    (1,109,894
    )
    
    $
    (86,970
    )Net income (loss) per share  basic and diluted:As reported
    
    $
    (0.03
    )
    
    $
    0.01Pro forma
    
    $
    (0.04
    )
    
    $
    0.00
 Three months ended March 31,2003
    
    2004Weighted average fair value of options granted using the Black-Scholes
option pricing model
    
    $
    
    
    
    $
    2.39Options granted during the period
    
    
    
    
    
    
    364,420Expected dividend yield
    
    
    
    
    
    
    
    %Risk-free interest rate
    
    
    
    
    
    
    2.95
    %Expected volatility
    
    
    
    
    
    
    103.9
    %Expected life in years
    
    
    
    
    
    
    5
 In March 2004, the Financial Accounting Standards Board issued an Exposure
Draft of a proposed Statement of Financial Accounting Standards entitled
Share-Based Payment. This proposed Statement addresses accounting for
stock-based compensation and would result in stock-based compensation costs,
including employee options, being recognized as an expense in the financial
statements. The proposed Statement would eliminate the ability to account for
stock-based compensation transactions using the intrinsic value method under
APB Opinion No. 25, and generally would require that such transactions be
accounted for using a fair-value based method. If approved, the proposed
statement would be applied to public entities, prospectively, for fiscal years
beginning after December 15, 2004. 7




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(d)
    
    Net Income (Loss) Per Share Basic income (loss) per share is computed based on weighted average shares
outstanding during the reporting period and excludes any potential dilution.
Diluted per share amounts reflect potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock. Our capital structure includes common stock options and common
stock warrants, of which the following have been excluded from the net income
(loss) per share calculation as they are antidilutive. At March 31,2003
    
    2004Outstanding options excluded from net income(loss) per share
    
    
    2,557,484
    
    
    
    1,377,493Outstanding warrants excluded from net income (loss) per
share
    
    
    398,333
    
    
    
    906,000
  (e)
    
    Concentration of Credit Risk Credit is extended based on an evaluation of a customers financial
condition and collateral is generally not required. The majority of revenues
are derived from private and public companies and public enterprises in the
research market in the United States. The table below summarizes the revenue and approximate accounts receivable
of our customers where our risk is significantly concentrated. Percent of Revenues
    
    Accounts ReceivableThree months ended
    
    December 31,
    
    March 31,Customer
    
    March 31,
    
    2003
    
    20042003
    
    2004Applied Biosystems, Inc.
    
    
    47
    %
    
    
    70
    %
    
    $
    1,134,000
    
    
    $
    1,217,000Amersham Biosciences
    
    
    22
    %
    
    
    0
    %
    
    $
    18,000
    
    
    $
    6,000
 The amounts due from Applied Biosystems in the above chart primarily
represent quarterly royalties and have historically been paid in accordance
with the terms of the underlying agreement.  (f)
    
    Private Equity Financing On February 23, 2004, we consummated the issuance of 2,470,000
newly-issued shares of our common stock, and warrants to purchase 741,000
newly-issued shares of our common stock, to a small number of institutional
investors, resulting in our receipt of $6,175,000 in gross proceeds, prior to
placement agent fees and other offering costs totaling $427,000 and the
exercise of the warrants. Investors received a warrant to purchase 0.3 shares
of common stock for each share of common stock purchased. The effective price
in the private placement was $2.50 for each unit, consisting of one share of
common stock and a warrant to purchase 0.3 shares of common stock. The
warrants have an exercise period of five years and an exercise price of $3.89
per share. Our placement agent with respect to the transaction received a cash
fee equal to 5.5% of the gross proceeds, and its affiliates received warrants
to purchase an aggregate of 75,000 shares of our common stock, carrying the
same terms as the warrants received by the investors. None of the shares of
common stock, the warrants sold to the investors, nor the shares of common
stock to be issued upon exercise of the warrants have been registered under the
Securities Act of 1933. Accordingly, these shares and warrants may not be
offered or re-sold in the United States, except pursuant to an effective
registration statement or an applicable exemption from the 8




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registration requirements of the Securities Act. The registration statement
covering the resale by the investors of these shares and the shares of common
stock issuable upon exercise of the warrants was declared effective by the SEC
on April 30, 2004. The warrants issued in the private equity placement provide for cash
redemption by the warrant holders upon the occurrence of a change in control
that may be outside of the control of our Board of Directors, subject to
certain exceptions. As a result, and in accordance with EITF 00-19,
Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled In a Companys Own Stock, the fair value of the warrants, measured
using the Black-Scholes valuation method, is recorded as a current liability on
our balance sheet. The decrease in the market price of our common stock from
the closing of the equity placement on February 23, 2004 to March 31, 2004
resulted in a decrease in the value of the warrants between these dates and the
$762,000 warrant valuation adjustment reported in our statements of operations
for the period ending March 31, 2004. The assumptions used in the Black-Scholes pricing model were: February 23, 2004
    
    March 31, 2004Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate
    
    
    3.03
    %
    
    
    2.81
    %Expected volatility
    
    
    104
    %
    
    
    99
    %Remaining contractual life in years
    
    
    5
    
    
    
    4.9
 Until the warrants are exercised or expire, the valuation of the warrants
and the corresponding liability will be re-measured quarterly and the financial
statements will reflect a non-cash valuation adjustment based on the change in
the fair value of the warrants at the end of each reporting period. 
 Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
That Act provides a safe harbor for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful, cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. Other than statements of historical fact, all statements in this Quarterly
Report on Form 10-Q and, in particular, any projections of or statements as to
our expectations or beliefs concerning our future financial performance or
financial position or as to future trends in our business or in our markets,
are forward-looking statements. Forward-looking statements reflect our current
expectations and are inherently uncertain and our actual results in future
periods may differ materially from our expectations concerning our projections
of those results or of future business trends described in this Quarterly
Report on Form 10-Q. The sections below entitled Certain Factors that May
Affect Our Business and Future Results under Item 2, Managements Discussion
and Analysis of Financial Condition and Results of Operations, describe some,
but not all, of the factors, risks and uncertainties that could cause these
differences, including but not limited to the fact that we have been profitable
in only two quarters and anticipate future losses, and that we may require
additional capital; the possibility that potential products utilizing the
Companys technology may be ineffective or, although effective, may be
uneconomical to market; that third parties may hold proprietary rights that
preclude Epoch or its licensees from marketing its products; or that third
parties may market superior products. Readers of this Quarterly Report on Form
10-Q are urged to read those sections in their entirety. In light of the
significant uncertainties 9




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inherent in the forward-looking information included in this document, the
inclusion of information should not be regarded as a representation by us or
any other person that our objectives or plans will be achieved. The
forward-looking statements contained in this Quarterly Report on Form 10-Q are
made only as of the date of this Quarterly Report on Form 10-Q and Epoch
undertakes no obligation to update or revise the forward-looking statements,
whether as a result of new information, future events or otherwise. The following discussion of Epochs financial condition and results of
operations should be read in conjunction with the financial statements and the
related notes thereto included elsewhere in this Quarterly Report on Form 10-Q
and other documents Epoch files from time to time with the Securities and
Exchange Commission, including subsequent Current Reports on Form 8-K,
Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. Results of Operations Overview Epoch develops technology and products that enable and accelerate genomic
analysis. The foundation of our business strategy is the continued funding of
innovative research and development and commercialization of the resultant
products through a number of channels. We earn revenues through a variety of sources. We license our technology
and sell chemical intermediates to companies, thereby allowing them to
incorporate our technology into their products and we generate product revenue
and earn license fees and royalties from those companies. We also sell our
products to end-users through our direct sales force and through distributors
that provide worldwide reach. We also earn revenues through contract research
activities, whereby third parties pay for specific research and development
activities carried out by our scientists, and through research grants. We expect to incur operating losses for at least the current fiscal year
as we continue funding research and development to apply our technology to
genomic analysis for the research markets and other fields, and as we incur
costs to commercialize the resultant products through various channels. Critical Accounting Policies Our accounting policies are more fully described in Note 1 to our
financial statements included with Form 10-K. However, certain of our
accounting policies are particularly important to the portrayal of our
financial position and results of operations and require the application of
significant judgment by our management. As a result they are subject to an
inherent degree of uncertainty. In applying those policies, our management
uses its judgment to determine the appropriate assumptions to be used in the
determination of certain estimates. Those estimates are based on our
historical experience, terms of existing contracts, our observance of trends in
the industry, information provided by our customers and information available
from other outside sources, as appropriate. Our critical accounting policy is
revenue recognition. 10




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Revenue recognition. We earn revenues from product sales of chemical
products and reagents to manufacturers for incorporation into their products,
from the sale of specialty oligonucleotides and value added reagents to end
users and distributors in the research fields of genomics and molecular
diagnostics, from license fees for the use of our proprietary technology and
know-how, and by providing services to third parties for performing research
and development on their behalf. We also have license agreements that result
in royalties to us upon ultimate sales of products by our partners. Many of
our arrangements contain multiple deliverables which require us to determine
the fair value of the various deliverables. To the extent we are unable to
determine the fair value of undelivered elements, we are required to defer all
revenue and recognize it over the appropriate period or until such time that
the fair value of remaining undelivered elements can be determined.  
    
    Revenues from product sales that require no ongoing
obligations are recognized when shipped to the customer and title
has passed. To the extent that sales are made to distributors and
not sold through to end users our future sales could decline
although distributors generally have no right of return.
    
    License fees are recognized over the term of the agreement to
which the license fees correspond, which may extend to the
expiration of the underlying patents, and based on the terms and
future performance obligations in the underlying agreements. These
upfront fees are generally nonrefundable regardless of future
performance. Deferred revenue principally represents these license
fees received in advance and prepayments for product purchases.
    
    Contract research revenues are recognized as the research and
development activities are performed under the terms of commercial
collaboration and supply agreements and government grants. Direct
costs related to these contracts and grants are reported as research
and development expenses.
    
    Royalty revenues are recognized when earned under the terms
of the related agreements, which is generally upon sale of products
by our partner containing our component products. To the extent our
partners no longer use our component products or sales of their
products are less than expected, our royalty revenues could decrease
in the future. Revenues Revenues for the quarter ended March 31, 2004 decreased 20% over the
similar quarter of 2003, primarily due to the reduction in product sales caused
by the sale of the assets and customer base for our non-proprietary
oligonucleotide business located in San Diego (San Diego Operations) in May
2003 offset by increased sales of our MGB Eclipse products, and a reduction in
contract research revenues. Product Sales. Product sales include sales of specialty oligonucleotides
to end users and to our distribution partners in the research market and sales
of chemical intermediates and our dyes, quencher, and modified bases to
collaborative partners and distributors. Product sales decreased 24% in the
first quarter of 2004 to $567,000 from $748,000 in the comparable quarter of
2003. The decrease in product sales was primarily due to the absence of sales
from our San Diego Operations that were sold in May 2003. During the quarter
ended March 31, 2003, we recognized $281,000 in product sales from these
operations. This decrease was offset by increased sales of our MGB Eclipse Probe
System products, that incorporate our proprietary technologies. These products
are sold directly to end users, and also through QIAGEN, our worldwide
distributor. Revenues from the sale of these products in the first quarter of
2004 were 56% higher than in the comparable quarter of 2003 due to increased
levels of direct selling activities by Epoch personnel and the introduction in
2003 of MGB Eclipse By Designassays that we design, manufacture, and
functionally validate. 11




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Chemical intermediate revenues represent component chemistries that we
generally supply on cost-plus terms for incorporation in our partners
products, and sales of dyes, quencher, and modified bases through distributors.
These revenues decreased 37% in the quarter ended March 31, 2004 from the
comparable period of 2003 as a result of a continued decrease in shipments to
Applied Biosystems and normal business fluctuations. License Fees and Royalty Income. License fees reflect the amortization of
initial payments for transfers of technology and know-how. These amounts are
amortized over the life of the contract. Royalty income represents amounts due
under license agreements with other companies for their sales of products that
include our technologies and/or for contractual minimum amounts. License fees
and royalty income increased to $1,367,000 in the quarter ended March 31, 2004
from $1,318,000 in the comparable period of 2003. This increase is the result
of higher contractual minimums from Applied Biosystems and higher sales of
products that incorporate our technologies by our partners, partially offset by
a reduction in technology access fees from our collaboration with Amersham
Biosciences. In 2003, Amersham Biosciences paid us technology access fees for
a specified period that expired in June 2003. In October 2003 we terminated
our distribution agreement with Amersham that gave rise to such technology
access fees. Contract Research Revenue. Contract research revenue reflects payments
for contract research and development performed for our corporate partners and
research grants from the National Institute of Health. We do not have any
contract research agreements at this time as a result of completion of work
under grants from the National Institute of Health and the termination of
contract programs with Amersham Biosciences. In 2003, Amersham Biosciences
paid us for specified research activities related to application of our MGB
Eclipse Probe Systems. Those programs terminated in June 2003, and in October
2003 we terminated our distribution agreement with Amersham that gave rise to
such programs. Cost of Product Sales. The cost of product sales represents the cost of
manufacturing products that we sell, including costs of material, labor and
overhead allocations. Also included is the cost of outside manufacturers which
we use to produce some of our chemical intermediates. The cost of product
sales decreased to $392,000 in the first quarter of 2004 compared to $740,000
in the comparable period of the prior year. Costs as a percentage of product
sales decreased from 99% in the first quarter of 2003 to 69% in the first
quarter of 2004. Generally, changes in costs of product sales are tied to changes in
revenues, while the changes in costs as a percentage of product sales are
impacted by the product mix and economies of scale resulting from changes in
volume. The selling prices of the majority of our chemical intermediates and
certain other products, for example, are generally to larger volume customers
and are determined by contracts tied to fully burdened manufacturing costs,
which result in lower gross margins. Further, we manufacture MGB Eclipse Probe
System products to various customer specifications- including custom orders,
catalog orders, and functionally validated assays. The gross margin on these
different products can vary significantly. The reduction in the dollar cost of product sales and in the percentage
cost of product sales in the current quarter is primarily the result of the
sale of our San Diego Operations on May 30, 2003. Many costs of our
non-proprietary oligonucleotide manufacturing operations in San Diego were
fixed within a wide range of capacity output. As a result, the significant
decreases in volume we experienced in our San Diego Operations in early 2003
did not result in a proportional decrease in costs and we experienced very poor
gross margins on those sales until we sold the assets and customer base in May
2003. 12




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Research and Development. Research and development costs of $928,000 in
the first quarter of 2004 decreased 26% compared to comparable period of 2003.
Research and development costs are heavily impacted by our use of research and
development personnel in our manufacturing operations to meet variations in
customer demand. As such, the use of research and development personnel in
manufacturing has, and will continue to, fluctuate depending on volumes and mix
of product sales and the availability of research and development personnel to
conduct such activities. Significant changes in research and development costs
were due to:  
    
    Transfer of personnel from research and development to
manufacturing reduced research and development expenses by $234,000
in the first quarter of 2004 compared to the similar period of 2003.
    
    Decreased costs of chemicals and supplies used in research
activities in the first quarter of 2004 was $98,000 lower than in
the comparable quarter of 2003. Selling, General and Administrative. Selling, general and administrative
expenses of $1,212,000 in the first quarter of 2004 decreased $88,000, or 7%,
compared to the comparable period of 2003. Significant changes in the 2004
period compared to the 2003 period were primarily the result of:  
    
    Increased selling and marketing expenses of $139,000 due to
overall increased sales and marketing efforts in the research market
and in support of our planned launch of clinical diagnostic products
later in 2004.
    
    The sale of our San Diego Operations in May 2003 resulted in
the elimination of our administrative functions which supported
those operations and reduced administrative expenses by $195,000.
    
    Arbitration expenses in the amount of $146,000 which were
incurred in the first quarter of 2003 related to our dispute with
Third Wave that was settled in the second quarter of 2003.
    
    Increased personnel and other expenses of $64,000 resulting
from our implementation of the FDAs quality systems regulation. Liquidity and Capital Resources Cash and cash equivalents amounted to $9,675,000 at March 31, 2004, a
$5,259,000 increase from December 31, 2003 balances, primarily as a result of
the private equity financing we completed in February 2004. Also impacting
cash flow were changes in working capital accounts and the repayment of bank
debt. Cash used in operations during the quarter ended March 31, 2004 amounted
to $291,000 primarily as a result of our net income of $175,000 adjusted for
the change in fair value of common stock warrants of $762,000 and for certain
non-cash reconciling items and fluctuations in working capital accounts. The
most significant changes in working capital accounts that impacted cash used in
operations were depreciation and amortization of $176,000, an increase in
deferred revenue of $90,000 and a decrease in prepaid expenses and other assets
of $70,000 reflecting normal amortization of our prepaid insurance costs.
Changes in deferred revenue represent up front license and technology access
payments subject to recognition over the terms of the underlying agreements and
impact cash flow from operations. During the first quarter of 2004, we
received higher up front fees than in 2003, including a license fee from Celera
Diagnostics as part of our license agreement. Cash used in investing activities represents the purchase of $48,000 of
manufacturing equipment. Future capital expenditures may include increased
manufacturing capacity for our Bothell facility and other investments to
support our operational growth. We may also require a larger inventory of raw 13




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materials and products to provide better service to our customers or to meet
our customers demand, particularly in light of our planned launch of clinical
diagnostic products later in 2004. We may finance these purchases from our
cash and cash equivalents on hand, cash generated from our operations,
borrowings, equity offerings, or a combination thereof. Cash provided by financing activities in the quarter ended March 31, 2004
of $5,599,000 was the result of $5,748,000 received in a private equity
transaction in February 2004 and $12,000 received from the exercise of stock
options, offset by repayments on term loans of $161,000. Private Equity Financing. On February 23, 2004, we consummated the
issuance of 2,470,000 newly-issued shares of our common stock, and warrants to
purchase 741,000 newly-issued shares of our common stock, to a small number of
institutional investors, resulting in our receipt of $6,175,000 in gross
proceeds, prior to placement agent fees and other offering costs totaling
$427,000 and the exercise of the warrants. Investors received a warrant to
purchase 0.3 shares of common stock for each share of common stock purchased.
The effective price in the private placement was $2.50 for each unit,
consisting of one share of common stock and a warrant to purchase 0.3 shares of
common stock. The warrants have an exercise period of five years and an
exercise price of $3.89 per share. Our placement agent with respect to the
transaction received a cash fee equal to 5.5% of the gross proceeds, and its
affiliates received warrants to purchase an aggregate of 75,000 shares of our
common stock, carrying the same terms as the warrants received by the
investors. The warrants issued in the private equity placement provide for cash
redemption by the warrant holders upon the occurrence of a change in control
that may be outside of the control of our Board of Directors, subject to
certain exceptions. As a result, and in accordance with EITF 00-19,
Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled In a Companys Own Stock, the fair value of the warrants, measured
using the Black-Scholes valuation method, is recorded as a current liability on
our balance sheet. The decrease in the market price of our common stock from
the closing of the equity placement on February 23, 2004 to March 31, 2004
resulted in a decrease in the value of the warrants between these dates and the
$762,000 warrant valuation adjustment reported in our statements of operations
for the period ending March 31, 2004. Until the warrants are exercised or expire, the valuation of the warrants
and the corresponding liability will be re-measured quarterly and the financial
statements will reflect a non-cash valuation adjustment based on the change in
the fair value of the warrants at the end of each reporting period. Bank Financing. Our current term loan facility allows us to borrow up to
$1,000,000 to finance manufacturing equipment and other assets and we continue
to have a working capital line of credit of up to $750,000 from a commercial
bank. Funds may be drawn on the equipment facility at any time through June
2004, and on the working capital line of credit at any time through August
2004, provided we are in compliance with the loan covenants. Advances under
the term loan and working capital line of credit are secured by a first
position security interest in our assets excluding intellectual property.
Amounts advanced under term loans are repayable in 36 monthly payments of
principal and interest at the banks prime rate plus 0.5%. On the working
capital line of credit, interest is payable monthly on any unpaid balances at
the banks prime rate plus 0.5%, with principal payable in full in September
2004. As of March 31, 2004, we have $941,000 of available financing under the
current term loan facility and $750,000 available from the working capital line
of credit. Summary. Based on cash and cash equivalents on hand at March 31, 2004, as
well as on results of operations and cash flows for the quarter ended March 31,
2004, we currently anticipate that existing cash balances, projected cash from
operations and unused borrowing capacity under existing bank loans will be
sufficient to meet our anticipated working capital and capital expenditures
needs through at least 14




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2005. However, our future capital requirements depend on numerous factors,
including but not limited to:  
    
    magnitude of our future losses;
    
    timing and terms of new technology licensing agreements or
other strategic relationships that may provide up front license fees
or other payments;
    
    resources that we devote to research and development and
sales and marketing in support of our business strategy; and
    
    capital expenditures necessary to expand manufacturing
capacity. It is possible that we may need to raise additional capital to fund our
activities and/or to consummate acquisitions of other businesses, products or
technologies. We may be able to raise such funds by selling more stock to the
public or to selected investors, or by borrowing money. In addition, even
though we may not need additional funds, we may still elect to sell additional
equity securities or obtain credit facilities for other reasons. We may not be
able to obtain additional funds on terms that would be favorable to our
shareholders and us, or at all. If we raise additional funds by issuing
additional equity or convertible debt securities, the ownership percentages of
existing shareholders would be reduced. In addition, the equity or debt
securities that we issue may have rights, preferences or privileges senior to
those of the holders of our common stock. Certain Factors That May Affect Our Business And Future Results Forward Looking Statements Some of the information included herein contains forward-looking
statements. These statements can be identified by the use of forward-looking
terms such as may, will, expect, anticipates, estimate, continue,
or other similar words. These statements discuss future expectations,
projections or results of operations or of financial condition or state other
forward-looking information. When considering these forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements we make. These risk factors could cause our actual results to
differ materially from those contained in any forward-looking statement. If
any of the following risks actually occur, our business could be harmed and the
trading price of our common stock could decline. We have realized operating profits in only one quarter and anticipate future
losses, and we may require additional capital Since our formation in 1985, we have generated limited revenues and
realized operating profit in only one quarter, which was the quarter ended
December 31, 2002. As of March 31, 2004, we had an accumulated deficit of
approximately $79 million. While we are commercializing our products and
technologies, prior to adequate revenues being generated from these activities
we expect to incur additional operating losses as we expand our manufacturing
capacity, continue our research and development activities and fund our product
commercialization efforts. There is no assurance that we will ever become
profitable from operations or that we will sustain operational profitability if
we do become profitable. Should we experience continued or unforeseen
operating losses, our capital requirements would increase and our stock price
would likely decline. Additionally, as of March 31, 2004 we had approximately $9.7 million in
cash and cash equivalents and have a commitment through June 2004 from a bank
for a secured term loan of $1,000,000 of which $59,000 has been drawn, a
working capital line of credit of $750,000 available through August 2004 that
has not been drawn upon. We currently anticipate that our current cash
balances, cash from operations, and unused borrowing capacity will be
sufficient to meet our cash needs 15




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through 2005. However, we may need to seek additional equity and/or debt
capital, and there can be no assurance that such capital will be available to
us on favorable terms, or at all. If additional funds are not available, we
would be required to delay, reduce, or eliminate expenditures for some or all
of our programs or products. We will be dependent upon our agreement with Applied Biosystems for a
significant portion of our revenues for 2004 and future periods, and a
reduction of sales under or early termination of this agreement would seriously
harm our revenues and operating results and would likely cause our stock price
to decline In January 1999, Epoch and Applied Biosystems entered into a License and
Supply Agreement pursuant to which we licensed some of our technology to
Applied Biosystems for use in its TaqMan® 5-nuclease real-time PCR assays,
(TaqMan® is a registered trademark of Roche Molecular Systems, Inc.). In July
1999, we licensed our proprietary software, which speeds the design of
oligonucleotide probes used in the study of genes, to Applied Biosystems. In
August 2000, the agreement was amended to, among other things, provide for
Epoch manufacturing product for Applied Biosystems. In July 2002 this
agreement was further amended to remove the manufacturing rights from the
contract effective October 2002, redefine product categories, increase the
minimum royalties and royalty rates, and establish that minimum royalties are
measured and paid quarterly. We will depend upon product sales and royalties
from Applied Biosystems sales of its TaqMan® assays under this agreement for a
significant portion of our revenues in 2004 and future periods. The technology licenses and Applied Biosystems obligation to pay us
royalties on their sale of products that incorporate our technologies continue
until the expiration of the underlying patents. Since the July 2002 amendment
that increased the minimum royalty levels, quarterly royalties earned based on
actual sales by Applied Biosystems have been less than the contractual minimum
royalty levels. As a result, weve received the specified quarterly minimum
amounts. The current agreement calls for quarterly royalty minimums through
September 2005. Thereafter, we will receive royalty payments based on actual
sales. Based on experience to date, those payments may be significantly less
than the minimum payments currently being made. Either party may terminate the agreement upon 180 days written notice. In
the event that this agreement is terminated, our revenues, financial condition
and operating results would be adversely affected and our stock price would
likely decline. There is a risk that our technology may not be effective or might not work The science and technology of synthetic DNA-based products is rapidly
evolving. While we are beginning to produce and supply products to customers
for commercial use, the majority of our products and proposed products are in
the discovery or early development stage. The proposed products will require
significant further research, development, and testing. We face the risk that
any or all of our products and proposed products could prove to be ineffective
or unsafe, or be an inferior product to products marketed by others because our
products are based on new and unproven innovative technologies. Some of our
current research and development activities may not result in any commercially
viable products. If we do not have commercially viable products, we will not
be able to sell our products, we will not be able to attract partners, and we
will not be able to generate funds internally to support operations. 16




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Our inability to implement effective marketing programs and build a successful
direct sales force and other distribution channels would limit our revenue
growth We have limited direct sales and marketing experience in general, little
infrastructure, and no recent experience selling to the clinical diagnostics
market. We believe that to market our products effectively, we must continue
to expand our direct sales operations. This expansion will require significant
management attention and financial resources to successfully develop direct and
indirect U.S. and international sales and support channels, and theres no
assurance that we will be successful or that our expenditures in this effort
will not exceed the amount of any resulting revenues. Competition for qualified
sales personnel is intense and we may not be able to hire and train as many
qualified individuals as we may require in the future. We will continue to
incur the expenses for a sales and marketing infrastructure before we recognize
significant revenue from sales of the product. If we are not able to
successfully build a sales and marketing infrastructure or if our direct sales
force is not successful we may not meet our revenue goals and our stock price
would likely decline. We have limited manufacturing experience While we have experience in researching and developing unique, proprietary
technologies to enhance the study of genes, and in manufacturing
oligonucleotides and other chemical intermediates at relatively small scales,
our experience in manufacturing at larger scales is relatively limited. We
have sufficient manufacturing capacity to meet current customer needs.
Anticipated increases in customer demand over the next year may require us to
expand our manufacturing capacity in Bothell, acquire additional manufacturing
capacity, or utilize costly third-party manufacturing vendors, as necessary.
Any delay or inability to expand our manufacturing capacity could materially
adversely affect our manufacturing ability. There is a risk that we do not own exclusive rights to our technology, or that
our competition may have access to our technology which may prevent us from
selling our products We attempt to protect our proprietary technology by relying on several
methods, including United States patents. We also have international patent
applications that correspond to many of the U.S. patents and patent
applications. The issued patents and pending patent applications cover
inventions relating to the components of our core technologies. The expiration
dates of these patents range from January 2012 to July 2020. We make no
guarantee that any issued patents will provide us with significant proprietary
protection, that pending patents will be issued, or that products incorporating
the technology covered by our issued patents or pending applications will be
free from challenges by competitors. Further, third parties may hold
proprietary rights which precede our claims and could therefore prohibit us
from marketing the proposed products. Some of our technology might infringe on the rights of others, which may
prevent us from selling our products There is a great deal of litigation regarding patents and other
intellectual property rights in the biomedical industry. We were defendants in
one action of this kind, which we settled prior to 1997. Although patent and
intellectual property disputes in the biomedical area are sometimes settled
through licensing or similar arrangements, this kind of solution can be
expensive, if a license can be obtained at all. An adverse determination in a
judicial or administrative proceeding or our failure to obtain necessary
licenses could prevent us from manufacturing and selling our products. This
would substantially hurt our business. 17




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We face numerous competitors and changing technologies which could make our
products obsolete Many companies do research and development and market products designed to
analyze genes and diagnose conditions based on a number of technologies and are
developing additional products. Many of these companies have substantially
greater capital resources, larger research and development and marketing staffs
and facilities and greater experience in developing products than we have.
Furthermore, the specific field in which we operate is subject to significant
and rapid technological change. Even if we successfully introduce our products
or proposed products, our technologies could be replaced by new technologies or
our products or proposed products might be obsolete or non-competitive. We will be dependent on our agreement with QIAGEN N.V. for the distribution of
our MGB Eclipse products and the resultant revenues. Lower than expected
sales, or early termination of this agreement would seriously harm our
projected revenues and operating results and would likely cause our stock price
to decline. In October 2002, Epoch and QIAGEN entered into a license and supply
agreement under which QIAGEN became the co-exclusive worldwide sales, marketing
and distribution partner to the research field of our MGB Eclipse Probe Systems
for gene expression. We will depend upon product sales to QIAGEN under this agreement for a
significant portion of our revenues in future periods. In the event that this
agreement is terminated, or if QIAGEN is unsuccessful at commercializing our
technologies, our revenues, financial condition and operating results would be
adversely affected and our stock price would likely decline. Some of our customers may experience financial difficulties, which could
adversely impact our collection of accounts receivable Although historically we have experienced limited credit losses from our
trade receivables, our experience is limited. At March 31, 2004, our allowance
for doubtful accounts was $70,000. We regularly review the collectibility and
credit worthiness of our customers and the receivables to determine an
appropriate allowance for doubtful accounts, however future uncollectible
accounts could exceed our current or future allowances. The loss of key personnel could adversely affect operations by impairing our
research and our efforts to commercialize and license our products Our performance is greatly dependent upon our key management, including
our Chief Executive Officer, Dr. William Gerber, and technical personnel and
consultants. Our future success will depend in part upon our ability to retain
these people and to recruit additional qualified personnel. We must compete
with other companies, universities, research entities and other organizations
in order to attract and retain highly qualified personnel. Although we have
entered into agreements with our key executive officers, we make no guarantee
that we will retain these highly qualified personnel or hire additional
qualified personnel. We currently maintain no key man life insurance on any of
our management or technical personnel. The value of our common stock could change significantly in a very short time The market price of our common stock may fluctuate significantly. For
example, in the year 2003 our stock closed as high as $3.56 in September, and
as low as $1.11 in February. The rapid price changes that our stock has
experienced recently, and throughout our history, place your investment in our 18




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common stock at risk of total loss over a short period of time. We are in
the biotechnology industry and the market price of securities of biotechnology
companies have fluctuated significantly and these fluctuations have often been
unrelated to the companies operating performance. Announcements by us or our
competitors concerning technological innovations, new products, proposed
governmental regulations or actions, developments or disputes relating to
patents or proprietary rights, and other factors that affect the market
generally could significantly impact our business and the market price of our
securities. Public opinion regarding ethical issues surrounding the use of genetic
information may adversely affect demand for our products Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic
testing. In addition, these authorities could prohibit testing for genetic
predisposition to certain conditions, particularly for those that have no known
cure. Furthermore, adverse publicity of public opinion relating to genetic
research and testing, even in the absence of any governmental regulation, could
harm our business. Any of these scenarios could reduce the potential markets
for our products and technologies, which could materially and adversely affect
our revenues. Government regulation of genetic research or testing may adversely affect the
demand for our products and impair our business and operations Federal, state and local governments may adopt regulations relating to the
conduct of genetic research and genetic testing. These regulations could limit
or restrict genetic research activities as well as genetic testing for research
or clinical purposes. In addition, if state and local regulations are adopted,
these regulations may be inconsistent with, or in conflict with, regulations
adopted by other state or local governments. Regulations relating to genetic
research activities could adversely affect our ability to conduct our research
and development activities. Regulations restricting genetic testing could
adversely affect our ability to market and sell our products and our
technologies. Accordingly, any regulations of this nature could harm our
business. Health care cost containment initiatives could limit the adoption of genetic
testing as a clinical tool, which would harm our revenues and prospects In recent years, health care payers as well as federal and state
governments have focused on containing or reducing health care costs. We
cannot predict the effect that any of these initiatives may have on our
business, and it is possible that they will adversely affect our business.
Health care cost containment initiatives focused on genetic testing could cause
the growth in the clinical market for genetic testing to be curtailed or
slowed. In addition, health care cost containment initiatives could also cause
pharmaceutical companies to reduce research and development spending. In
either case, our business and our operating results could be harmed. 19




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We plan to introduce products for the clinical diagnostics market in 2004, and
we will need to comply with FDA quality system regulations and other
regulations relating to the manufacturing, marketing and sale of clinical
products. The manufacturing, labeling, distribution and marketing of our clinical
diagnostic products will be subject to regulation in the United States and in
certain other countries. In the United States, the Food and Drug Administration, or the FDA,
regulates, as medical devices, most diagnostic tests and in vitro reagents that
are marketed as finished test kits. Some clinical laboratories, however,
purchase clinical products which are marketed under FDA regulations as analyte
specific reagents, or ASRs, and develop and prepare their own finished
diagnostic tests called home brews. The FDA also considers ASRs to be
medical devices which are exempt from premarket approval requirements. The FDA
restricts the sale of these products to clinical laboratories certified under
the Clinical Laboratory Improvement Amendments of 1988, known as CLIA, to
perform high complexity testing. Unless otherwise exempt, medical devices require FDA approval or clearance
prior to marketing in the United States. We believe our currently marketed
products, as well as those ASRs we intend to market in the future, are exempt
from 510(k) premarket notification and premarket approval requirements. To
date, we have not applied for FDA or any other regulatory approvals or
clearances with respect to any of our clinical diagnostic products. However,
clinical products that we may seek to introduce in the future may require FDA
approvals or clearances prior to commercial sale in the United States and that
process can be time-consuming, expensive, and uncertain. We may experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new clinical products. There can be no assurance
that the FDA will not require us to conduct clinical studies as a condition of
approval or clearance. In addition, we cannot assure you that regulatory
approval or clearance of any clinical products for which we seek such approvals
will be granted by the FDA or foreign regulatory authorities on a timely basis,
if at all. If approval or clearance is obtained we will be subject to
continuing FDA obligations. When manufacturing medical devices, including ASRs, we will be required to
adhere to Quality System regulations, which will require us to manufacture our
products and maintain records in a prescribed manner. Our manufacturing
facility for ASRs is subject to periodic and unannounced inspections by the FDA
and state agencies for compliance with quality system regulations. We have
never been subject to an FDA Quality System inspection, and we cannot assure
you that we can pass an FDA audit or maintain compliance in the future.
Further, the FDA may place substantial restrictions on the indications for
which our products may be marketed or to whom they may be marketed. Failure to
comply with applicable FDA requirements can result in, among other things:  
    
    administrative or judicially imposed sanctions;
    
    injunctions, civil penalties, recall or seizure of our products;
    
    total or partial suspension of production;
    
    failure of the government to grant premarket clearance or
premarket approval for our products;
    
    withdrawal of marketing clearance or approvals; and
    
    criminal prosecution. Customers using our products for clinical diagnostics use in the United
States may be regulated under CLIA. CLIA is intended to ensure the quality and
reliability of clinical laboratories in the United States by mandating specific
standards in the areas of personnel qualification, administration, 20




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participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The regulations promulgated under CLIA
establish three levels of clinical tests and the standards applicable to a
clinical laboratory depend on the level of the tests it performs. CLIA
requirements may prevent some clinical laboratories from using our products.
Therefore, CLIA regulations and future administrative interpretations of CLIA
could harm our business by limiting the potential market for our products. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Our financial instruments include cash and short-term investment grade
debt securities. We also have term loans on capital equipment through a
commercial bank. At December 31, 2003 and March 31, 2004 the carrying values
of our financial instruments approximated their fair values based on current
market prices and rates. We do not believe that fluctuations in interest rates
would have a material impact on us. It is our policy not to enter into
derivative financial instruments. We do not currently have material foreign
currency exposure as our international transactions are minimal and the
majority of our international transactions are denominated in U.S. currency.
Accordingly, we do not have significant exposure to foreign currency exchange
rate risk at March 31, 2004. In the future, under the terms of the QIAGEN
agreement, we anticipate conducting increasing volumes of business in Euros for
QIAGEN sales in Europe and in Yen for QIAGEN sales in Japan. We do not
anticipate that these transactions will create significant exposure to foreign
currency exchange rate risk. 
 Item 4. Controls and Procedures The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures as of the end of the period
covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures, as of the end of the
period covered by this report, were effective in timely alerting them to
material information relating to the Company required to be included in the
Companys periodic SEC filings. There has been no change in the Companys internal control over financial
reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 21




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Part II. Other Information 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities. Recent Sales of Unregistered Securities On February 23, 2004, we consummated the issuance of 2,470,000
newly-issued shares of our common stock, and warrants to purchase 741,000
newly-issued shares of our common stock, to a small number of institutional
investors, resulting in our receipt of approximately $6,175,000 in gross
proceeds, prior to placement agent fees and other offering costs totaling
$427,000 and the exercise of the warrants. Investors received a warrant to
purchase 0.3 shares of common stock for each share of common stock purchased.
The effective price in the private placement was $2.50 for each unit,
consisting of one share of common stock and a warrant to purchase 0.3 shares of
common stock. The warrants have an exercise period of five years and an
exercise price of $3.89 per share. Our placement agent with respect to the
transaction received a fee equal to 5.5% of the gross proceeds, and its
affiliates received warrants to purchase an aggregate of 75,000 shares of our
common stock, carrying the same terms as the warrants received by the
investors. None of the shares of common stock, the warrants sold to the
investors, nor the shares of common stock to be issued upon exercise of the
warrants have been registered under the Securities Act of 1933. Accordingly,
these shares and warrants may not be offered or re-sold in the United States,
except pursuant to an effective registration statement or an applicable
exemption from the registration requirements of the Securities Act. The
registration statement covering the resale by the investors of these shares and
the shares of common stock issuable upon exercise of the warrants was declared
effective by the SEC on April 30, 2004. Any opportunity to participate in the
private placement was available to a very limited group of institutional and
other accredited investors. Exemption from the registration requirements of
the Securities Act for the sales of the securities described above was 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. We plan to use proceeds from the private placement principally to
expand our sales and marketing infrastructure to support direct selling
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Item 6. Exhibits and Reports on Form 8-K (a) Exhibits ExhibitNumber

    Description10.37
    
    Securities Purchase Agreement, dated February 23, 2004, by
and among Epoch Biosciences, Inc. and the investors a party
thereto (incorporated by reference to Exhibit 4.1 of
Epochs current report on Form 8-K filed with the SEC on
February 25, 2004).10.38
    
    Registration Rights Agreement, dated February 23, 2004, by
and among Epoch Biosciences, Inc. and the investors a party
thereto (incorporated by reference to Exhibit 4.2 of
Epochs current report on Form 8-K filed with the SEC on
February 25, 2004).10.39
    
    Form of Warrant issued pursuant to the Securities Purchase
Agreement, dated February 23, 2004, by and among Epoch
Biosciences, Inc. and the investors a party thereto
(incorporated by reference to Exhibit 4.3 of Epochs
current report on Form 8-K filed with the SEC on February
25, 2004).31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 23




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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 Biosciences, Inc.Date: May 10, 2004
    By:
    /s/  Bert W. HogueBert W. HogueVice President and Chief Financial Officer 24




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EXHIBIT INDEX ExhibitNumber
    
    Description10.37
    
    Securities Purchase Agreement, dated February 23, 2004, by
and among Epoch Biosciences, Inc. and the investors a party
thereto (incorporated by reference to Exhibit 4.1 of
Epochs current report on Form 8-K filed with the SEC on
February 25, 2004).10.38
    
    Registration Rights Agreement, dated February 23, 2004, by
and among Epoch Biosciences, Inc. and the investors a party
thereto (incorporated by reference to Exhibit 4.2 of
Epochs current report on Form 8-K filed with the SEC on
February 25, 2004).10.39
    
    Form of Warrant issued pursuant to the Securities Purchase
Agreement, dated February 23, 2004, by and among Epoch
Biosciences, Inc. and the investors a party thereto
(incorporated by reference to Exhibit 4.3 of Epochs
current report on Form 8-K filed with the SEC on February
25, 2004).31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.