As filed with the Securities and Exchange Commission on November 15, 1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from _________________.
Commission File Number 0-27352
HYBRIDON, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3072298
- ------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
155 Fortune Blvd.
Milford, Massachusetts 07157
(Address of principal executive offices)
(508) 482-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.001 per share 16,262,722
- --------------------------------------- -----------------------------------
Class Outstanding as of November 12, 1999
HYBRIDON, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL STATEMENTS
Item 1- Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 1999 and
December 31, 1998.
Consolidated Condensed Statements of Operations for the Three Months
and Nine Months ended September 30, 1999 and 1998.
Consolidated Condensed Statements of Cash Flows for the Nine Months
ended September 30, 1999 and 1998.
Notes to Consolidated Condensed Financial Statements.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.
PART II - OTHER INFORMATION
Items 1-3 None
Item 4 None
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
2
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
September December
30, 1999 31, 1998
CURRENT ASSETS:
Cash and cash equivalents $ 500,179 $ 5,607,882
Accounts receivable 838,852 1,175,441
Prepaid expenses and other current assets 102,185 110,827
----------- -----------
Total current assets 1,441,216 6,894,150
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 11,127,035 11,127,035
Laboratory and other equipment 9,988,579 11,432,435
----------- -----------
21,115,614 22,559,470
Less--Accumulated depreciation and amortization 14,162,190 13,788,979
----------- -----------
6,953,424 8,770,491
----------- -----------
OTHER ASSETS:
Deferred financing costs and other assets 531,423 612,374
Notes receivable from officers 267,200 258,650
----------- -----------
798,623 871,024
----------- -----------
$ 9,193,263 $16,535,665
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,078,179 $ 6,070,951
Related party promissory notes payable 1,000,000 --
Accounts payable 2,512,738 2,368,163
Accrued expenses 2,389,804 4,068,679
------------- -------------
Total current liabilities 11,980,721 12,507,793
LONG-TERM DEBT, NET OF CURRENT PORTION 413,523 473,094
------------- -------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 1,306,000 1,306,000
------------- -------------
STOCKHOLDERS' (DEFICIT)EQUITY:
Preferred stock, $.01 par value-
Authorized--5,000,000 shares
Series A convertible preferred stock-
Designated - 1,500,000 shares
Issued and outstanding--641,023
and 641,259 shares at September
30, 1999 and December 31, 1998,
respectively 6,410 6,413
(Liquidation preference of $00
at September 30, 1999)
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding - 16,260,731 and
15,304,825 shares,
respectively 16,261 15,305
Additional paid-in capital 246,227,811 241,632,024
Accumulated deficit (249,974,144) (238,447,837)
Deferred compensation (783,319) (957,127)
------------- -------------
Total stockholders' (deficit) equity (4,506,981) 2,248,778
------------- -------------
$ 9,193,263 $ 16,535,665
============= =============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
Hybridon, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
REVENUES:
Product and service revenue $ 1,577,125 $ 846,746 $ 4,643,842 $ 2,353,435
Research and development 150,000 150,000 450,000 949,915
Interest income 12,540 44,010 81,724 106,457
Royalty and other income 51,970 -- 106,950 --
------------ ------------ ------------ ------------
1,791,635 1,040,756 5,282,516 3,409,807
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development 3,414,782 5,201,246 10,106,459 17,180,927
General and administrative 884,109 1,503,845 2,946,564 5,817,864
Interest 224,555 296,344 561,949 2,880,307
------------ ------------ ------------ ------------
4,523,446 7,001,435 13,614,972 25,879,098
------------ ------------ ------------ ------------
Loss from operations (2,731,811) (5,960,679) (8,332,456) (22,469,291)
EXTRAORDINARY ITEM:
Gain on conversion of 9%
convertible subordinated notes
payable -- -- -- 8,876,685
------------ ------------ ------------ ------------
NET LOSS (2,731,811) (5,960,679) (8,332,456) (13,592,606)
------------ ------------ ------------ ------------
ACCRETION OF PREFERRED STOCK
DIVIDENDS 1,075,899 1,026,500 3,193,851 1,647,000
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (3,807,710) $ (6,987,179) $(11,526,307) $(15,239,606)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON
SHARE FROM (Note 3):
LOSS BEFORE EXTRAORDINARY
ITEM $ (0.17) $ (0.39) $ (0.54) $ (2.11)
EXTRAORDINARY ITEM -- -- -- 0.83
------------ ------------ ------------ ------------
NET LOSS PER SHARE (0.17) (0.39) (0.54) (1.28)
ACCRETION OF PREFERRED STOCK
DIVIDENDS (0.07) (0.07) (0.20) (0.15)
------------ ------------ ------------ ------------
NET LOSS PER SHARE APPLICABLE TO
COMMON STOCKHOLDERS $ (0.24) $ (0.46) $ (0.74) $ (1.43)
============ ============ ============ ============
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER COMMON SHARE
(Note 3) 15,984,146 15,254,825 15,653,562 10,648,116
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated condensed financial statements
4
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,332,456) $(13,592,606)
Adjustments to reconcile net loss to net cash used in
operating activities-
Extraordinary gain on conversion of 9% convertible
subordinated notes payable -- (8,876,685)
Depreciation and amortization 1,825,370 2,419,269
Loss on disposal of fixed assets -- 424,675
Amortization of deferred compensation 576,697 163,044
Amortization of deferred financing costs 80,951 240,611
Changes in operating assets and liabilities-
Accounts receivable 336,589 (295,966)
Prepaid and other current assets 8,642 557,703
Notes receivable from officers (8,550) (8,550)
Accounts payable and accrued expenses (534,300) 328,673
------------ ------------
Net cash used in operating activities (6,047,057) (18,639,832)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (8,303) (340,507)
Proceeds from sale of fixed assets -- 460,000
------------ ------------
Net cash (used in) provided by investing activities (8,303) 119,493
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock -- 7,999,960
Net proceeds from issuance of common stock -- 6,876,676
Proceeds from issuance of convertible promissory notes payable -- 4,233,833
Proceeds from related party promissory notes payable 1,000,000 --
Payments on long-term debt and capital leases (52,343) (4,236,693)
Decrease in restricted cash and other assets -- 2,327,186
------------ ------------
Net cash provided by financing activities 947,657 17,200,962
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,107,703) (1,319,377)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,607,882 2,202,202
------------ ------------
5
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 500,179 $ 882,825
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 532,564 $ 1,494,323
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accretion of Series A convertible preferred stock dividend $ 3,193,851 $ 1,026,500
============ ============
Issuance of common stock in lieu of services $ 1,000,000 $ --
============ ============
Issuance of Series A convertible preferred stock and
attached warrants in exchange for conversion of 9%
convertible subordinated notes payable and accrued interest $ -- $ 51,055,850
============ ============
Issuance of common stock and attached warrants in exchange for
conversion of convertible promissory notes payable $ -- $ 4,800,000
============ ============
Issuance of common stock and attached warrants in exchange for
conversion of accounts payable and other obligations $ -- $ 5,934,558
============ ============
Conversion of Series A convertible preferred stock into shares
of common stock $ 486 $ --
============ ============
The accompanying notes are an integral part of these
consolidated condensedfinancial statements.
6
Hybridon, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION
Hybridon, Inc. (the Company) was incorporated in the State of Delaware
on May 25, 1989. The Company is engaged in the discovery and
development of novel genetic medicines based primarily on antisense
technology.
Since inception, the Company has been engaged primarily in research and
development efforts, development of its manufacturing capabilities and
organizational efforts, including recruiting of scientific and
management personnel and raising capital. To date, the Company has not
received revenue from the sale of biopharmaceutical products developed
by it based on antisense technology. In order to commercialize its own
products, the Company will need to address a number of technological
challenges and comply with comprehensive regulatory requirements.
Accordingly, it is not possible to predict the amount of funds that
will be required or the length of time that will pass before the
Company receives revenues from sales of any of these products. All
revenues received by the Company to date have been derived from
collaboration agreements, interest on investment funds and revenues
from the custom contract manufacturing of synthetic DNA and reagent
products by the Company's Hybridon Specialty Products Division. As a
result, although the Company has begun to generate revenues from its
contract manufacturing business, the Company is dependent on the
proceeds from possible future sales of equity securities, debt
financings and research and development collaborations in order to fund
future operations.
The Company is currently seeking debt or equity financing in an amount
sufficient to support its (operations through at least the end of 1999,
and in connection therewith, is in negotiations to obtain such
financing. Subsequent to September 30, 1999, the Company obtained
approximately $500,000 under a loan agreement (the Loan) from new and
existing investors (the New Investors). No later than December 31,
1999, the Loan will be converted, at the option of the New Investors,
into either (i) preferred stock or (ii) secured debt, as defined. In
addition, the Company has also received approximately $500,000 (and an
additional $400,000 in escrow) under the terms of its current debt
offering of 8% Notes convertible to common stock at $.60 per share.
While the terms of this financing have been agreed to, the parties have
not yet finalized the documentation. It is therefore possible that the
Company may not consummate this financing and gain use of these funds.
The Company does not, however, anticipate any such difficulties. If the
Company is unable to obtain additional financing by the end of 1999, it
will be forced to obtain funds through arrangements with collaborative
partners or others that may require it to relinquish rights to certain
of its technologies, product candidates or products which it would
otherwise pursue on its own, or terminate operations or seek relief
under applicable bankruptcy laws.
On December 3, 1997, the Company was delisted from the Nasdaq Stock
Market, Inc. (NASDAQ) because the Company was not in compliance with
the continued listing requirements of the NASDAQ National Market. The
Company is currently trading on the NASD OTC as a result of the
delisting.
(2) UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited consolidated condensed financial statements included
herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission and
include, in the opinion of management, all adjustments, consisting of
normal, recurring adjustments, necessary for a fair presentation of
interim period results. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however,
that its disclosures are adequate to make the information presented not
misleading. The results for the interim periods
7
Hybridon, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
presented are not necessarily indicative of results to be expected for
the full fiscal year. It is suggested that these financial statements
be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, as filed with the
Securities and Exchange Commission.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss per Common Share
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share. Under SFAS No. 128, basic
net loss per share applicable to common shareholders is computed using
the weighted average number of shares of common stock outstanding
during the period. Diluted net loss per common share is the same as
basic net loss per common as the effects of the Company's potential
common stock equivalents are antidilutive.
Comprehensive Loss
The Company follows the provisions of SFAS No. 130, Reporting
Comprehensive Income. Comprehensive loss is defined as the change in
equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. The Company's
comprehensive loss is the same as the reported net loss for all periods
presented.
Segment Reporting
The Company follows the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected
information for those segments to be reported in interim financial
reports issued to stockholders. SFAS No. 131 also establishes standards
for related disclosures about products and services and geographic
areas. To date, the Company has viewed its operations and manages its
business as principally one operating segment. As a result, the
financial information disclosed herein, represents all of the material
financial information related to the Company's principal operating
segment. All of the Company's revenues are generated in the United
States and substantially all assets are located in the United States.
(4) CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash and
cash equivalents at September 30, 1999 and December 31, 1998 consisted
of the following (at amortized cost, which approximates fair market
value):
September December
30, 1999 31, 1998
Cash and cash equivalents-
Cash and money market funds $ 407,966 $3,865,365
Corporate bond 92,213 1,742,517
---------- ----------
$ 500,179 $5,607,882
========== ==========
8
Hybridon, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5) 9.0% CONVERTIBLE SUBORDINATED NOTES
On April 2, 1997, the Company issued $50,000,000 of 9.0% convertible
subordinated notes (the 9% Notes). On May 5, 1998 noteholders holding
$48.7 million of principal value of the 9% Notes tendered such notes in
exchange for Series A convertible preferred stock, approximately
$2,355,000 of accrued interest thereon was converted into shares of
Series A convertible preferred stock and warrants to purchase common
stock. As of September 30, 1999, there is $1.3 million of 9% Notes
outstanding. Under the terms of the 9% Notes, the Company must make
semi-annual interest payments on the outstanding principal balance
through the maturity date of April 1, 2004. If the 9% Notes are
converted prior to April 1, 2000, the Noteholders are entitled to
receive accrued interest from the date of the most recent interest
payment through the conversion date. The 9% Notes are convertible at
any time prior to the maturity date at a conversion price equal to
$35.0625 per share, subject to adjustment under certain circumstances,
as defined.
Beginning April 1, 2000, the Company may redeem the 9% Notes at its
option for a 4.5% premium over the original issuance price, provided
that from April 1, 2000 to March 31, 2001, the 9% Notes may not be
redeemed unless the closing price of the common stock equals or exceeds
150% of the conversion price for a period of at least 20 out of 30
consecutive trading days and the 9% Notes redeemed within 60 days after
such trading period. The premium decreases by 1.5% each year through
March 31, 2003. Upon a change of control of the Company, as defined,
the Company will be required to offer to repurchase the 9% Notes at
150% of the original issuance price.
(6) NOTE PAYABLE TO LENDERS
During November 1998, the Company entered into a $6,000,000 note
payable with Forum Capital Markets, LLC (Forum) and certain investors
associated with Pecks Management Partners Ltd. (collectively, the
Lenders). The terms of the note payable are as follows: (i) the
maturity is November 30, 2003; (ii) the interest rate is 8%; (iii)
interest is payable monthly in arrears, with the principal due in full
at maturity of the loan; (iv) the note payable is convertible, at the
Lender's option, in whole or in part, into shares of common stock at a
rate equal to $2.40 per share; (v) the note includes a minimum
liquidity covenant of $2,000,000; and (vi) the note payable may not be
prepaid, in whole or in part, at any time prior to December 1, 2000.
The Company has received waivers of noncompliance with the minimum
tangible net worth covenant and for the minimum liquidity covenant
through November 30, 1999. The Company has classified the outstanding
balance of $6,000,000 at September 30, 1999 and December 31, 1998 as a
current liability in the accompanying consolidated balance sheet at it
does not expect to remain in compliance with the financial covenants.
In connection with refinancing the note payable to a bank, Forum
received $400,000, which was reinvested by Forum to purchase 160,000
shares of common stock with 40,000 attached warrants at an exercise
price of $3.00 per share. The Company has recorded the $400,000 as a
deferred financing cost, which will be amortized to interest expense
over the term of the note. In addition, Forum received warrants to
purchase 133,333 shares of common stock of the Company at $3.00 per
share. The Company computed the value of the warrants to be $85,433, by
using the Black-Scholes option pricing model. The Company has recorded
this $85,433 as a deferred financing cost, which will be amortized to
interest expense over the term of the note.
9
(7) RELATED PARTY PROMISSORY NOTES PAYABLE
During September 1999, the Company entered into two $500,000 promissory
notes payable with the Company's Chief Executive Officer and President
(the Lender). The terms of the promissory notes payable are as follows:
(i) the maturity is March 1, 2000, subject to certain conditions, as
defined; (ii) interest is payable at the option of the Lender at either
(a) 12% payable in cash, or (b) 15% payable in common stock of the
Company at $.50 per share; (iii) interest is payable monthly in
arrears, beginning October 1, 1999; and (iv) the term note may be
prepaid in whole or in part, at anytime without penalty. The promissory
notes payable are secured by substantially all tangible and intangible
assets of the Company.
(8) STOCK OPTION REPRICING
In September 1999, the Company's Board of Directors authorized a
repricing of all outstanding stock options. Under the terms of the
repricing, all current option holders (5,251,827 shares) had their
options repriced to an exercise price of $.50 per share. Under
Accounting Principles Board Opinion No. 25, the Company is required to
use variable plan accounting for these options until their expiration
or exercise.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Hybridon is engaged in the discovery and development of genetic medicines based
on antisense technology. Hybridon commenced operations in February 1990 and
since that time has been engaged primarily in research and development efforts,
developing its manufacturing capabilities and raising capital. In order to
commercialize its therapeutic products, Hybridon will need to raise substantial
additional funds, as well as to address a number of technological challenges and
comply with comprehensive regulatory requirements. All revenues received by
Hybridon to date have been derived from collaborative agreements, interest on
invested funds and revenues from the custom contract manufacturing of synthetic
DNA and reagent products by Hybridon Specialty Products ("HSP").
Hybridon has incurred cumulative losses from inception through September 30,
1999 of approximately $250.0 million. Hybridon has significantly reduced its
operating expenses pursuant to a restructuring commenced in the second half of
1997 and completed in 1998. Hybridon expects that, assuming adequate financing
can be obtained, its research and development expenses will be significant in
1999 and future years as it pursues its core drug development programs and
expects to continue to incur operating losses and have significant capital
requirements that it will not be able to satisfy with internally generated
funds. As of November 12, 1999, the Company had 45 full-time employees.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Hybridon had total revenues of $1.8 million and $1.0 million for the three
months ended September 30, 1999 and 1998, respectively, and had total revenues
of $5.3 million and $3.4 million for the nine months ended September 30, 1999
and 1998, respectively. Revenues from products and services were $1.6 million
and $0.8 million for the three months ended September 30, 1999 and 1998,
respectively, and $4.6 million and $2.4 million for the nine months ended
September 30, 1999 and 1998, respectively. The increase was primarily the result
of increased sales to HSP customers and receipt of service revenues from
MethylGene, Inc., an entity in which the Company has an approximately 30% equity
interest and OriGenix Technologies, Inc., an entity in which the Company has an
approximately 49% equity interest.
Revenues from research and development collaborations were $0.2 million for both
the three months ended September 30, 1999 and 1998, and $0.5 million and $0.9
million for the nine months ended September 30, 1999 and 1998, respectively.
This decrease was primarily due to a reduction in revenues recorded under a
License Agreement with MethylGene, Inc.
Hybridon's research and development expenses were $3.4 million and $5.2 million
for the three months ended September 30, 1999 and 1998, respectively, and $10.1
million and $17.2 million for the nine months ended September 30, 1999 and 1998,
respectively. The decrease reflects Hybridon's reduction of its operating
expenses in 1997 and 1998 pursuant to the restructuring commenced in 1997 and
completed in 1998 and the lower levels of cash available for expenditures in
1999. The restructuring included the discontinuation of operations at Hybridon's
facilities in Europe, and also resulted in significant reductions in employees
and employee-related expenses, clinical and outside testing, consulting,
materials and lab expenses.
In addition, the facilities expense included in research and development
expenses decreased significantly in 1999 as a result of the relocation of the
Company's corporate offices and lab space in July 1998 from Cambridge to
Milford, Massachusetts and the sublease of its unused facilities.
Hybridon's general and administrative expenses were $0.9 million and $1.5
million for the three months ended September 30, 1999 and 1998, respectively,
and $2.9 million and $5.8 million for the nine months ended September 30, 1999
and 1998, respectively. The decrease reflects Hybridon's reduction of its
operating expenses in 1997 and
11
1998 pursuant to the restructuring commenced in 1997 and completed in 1998 and
which resulted in significant reduction in employees and employee-related
expenses and consulting expenses. General and administrative expenses related to
business development, public relations and legal and accounting expenses also
decreased in 1999.
In addition, the facilities expense included in general and administrative
expenses also decreased significantly in 1999 as a result of the relocation of
the Company's corporate offices to Milford, Massachusetts in 1998.
Hybridon's patent expenses remained at approximately the same level in 1999 as
1998.
Hybridon's interest expense was $0.2 million and $0.3 million for the three
months ended September 30, 1999 and 1998, respectively, and $0.6 million and
$2.9 million for the nine months ended September 30, 1999 and 1998,
respectively. The decrease is attributable to the exchange of approximately
$48.7 million of the 9% convertible subordinated notes (the "9% Notes") issued
in the second quarter of 1997 for Series A Preferred Stock on May 5, 1998. In
addition, the outstanding balance of borrowings to finance the purchase of
property and equipment was reduced in May 1998, resulting in a subsequent
reduction in interest expense.
As a result of the above factors, Hybridon incurred net losses from operations
of $2.7 million and $6.0 million for the three months ended September 30, 1999
and 1998, respectively, and $8.3 million and $22.5 million for the nine months
ended September 30, 1999 and 1998, respectively.
Hybridon had extraordinary income of $8.9 million for the nine months ended
September 30, 1998 resulting from the conversion of $48.7 million principal
amount of 9% Notes to Series A Convertible Preferred Stock in the second quarter
of 1998. As a result of this transaction, the Company reduced its net loss to
$13.6 million for the nine months ended September 30, 1998.
Hybridon had accretion of preferred stock dividends of $1.1 million and $1.0
million for the three months ended September 30, 1999 and 1998, respectively,
and $3.2 million and $1.6 million for the nine months ended September 30, 1999
and 1998, respectively, to reflect the accrued portion of dividends payable to
the holders of Series A Preferred Convertible Stock, resulting in a net loss to
common stockholders of $3.8 million and $7.0 million for the three months ended
September 30, 1999 and 1998, respectively, and a net loss to common stockholders
of $11.5 million and $15.2 million for the nine months ended September 30, 1999
and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, Hybridon used approximately
$6.0 million to fund operating activities. The primary use of cash for operating
activities was to fund a portion of Hybridon's operating loss of $8.3 million.
Hybridon had cash and cash equivalents of $0.5 million at September 30, 1999.
However, since that date, Hybridon has expended a portion of such cash resources
and continues to have substantial obligations to lenders, real estate landlords,
trade creditors and others. On November 12, 1999, Hybridon's obligations
included a $1.0 million loan described below with E. Andrews Grinstead III,
Hybridon's Chairman and President, $1.3 million principal amount of 9% Notes, a
$6.0 million loan with Forum Capital Markets, LLC and others (collectively, the
"Lenders"), a $0.5 million loan as described below, approximately $0.5 million
in 8% Convertible Notes as described below, and approximately $2.3 million of
accounts payable. Because of Hybridon's financial condition, many trade
creditors are only willing to provide Hybridon with products and services on a
cash on delivery basis. The note to the Lenders contains certain financial
covenants that require Hybridon to maintain minimum tangible net worth and
minimum liquidity. Hybridon is not in compliance with those covenants. However,
Forum Capital Markets has granted Hybridon a waiver of compliance with the
minimum tangible net worth requirement and the minimum liquidity requirement at
September 30, 1999 and has agreed not to require that Hybridon comply with those
requirements for any periods commencing October 1, 1999 through November 30,
1999. A representative of the other Lenders has indicated informally to Hybridon
that the other Lenders intend to do likewise, but they have not yet entered into
a written agreement to that effect.
12
On September 1, 1999 and September 27, 1999, Hybridon entered into two six
month, $500,000 promissory notes payable and a loan agreement with E. Andrews
Grinstead III, Hybridon's Chairman and President. The loan is payable with
interest, at the option of the lender, at the rate of either (a) 12% per annum,
payable in cash or (b) 15% per annum, payable in Hybridon's common stock at the
rate of $0.50 per share. Interest is due and payable monthly in arrears on the
first business day of each month commencing on October 1, 1999 until March 1,
2000. The loan agreement provides that it is the intent of the parties that upon
the closing of any third party debt financing on or before March 1, 2000, this
loan will be converted into a portion of the credit facility made pursuant to
such debt financing. If for any reason the third party debt financing does not
close on or before March 1, 2000, the lender will have the option (a) to convert
the entire loan to a five-year term loan bearing interest at 8% per annum, with
the right to receive warrants to purchase in the aggregate 2,100,000 shares of
Hybridon common stock at per-share exercise prices of $1.50 (for three-year
warrants) and $1.25 (for four-year warrants), subject to downward adjustment, at
the one-year anniversary of the warrant issuance date, to the per-share market
price of Hybridon's common stock, in the case of the warrants having a $1.50
exercise price, and to 83.3% of the per-share market price of Hybridon's common
stock, in the case of the warrants with a $1.25 exercise price, if the market
price does not exceed $1.50, (b) to convert the entire loan to a demand loan
bearing interest at the lender's option at either (i) 12% per annum, payable in
cash or (ii) 15% per annum, payable in Hybridon's common stock at the rate of
$0.50 per share, or (c) to declare the entire principal and interest immediately
due and payable. The loan may be prepaid without premium or penalty at any time.
The loan is secured by substantially all the assets of Hybridon.
During October and November 1999, Hybridon raised approximately %500,000 under a
loan agreement with various parties. The loan will be converted, at the lenders'
option, into either (a) preferred equity, or (b) secured debt, no later than
December 31, 1999, as described below. Hybridon will pay the lenders interest
monthly in arrears on the unpaid principal amount of the loan at the rate of 8%
per annum, payable in common stock at the rate of $0.50 per share, on the first
business day of each month that the loan is outstanding, commencing November 1,
1999. The loan may be prepaid without premium or penalty at any time. Any
preferred stock into which such loan is converted will (i) rank senior to
existing preferred stock, but junior to all debt, (ii) will be paid a dividend
of 8% per annum, payable semi-annually in arrears, which will be payable in
Hybridon common stock, priced at the market price on the record date, (iii) will
be convertible to Hybridon common stock at the rate of $0.50 per share at any
time and (iv) will be callable by Hybridon at any time after three years. Any
secured debt into which such loan will be converted will (a) have a five-year
term, (b) will bear 8% interest, payable semi-annually in arrears, payable in
cash or Hybridon common stock, at Hybridon's option, (c) will be convertible
into common stock at $0.60 per share, (d) will be prepayable by Hybridon, in
whole or in part, at any time in cash; provided however, that if the loan is
prepaid at Hybridon's election during the first three years of the term,
Hybridon will issue a number of warrants with an exercise price of $0.60 per
share to purchase common stock equal to the number of shares into which the
amount prepaid was convertible, (e) will be secured by all assets of Hybridon
and (f) will rank pari passu with the current $6.0 million loan held by the
Lenders.
During October 1999, Hybridon commenced an offering that will extend through
December 1999. If such offering is consummated, the September notes and October
loans described above are expected to convert and become part of the offering.
The terms of the offering are as follows: (a) three-year term; (b) interest rate
of 8%, payable semi-annually in arrears; (c) interest is payable in cash or in
additional notes, at Hybridon's option; (d) convertible into common stock at
$0.60 per share; (e) prepayable by Hybridon, in whole or in part, at any time in
cash; (f) if prepaid at Hybridon's election during the first three years of the
term, Hybridon will issue a number of warrants to purchase common stock equal to
the number of shares into which the amount prepaid was convertible, with a $0.60
strike price; and (g) secured by substantially all assets. The securities
offered have not been and will not be registered under the Securities Act and
may not be offered or sold in the U.S. absent registration or an applicable
exemption from registration requirements. As of November 15, 1999, Hybridon had
received approximately $500,000 (and an additional $400,000 in escrow) under the
terms of this offering. While the terms of this financing have been agreed to,
the parties have not yet finalized the documentation. It is therefore possible
that Hybridon may not consummate this financing and gain use of these funds.
Hybridon does not, however, anticipate any such difficulties.
Hybridon's ability to continue operations in 1999 depends on its success in
obtaining new funds in the immediate future. Hybridon is currently seeking debt
or equity financing in an amount sufficient to support its operations into 2000,
and in connection therewith, is in negotiations with several parties to obtain
such financing. However, there can be no assurance that Hybridon will obtain any
funds or as to the timing thereof. Hybridon's existing cash resources are
expected to be sufficient to fund Hybridon's operations through the end of
1999. If Hybridon is unable to obtain substantial additional new funding by the
end of 1999, Hybridon will be required to obtain funds through arrangements with
collaborative partners or others that may require it to relinquish rights to
13
certain of its technologies, product candidates or products which it would
otherwise pursue on its own, or terminate operations or seek relief under
applicable bankruptcy laws.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
Since inception, Hybridon has incurred significant losses, which it has funded
through the issuance of equity securities, debt issuances, sales by HSP, and
through research and development collaborations and licensing arrangements.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Even though Hybridon has obtained sufficient cash to fund its operations for the
balance of 1999, it will be required to raise substantial additional funds
through external sources, including through collaborative relationships and
public or private financing, to support its operations throughout 2000 and
beyond. Except for research and development funding from Searle under its
collaborative agreement with Searle (which is subject to early termination in
certain circumstances), Hybridon has no committed external sources of capital,
and, as discussed above, expects no product revenues for several years from
sales of the therapeutic products that it is developing (as opposed to sales of
DNA products and reagents manufactured and sold by HSP).
No assurance can be given that additional funds will be available to fund
operations for the balance of 1999 or in future years, or, if available, that
such funds will be available on acceptable terms. If additional funds are raised
by issuing equity securities, further dilution to then existing stockholders
will result. Additionally, the terms of any such additional financing may
adversely affect the holdings or rights of then existing stockholders.
Hybridon's future capital requirements will depend on many factors, including
continued scientific progress in its research, drug discovery and development
programs, the magnitude of these programs, progress with preclinical and
clinical trials, sales of DNA products and reagents to third parties by HSP and
the margins on such sales, the time and costs involved in obtaining regulatory
approvals, the costs involved in filing, prosecuting and enforcing patent
claims, competing technological and market developments, Hybridon's ability to
establish and maintain collaborative academic and commercial research,
development and marketing relationships, its ability to obtain third-party
financing for leasehold improvements and other capital expenditures and the
costs of manufacturing scale-up and commercialization activities and
arrangements.
YEAR 2000; CONTINGENCY PLANS
As has been widely publicized, many computer systems and microprocessors are not
programmed to accommodate dates beyond the year 1999. Hybridon's exposure to
this year 2000 ("Y2K") problem comes not only from its own internal computer
systems and microprocessors, but also from the systems and microprocessors of
its key suppliers, including utility companies and payroll services.
Hybridon believes that all of its internal systems will be Y2K compliant by the
end of 1999. Hybridon is currently evaluating all of its internal computer
systems and microprocessors in light of the Y2K problem. As part of this
process, Hybridon has conducted an inventory of its automated instruments and
other computerized equipment and is contacting applicable vendors for
information regarding Y2K compliance. Hybridon will then upgrade or otherwise
modify its internal computer systems and microprocessors, to the extent
necessary. Testing of all its internal computer systems and microprocessors have
been completed. Hybridon does not expect the cost of bringing all systems and
microprocessors into Y2K compliance to be material. Approximately 90% of
Hybridon's systems either have been found compliant or have already been brought
into compliance.
Hybridon's Y2K compliance efforts are in addition to other planned information
technology ("IT") projects. While these efforts have caused and may continue to
cause delays in other IT projects, Hybridon does not expect that any of these
delays will have a significant effect on Hybridon's business or that any of
Hybridon's other IT projects will be canceled or postponed to pay for the Y2K
upgrades.
14
With regard to potential supplier Y2K problems, Hybridon has compiled a list of
its critical suppliers, and has sent and received back a Y2K questionnaire from
each of them in order to permit Hybridon to ascertain the Y2K compliance status
of each. Hybridon has not yet uncovered any key supplier Y2K problems that could
have a material effect on its business. If through continued monitoring of these
suppliers Hybridon becomes aware of any such problems and is not satisfied that
those problems are being adequately addressed, it will take appropriate steps to
find alternative suppliers.
It has been acknowledged by governmental authorities that Y2K problems have the
potential to disrupt global economies, that no business is immune from the
potentially far-reaching effects of Y2K problems, and that it is difficult to
predict with certainty what will happen after December 31, 1999. Consequently,
it is possible that Y2K problems will have a material effect on Hybridon's
business even if Hybridon takes all appropriate measures to ensure that it and
its key suppliers are Y2K compliant.
It is possible that the conclusions reached by Hybridon from its analysis to
date will change, which could cause Hybridon's Y2K cost estimates and target
completion dates to change.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements contained in this Report on Form 10-Q may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. For this purpose, any
statements herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes," "anticipates,"
"plans," "expects" and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements are based on
management's current expectations and involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of Hybridon to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. These forward looking statements are subject to a number of
uncertainties and other factors, many of which are outside Hybridon's control,
that could cause Hybridon's actual results to differ materially from those
indicated by such statements.
For a more complete discussion of the factors that could cause actual results to
differ materially from such forward looking statements, see the discussion
thereof contained under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors that May Affect
Future Results" in Hybridon's Annual Report on Form 10-K for the year ended
December 31, 1998, which information is incorporated herein by reference.
Hybridon disclaims any intention or obligation to update or revise any forward
looking statements, whether as a result of new information, future events or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Historically, Hybridon's primary exposures have been related to
nondollar-denominated operating expenses in Europe. As of September 30, 1999,
Hybridon's assets and liabilities related to nondollar-denominated currencies
were not material.
15
HYBRIDON, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On September 23, 1999, Hybridon lifted the contractual "lock-up"
provision concerning the sale of common stock acquired by certain
investors in May 1998.
On September 7, 1999, Hybridon entered into a non-exclusive license
agreement with Genzyme Molecular Oncology, a division of Genzyme
Corporation ("Genzyme"). Under the license agreement, Hybridon obtained
a non-exclusive license to patent rights relating to antisense
compounds that interfere with the expression of MDM2, a cancer-related
protein, methods for treating cancers with these compounds, and methods
for identifying these compounds. These patent rights are exclusively
licensed to Genzyme by the Johns Hopkins University. In exchange for
the patent rights, Genzyme received an up-front payment. If Hybridon
successfully develops therapeutic products through the use of these
rights, Genzyme will receive significant milestone payments and royalty
payments on product sales.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Licensing Agreement dated September 7, 1999, between Genzyme
Corporation and Hybridon, Inc.
10.2 Form of loan agreement relating to a loan in the amount of
$454,901 made to Hybridon, Inc. in October 1999 by various
parties.
10.3 Form of promissory note relating to a loan in the amount of
$454,901 made to Hybridon, Inc. in October 1999 by various
parties.
16
10.4 Loan Agreement dated as of September 1, 1999, between
Hybridon, Inc. and E. Andrews Grinstead III.
10.5 Term promissory note in the amount of $500,000 dated September
1, 1999, by Hybridon, Inc. in favor of E. Andrews Grinstead
III.
10.6 Term promissory note in the amount of $500,000 dated September
27, 1999, by Hybridon, Inc. in favor of E. Andrews Grinstead
III.
27.1 Financial Data Schedule (EDGAR)
(b) No current reports on Form 8-K were filed during the three months ended
September 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYBRIDON, INC.
November 15, 1999 /s/ E. Andrews Grinstead, III
- ----------------- ---------------------------------------
Date E. Andrews Grinstead, III
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
November 15, 1999 /s/ Robert G. Andersen
- ----------------- ----------------------
Date Robert G. Andersen
Treasurer (Principal Financial and
Accounting Officer)
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HYBRIDON, INC.
EXHIBIT INDEX
10.1 Licensing Agreement dated September 7, 1999, between Genzyme
Corporation and Hybridon, Inc.
10.2 Form of loan agreement relating to a loan in the amount of $454,901
made to Hybridon, Inc. in October 1999 by various parties.
10.3 Form of promissory note relating to a loan in the amount of $454,901
made to Hybridon, Inc. in October 1999 by various parties.
10.4 Loan Agreement dated as of September 1, 1999, between Hybridon, Inc.
and E. Andrews Grinstead III.
10.5 Term promissory note in the amount of $500,000 dated September 1, 1999,
by Hybridon, Inc. in favor of E. Andrews Grinstead III.
10.6 Term promissory note in the amount of $500,000 dated September 27,
1999, by Hybridon, Inc. in favor of E. Andrews Grinstead III.
27.1 Financial Data Schedule (EDGAR)
19