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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2001
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 March 31, 2001, 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)
345 Vassar Street
Cambridge, Massachusetts 02139
(Address of principal executive offices)
(617) 679-5500
(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 18,710,659
- --------------------------------------------------------------------------------
Class Outstanding as of May 7, 2001
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HYBRIDON, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL STATEMENTS
Item 1- Financial Statements
Consolidated Condensed Balance Sheets as of March 31, 2001 and
December 31, 2000.
Consolidated Condensed Statements of Operations for the Three
Months ended March 31, 2001 and 2000.
Consolidated Condensed Statements of Cash Flows for the Three
Months ended March 31, 2001 and 2000.
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
Item 1 - None
Item 2 - Changes in Securities and Use of Proceeds
Items 3-6 - None
Signatures
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HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,270,134 $ 1,532,155
Short-term investments -- 2,000,000
Receivables 740,300 337,403
Prepaid expenses and other current assets 40,104 71,616
------------- -------------
Total current assets 7,050,537 3,941,174
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 150,342 150,342
Laboratory equipment and other 5,149,549 5,236,299
------------- -------------
5,299,891 5,386,641
Less-- Accumulated depreciation and amortization 5,216,031 5,295,963
------------- -------------
83,860 90,678
OTHER ASSETS:
Deferred financing costs and other assets 334,198 969,631
Restricted cash -- 5,000,000
------------- -------------
334,198 5,969,631
$ 7,468,596 $ 10,001,483
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,000,000 $ 6,000,000
Accounts payable 1,279,385 1,084,330
Accrued expenses 1,232,913 1,094,735
------------- -------------
Total current liabilities 8,512,297 8,179,065
------------- -------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 1,306,000 1,306,000
------------- -------------
8% CONVERTIBLE NOTES PAYABLE 692,374 8,046,420
------------- -------------
STOCKHOLDERS' (DEFICIT):
Preferred stock, $0.01 par value --
Authorized -- 5,000,000 shares
Series A convertible preferred stock --
Designated -- 1,500,000 shares
Issued and outstanding -- 612,949 and 626,170 shares
at March 31, 2001 and December 31, 2000, respectively
(liquidation preference of $63,286,984 at March 31, 2001) 6,130 6,262
Series B convertible preferred stock --
Designated -- 85,000 shares
Issued and outstanding -- 76,046 shares
at March 31, 2001
(liquidation preference of $7,647,300 at March 31, 2001) 760 --
Common stock, $0.001 par value--
Authorized-- 100,000,000 shares
Issued and outstanding-- 18,698,259 and 18,382,237
shares at March 31, 2001 and December 31, 2000, respectively 18,698 18,382
Additional paid-in capital 262,149,597 252,645,636
Accumulated deficit (265,211,145) (260,193,046)
Deferred compensation (6,116) (7,236)
------------- -------------
Total stockholders' deficit (3,042,076) (7,530,002)
------------- -------------
$ 7,468,596 $ 10,001,483
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2001 2000
------------------- --------------------
REVENUES:
Research and development $ 34,000 $ --
Royalty and other income 25,189 77,448
Interest income 105,129 34,641
-------------------- --------------------
Total revenues 164,318 112,089
-------------------- --------------------
OPERATING EXPENSES:
Research and development 1,101,051 1,172,767
General and administrative 1,346,538 903,194
Interest 315,069 346,075
-------------------- --------------------
Total operating expenses 2,762,658 2,422,036
-------------------- --------------------
Loss from continuing operations (2,598,340) (2,309,947)
Loss from discontinued operations -- (394,015)
-------------------- -------------------
LOSS BEFORE EXTRAORDINARY ITEM (2,598,340) (2,703,962)
EXTRAORDINARY ITEM:
Loss on early retirement of 8% convertible notes payable (1,411,876) --
-------------------- --------------------
NET LOSS (4,010,216) (2,703,962)
ACCRETION OF PREFERRED STOCK DIVIDENDS (1,007,884) (1,070,800)
--------------------- ---------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (5,018,100) $ (3,774,762)
===================== =====================
BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM:
Continuing Operations $ (0.14) $ (0.14)
Discontinued Operations -- (0.02)
Extraordinary Loss (0.08) --
-------------------- --------------------
NET LOSS PER SHARE (0.22) (0.17)
ACCRETION OF PREFERRED STOCK DIVIDENDS (0.05) (0.07)
-------------------- --------------------
NET LOSS PER SHARE APPLICABLE TO COMMON STOCKHOLDERS $ (0.27) $ (0.23)
==================== ====================
SHARES USED IN COMPUTING BASIC AND DILUTED LOSS PER COMMON SHARE 18,489,267 16,260,722
==================== ====================
The accompanying notes are an integral part of these consolidated condensed
financial statements
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HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2001 2000
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,010,216) $ (2,703,962)
Loss from discontinued operations -- (394,015)
-------------------- ---------------------
Loss from continuing operations, including extraordinary item
in the three months ended March 31, 2001 (4,010,216) (2,309,947)
Adjustments to reconcile net loss to net cash used in operating activities -
Extraordinary loss on exchange of 8% convertible subordinated notes payable 1,411,876 --
Depreciation and amortization 6,817 34,643
Gain on sale of property and equipment (20,650) --
Amortization of deferred compensation 1,120 273,854
Amortization of deferred financing costs 113,478 105,045
Non-cash interest expense 250,556 --
Changes in operating assets and liabilities -
Accounts receivable (402,897) 150,867
Prepaid expenses and other current assets 31,512 1,756
Notes receivable from officer -- (2,850)
Accounts payable and accrued expenses 333,232 (728,293)
-------------------- ---------------------
Net cash used in continuing operating activities (2,285,171) (2,474,925)
--------------------- ---------------------
Net cash provided by discontinued operations -- 337,093
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term investments 2,000,000 --
Proceeds from sale of property and equipment 20,650 --
-------------------- --------------------
Net cash provided by investing activities 2,020,650 --
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 2,500 --
Proceeds from issuance of convertible promissory notes payable -- 1,479,680
Increase in deferred financing costs -- (98,395)
Decrease in restricted cash and other assets 5,000,000 --
-------------------- --------------------
Net cash provided by financing activities 5,002,500 1,381,285
-------------------- --------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,737,979 (756,547)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,532,155 2,551,671
-------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,270,134 $ 1,795,124
==================== ====================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 120,000 $ 193,939
==================== ====================
Supplemental disclosure of non cash financing and investing activities:
Exchange of 8% Convertible Notes Payable for Series B Convertible Preferred Stock $ 7,604,600 $ -
==================== ====================
Accretion of Series A and Series B preferred stock dividends $ 1,007,884 $ 1,070,800
==================== ====================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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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 on antisense technology,
immune stimulation technology, and tools for the discovery of gene
function.
Since inception, the Company has been primarily engaged 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 the antisense and immune stimulation mechanisms. 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 and licensing 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 business prior to the disposal thereof (Note 7).
The Company believes that its existing cash resources and the
additional funds to be received upon consummation of the transactions
discussed in Note 8 will be sufficient to fund operations through
December 31, 2001. The Company will be required to raise substantial
additional funds from external sources to support its operations in
2002 and beyond.
(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 period presented are not
necessarily indicative of results to be expected for the full fiscal
year.
The financial statements of the Company have been restated to reflect
the financial results of the Hybridon Specialty Products business as a
discontinued operation for the period ended March 31, 2000. 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, 2000, as filed with the Securities and Exchange
Commission.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss per Common Share
The Company applies SFAS No. 128, Earnings per Share. Under SFAS No.
128, basic net loss per common share 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 share as the effects of the Company's potential common stock
equivalents are antidilutive. Antidilutive securities, which consist of
stock options, warrants and convertible preferred stock and convertible
debt
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instruments (on an as-converted basis) that are not included in diluted
net loss per common share were 55,422,897 and 49,754,883 for the three
months ended March 31, 2001 and 2000, respectively.
Comprehensive Loss
The Company applies 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 applies 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 presented 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.
Reclassifications
Certain amounts in the prior-period consolidated financial statements
have been reclassified to conform to the current period's presentation.
(4) CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
90 days or less when purchased to be cash equivalents. Cash and cash
equivalents at March 31, 2001 and December 31, 2000 consist of the
following (at amortized cost, which approximates fair market value):
MARCH 31 DECEMBER 31
2001 2000 *
---- ------
Cash and cash equivalents --
Cash and money market funds...................... $ 1,270,134 $ 238,327
Corporate bond................................... 5,000,000 1,293,828
------------ ------------
Total cash and cash equivalents.......... $ 6,270,134 $ 1,532,155
============ ============
----------
* Does not include restricted cash of $5,000,000 at December 31, 2000
(see Note 6).
(5) $6.0 MILLION LOAN
During November 1998, the Company entered into a $6,000,000 note
payable with Forum Capital Markets, LLC, which is now Founders
Financial Group, L.P. (Founders), and certain investors associated with
Pecks Management Partners Ltd. (Pecks). 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 Pecks' and Founders' option, in whole or in
part, into shares of common stock at a conversion price equal to $2.40
per share, a premium to fair value at date of issuance, and (v) the
note requires minimum liquidity, as defined, of $2,000,000. The Company
has classified the outstanding balance of $6,000,000 at December 31,
2000 and March 31, 2001 as a current liability in the accompanying
consolidated balance sheets as it does not currently have the financing
to remain in compliance with the financial covenants. However,
compliance with these covenants has been waived through September 30,
2001 by the noteholders.
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On March 28, 2001, the Company entered into an agreement with the
holders of its $6.0 million notes whereby it would pay, out of the
proceeds of the sale of its MethylGene shares discussed in Note 8, $3.0
million to the holders in partial satisfaction of the notes. On April
27, 2001, $1.8 million of the $3.0 million was paid upon receipt of the
proceeds from the sale of 60% of the Company's holdings in MethylGene.
The remaining $1.2 million was paid upon the sale of the 40% balance of
the Company's holdings in MethylGene on May 14, 2001. In addition, it
agreed that it would deposit the sum of $821,250 in a money market fund
for the purpose of securing payment of the balance remaining on notes
held by a particular lender group. This arrangement was made to
encourage the holders of these notes to release their security interest
in the shares of MethylGene, Inc. The loans held by these entities were
paid down by $3.0 million, which was distributed proportionately. The
sum of $821,250 will be deposited to secure the loans held by clients
of Pecks Management Partners.
(6) 8.0% CONVERTIBLE NOTES PAYABLE
In March 2000, the Company completed an offering of the 8% Convertible
Notes Payable (8% Notes). As of December 31, 2000, the Company had
received approximately $7.6 million in principal with respect to the 8%
Notes. Under the terms of the 8% Notes, the Company must make
semiannual interest payments on the outstanding principal balance
through the maturity date of November 30, 2002. The 8% Notes are
convertible at any time prior to the maturity date at a conversion
price equal to $0.60 per share of common stock, fair value at the
commitment date, the "Conversion Ratio," subject to adjustment under
certain circumstances, as defined.
In connection with the 8% Notes, the Company must comply with certain
covenants, including making all payments of interest when due and
maintaining consolidated cash balances of at least $1.5 million as of
the last day of any calendar month. At March 31, 2001 the Company is in
compliance with the covenant regarding consolidated cash balances. If
an event of default occurs, as defined, the noteholders may declare the
unpaid principal and interest due and payable immediately. If the
Company defaults with respect to payment of interest, the Company will
be required to pay interest at a default rate equal to 12%. On July 10,
2000, the holders of the 8% Notes entered into an amendment to the
Subordination and Intercreditor Agreement. In the Subordination and
Intercreditor Agreement, as amended, all parties agreed to release
their lien on the portion of the collateral that includes assets that
were conveyed in the HSP sale. In return for this partial release, the
Company undertook in the Subordination and Intercreditor Agreement, as
amended, that upon consummation of the HSP sale it would set aside from
the proceeds thereof the sum of $5.0 million with which it will
purchase a money market instrument and pledge the same as collateral to
secure its obligation to the holders of the 8% Notes. The amount of the
pledge will be reduced as the Company's obligations are converted to
equity or repaid. The lenders that are party to the Subordination and
Intercreditor Agreement, as amended, will continue to have a lien on
substantially all of the Company's assets remaining after the HSP sale.
On March 5, 2001, the Company made an offer to the holders of its 8%
Notes to exchange their notes for one share of a newly-designated class
of Series B Convertible Preferred Stock (par value $.01 per share)
(Series B Preferred Stock) for each $100 in principal amount of notes
tendered. On March 30, 2001, holders of $7.6 million of the Company's
8% Notes exchanged their notes for one share of Series B Preferred
Stock for each $100 in principal amount of notes tendered (76,046
shares in aggregate). Shares of the Series B Preferred Stock have a
face value of $100 per share and are senior in right of payment with
respect to liquidation, distributions and dividends to the Company's
Series A Convertible Preferred Stock and common stock. Such shares will
accrue dividends at the rate of 8% per annum which are payable in kind
or in cash at the Company's option. Shares of Series B Preferred Stock
are convertible into shares of common stock at an initial rate of one
share of Series B Preferred Stock for 200 shares of common stock.
If all shares of Series B Preferred Stock issued to the holders of 8%
Notes were converted to common stock at this time, the Company would be
required to issue 15,209,200 shares of its common stock. In
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accordance with SFAS No. 15, Accounting by Debtors and Creditors for
Troubled Debt Restructurings, the Company recorded an extraordinary
loss of $1.4 million related to the early extinguishment of the 8%
Notes. The extraordinary loss represents the difference between the
carrying value of the 8% Notes, and the fair value of the Series B
Preferred Stock, as determined by the fair market value of the common
stock into which the Series B Preferred Stock is convertible.
For interest calculation purposes, 8% Notes submitted for exchange were
deemed exchanged as of March 5, 2001. Under the offer, all accrued but
unpaid interest on the exchanged notes was paid through March 5, 2001
by issuing additional notes in an aggregate principal amount equal to
the amount of accrued but unpaid interest. These additional notes were
tendered for exchange by the noteholders participating in the offer.
Any tender of notes involving denominations of less than $100 in
principal amount were exchanged for cash equal to such principal
amount. Dividends on shares of Series B Preferred Stock began accruing
on March 6, 2001.
As a result of the exchange, the 8% Noteholders released their claim on
$5.0 million of the proceeds from the HSP Sale (Note 7), which was held
as collateral prior to the exchange.
As of March 31, 2001, $692,374 of 8% Notes remained outstanding
representing those noteholders who did not participate in the exchange
offer described above.
(7) SALE OF HYBRIDON SPECIALTY PRODUCTS
On September 21, 2000, the Company completed the sale of its Hybridon
Specialty Products business, which manufactures, markets and sells
oligonucleotides, to a subsidiary of Avecia, Inc. of Manchester, United
Kingdom, Avecia Biotechnology, for up to $15.0 million. The Company
received approximately $12.0 million of the $15.0 million from the sale
of HSP to Avecia. The remaining $3.0 million is payable on September
21, 2001, subject to offset rights under the agreement to purchase HSP.
As part of this transaction, the Company entered into a supply
agreement whereby it may have an obligation to purchase products from
Avecia Biotechnology. To the extent that Avecia Biotechnology's
third-party sales of HSP product exceed certain goals, the Company does
not have any such purchase commitment. If Avecia Biotechnology's third
party sales do not meet such goals, the Company must make purchases
sufficient to cover the shortfall, subject to an agreed upon formula.
The Company's commitment is on a "take-or-pay" basis for the fourth
quarter of 2000 and each quarter of 2001. Purchases by OriGenix and
MethylGene are applied against the Company's commitment. Any unpaid
amounts under this agreement will reduce the $3.0 million contingent
payment to be received in September 2001. The balance of the term of
this agreement (through March 31, 2003) does not require minimum
purchases.
To the extent that the Company purchases products under this agreement
for use in the normal course of business, the Company will record in a
manner consistent with its accounting treatment for research materials
(expense as incurred). To the extent that the Company makes payments
for a purchasing shortfall where it has no use for the related
products, the Company will record such amount as an offset against the
gain to be recorded in September 2001 upon receipt of the additional
$3.0 million payment. On March 31, 2001 and December 31, 2000, the
Company had accrued approximately $707,000 and $337,000, respectively,
for its purchasing shortfall. These amounts are included in receivables
and accounts payable on the accompanying balance sheets. Subsequent to
March 31, 2001, all amounts recorded in accounts payable have been paid
to Avecia.
(8) INVESTMENT IN METHYLGENE, INC.
On April 27, 2001, the Company closed the sale of 60% of its holdings
of shares of Class A and Class B stock of MethylGene, Inc., to a group
of private United States institutional investors. MethylGene is a
Canadian pharmaceutical research company in which the Company had a 22%
ownership as a result of helping to found MethylGene in 1999. On May
14, 2001, the Company closed the sale of the remaining 40% of its
holdings with three of MethylGene's other shareholders on terms similar
to those agreed to by the institutional investors ($2.85 Canadian or
approximately $1.84 US per share as of April 27, 2001). The Company
received total proceeds of approximately $7.1 million (US). During the
second quarter of 2001, the Company will record a gain for this
transaction.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Hybridon, established in 1989, utilizes chemically-modified synthetic DNA
for medical applications, including the discovery and development of genetically
based drugs, which treat diseases by acting on a particular gene. The genetic
drugs being developed by Hybridon are based on "antisense" technology, in that
they use synthetic DNA material, also called oligonucleotides, with the aim of
inhibiting or reducing the body's production of proteins that directly or
indirectly cause or support a given disease. Hybridon has also developed a
portfolio of chemically modified DNA compounds designed to stimulate responses
of the immune system. Chemically-modified DNA is also being developed for use in
the laboratory to determine the function of proteins produced by genes whose
function has not yet been established.
Hybridon has developed and owns certain medicinal chemistry innovations
useful in the design of new synthetic DNA compounds. Hybridon also has rights to
technology allowing the chemical modification of synthetic DNA.
Hybridon began operations in February 1990 and since that time has been
involved primarily in research and development efforts, developing its
manufacturing capabilities, and raising capital. In order to commercialize its
therapeutic products, Hybridon will need to address a number of technological
challenges and comply with comprehensive regulatory requirements. Revenues
received by Hybridon to date have been from collaborative agreements, interest
on invested funds and revenues from the custom contract manufacturing of
synthetic DNA and reagent products by its manufacturing business, Hybridon
Specialty Products or "HSP" prior to the disposal thereof in September 2000.
Hybridon has incurred total losses of approximately $265.2 million through
March 31, 2001. Hybridon expects that its research and development and general
and administrative expenses will be significant in 2001 and future years as it
pursues its core drug development programs and expects to continue to incur
operating losses and significant capital needs.
As of May 14, 2001, Hybridon had 14 full-time employees.
The financial statements of Hybridon have been restated to reflect the
financial results of the HSP business as a discontinued operation for the period
ended March 31, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Hybridon had total revenues of $0.2 million and $0.1 million for the three
months ended March 31, 2001 and 2000. The increase in revenues in 2001 over 2000
is primarily due to an increase in interest income in 2001 resulting from higher
cash balances available for investment from the HSP sale in September 2000.
Hybridon's research and development expenses were $1.1 million and $1.2
million for the three months ended March 31, 2001 and 2000, respectively. The
decrease in research and development expenses reflects more focused R&D
activities in order to conserve cash by minimizing operating expenses such as
salaries and related costs, clinical and outside testing, consulting, materials
and lab expenses. In addition, research and development facilities expenses
decreased during this period due to the consolidation of corporate offices and
laboratory space and the disposition of the Milford, Massachusetts facility in
September 2000.
Hybridon's general and administrative expenses were $1.3 and $0.9 million
for the three months ended March 31, 2001 and 2000, respectively. The increase
was primarily due to the accrual of executive compensation awards.
Hybridon's interest expense was $0.3 million for the three months ended
March 31, 2001 and 2000.
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As a result of the above factors, Hybridon incurred net losses from
continuing operations of $2.6 million and $2.3 million for the three months
ended March 31, 2001 and 2000, respectively. Hybridon incurred net losses from
discontinued operations of zero and $0.4 million for the three months ended
March 31, 2001 and 2000, respectively.
Hybridon had an extraordinary loss of $1.4 million for the three months
ended March 31, 2001 resulting from the conversion of the 8% Notes to Series B
Convertible Preferred Stock. See "Item 1 - Financial Statements - Notes to
Consolidated Condensed Financial Statements" for a discussion of Hybridon's
extraordinary loss. As a result of the transaction, Hybridon recorded a net loss
after extraordinary item of $4.0 million for the three months ended March 31,
2001.
Hybridon recorded preferred stock dividends on the Series A and Series B
convertible preferred stock of $1.0 million and $1.1 million for the three
months ended March 31, 2001 and 2000, respectively, resulting in a net loss
applicable to common stockholders of $5.0 million and $3.8 million for the three
months ended March 31, 2001 and 2000, respectively.
The net loss from discontinued operations, as presented on the consolidated
condensed statement of operations for the three months ended March 31, 2000,
includes the operating loss from discontinued operations relating solely to the
operating results of the Hybridon Specialty Products business.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2001, Hybridon utilized
approximately $2.3 million to fund continuing operating activities and did not
incur any capital expenditures. The primary use of cash for operating activities
was to fund Hybridon's loss of $4.0 million, of which $1.4 million was related
to a non-cash extraordinary charge.
Hybridon had cash and cash equivalents of $6.3 million at March 31, 2001.
This amount includes cash which had been previously pledged and released for
discretionary purposes upon the exchange of the 8% Convertible Notes, effective
March 5, 2001.
On May 14, 2001, Hybridon's obligations included $1.3 million principal
amount of 9% Notes, a $3.0 million loan from Founders Financial Group LP,
formerly Forum Capital Markets, LLC and other lenders, approximately $0.7
million in 8% Convertible Notes and accrued interest as described below, and
approximately $0.5 million of accounts payable. The loan agreement covering the
$3.0 million loan from the lenders contains financial covenants that require
Hybridon to maintain minimum tangible net worth and minimum liquidity
requirements. Compliance with these covenants has been waived through September
30, 2001 by the noteholders.
Hybridon received approximately $12.0 million of the $15.0 million from the
sale of HSP to Avecia. The remaining $3.0 million is payable on September 21,
2001, subject to offset rights under the agreement to purchase HSP. As part of
this transaction, Hybridon entered into a supply agreement whereby it may have
an obligation to purchase products from Avecia Biotechnology. To the extent that
Avecia Biotechnology's third-party sales of HSP product exceed certain goals,
Hybridon does not have any such purchase commitment. If Avecia Biotechnology's
third party sales do not meet such goals, Hybridon must make purchases
sufficient to cover the shortfall, subject to an agreed upon formula. Hybridon's
commitment is on a "take-or-pay" basis for the fourth quarter of 2000 and each
quarter of 2001. Purchases by OriGenix and MethylGene are applied against
Hybridon's commitment. Any unpaid amounts under this agreement will reduce the
$3.0 million contingent payment to be received in September 2001. The balance of
the term of this agreement (through March 31, 2003) does not require minimum
purchases. Hybridon expects to collect the second installment of the proceeds
from the HSP Sale in the amount of $3.0 million assuming that Avecia claims no
offset pursuant to offset rights granted it.
To the extent that Hybridon purchases products under this agreement for use
in the normal course of business, Hybridon will record in a manner consistent
with its accounting treatment for research materials (expense as incurred). To
the extent that Hybridon makes payments for a purchasing shortfall where it has
no use for the related products, Hybridon will record such amount as an offset
against the gain to be recorded in September 2001 upon receipt of the additional
$3.0 million payment. On March 31, 2001 and December
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31, 2000, Hybridon had accrued approximately $707,000 and $337,000,
respectively, for its purchasing shortfall. These amounts are included in
receivables and accounts payable on the accompanying balance sheet.
To facilitate the sale of HSP's business and assets, the holders of the 8%
Convertible Notes due 2002 and the $6.0 million notes due 2003 amended the terms
of a Subordination and Intercreditor Agreement, to release their lien on that
portion of Hybridon's assets being conveyed to Avecia. In return for this
partial release, Hybridon set aside, from the proceeds of the HSP sale, the sum
of $5.0 million, which was classified as restricted cash on its balance sheet as
of December 31, 2000 and pledged the same as collateral to secure its obligation
to the 8% Convertible Noteholders and the lenders of the $6.0 million loan. The
amendment provided that the restrictions on the $5.0 million would be released
upon substantial payment of the 8% Notes.
On April 27, 2001, Hybridon closed the sale of 60% of its holdings of
shares of Class A and Class B stock of MethylGene, Inc., to a group of private
United States institutional investors. MethylGene is a Canadian pharmaceutical
research company in which Hybridon had a 22% ownership as a result of helping to
found MethylGene in 1999. On May 14, 2001, Hybridon closed the sale of the
remaining 40% of its holdings with three of MethylGene's other shareholders on
terms similar to those agreed to by the institutional investors ($2.85 Canadian
or approximately $1.84 US per share as of April 27, 2001). Hybridon received
total proceeds of approximately $7.1 million (US).
Hybridon's holdings of MethylGene shares were subject to the security
interest of the holders of its 8% Convertible Notes due 2002 and its $6.0
million notes due 2003. The following is a discussion of arrangements, which
Hybridon made with these noteholders to procure a release of their security
interest:
On March 5, 2001, Hybridon made an offer to the holders of its 8% Notes to
exchange their notes for one share of a newly-designated class of Series B
Convertible Preferred Stock (par value $.01 per share) (Series B Preferred
Stock) for each $100 in principal amount of notes tendered. On March 30, 2001,
holders of $7.6 million of Hybridon's 8% Notes exchanged their notes for one
share of Series B Preferred Stock for each $100 in principal amount of notes
tendered (76,046 shares in aggregate). Shares of the Series B Preferred Stock
have a face value of $100 per share and are senior in right of payment with
respect to liquidation, distributions and dividends to Hybridon's Series A
Convertible Preferred Stock and common stock. Such shares will accrue dividends
at the rate of 8% per annum which are payable in kind or in cash at Hybridon's
option. Shares of Series B Preferred Stock are convertible into shares of common
stock at an initial rate of one share of Series B Preferred Stock for 200 shares
of common stock. If all shares of Series B Preferred Stock issued to the holders
of 8% Notes were converted to common stock at this time, Hybridon would be
required to issue 15,209,200 shares of its common stock.
The exchange of the notes into Series B shares, being a discharge of
Hybridon's obligation under the notes, has resulted in Hybridon becoming
entitled to the unrestricted use of $5.0 million, which were proceeds from the
sale of its HSP business and which was held as collateral prior to the exchange.
As of March 31, 2001, $692,374 of 8% Notes remained outstanding representing
those noteholders who did not participate in the exchange offer described above.
For interest calculation purposes, 8% Notes submitted for exchange were
deemed exchanged as of March 5, 2001. Under the offer, all accrued but unpaid
interest on the exchanged notes was paid through March 5, 2001 by issuing
additional notes in an aggregate principal amount equal to the amount of accrued
but unpaid interest. These additional notes were tendered for exchange by the
noteholders participating in the offer. Any tender of notes involving
denominations of less than $100 in principal amount were exchanged for cash
equal to such principal amount. Dividends on shares of Series B Preferred Stock
began accruing on March 6, 2001.
On March 28, 2001, Hybridon entered into an agreement with the holders of
its $6.0 million notes whereby it would pay, out of the proceeds of the sale of
its MethylGene shares, $3.0 million to the holders in partial satisfaction of
the notes. On April 27, 2001, $1.8 million of the $3.0 million was paid upon
receipt of the proceeds from the sale of 60% of the Company's holdings in
MethylGene. The remaining $1.2 million was paid upon the sale of the 40% balance
of the Company's holdings in MethylGene on May 14, 2001. In
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addition, it agreed that it would deposit the sum of $821,250 in a money market
fund for the purpose of securing payment of the balance remaining on notes held
by a particular lender group upon closing of the MethylGene transactions. This
arrangement was made to encourage the holders of these notes to release their
security interest in the shares of MethylGene, Inc. Lenders holding the
$6,000,000 loan include companies which are holders of 5% or more of Hybridon's
common stock. The loans held by these entities were paid down by $3.0 million,
which was distributed proportionately. The sum of $821,250 will be deposited
to secure the loans held by clients of Pecks Management Partners.
On April 23, 2001, Hybridon and EpiGenesis Pharmaceuticals Inc. entered
into a collaborative alliance to develop and market up to five antisense drugs
for respiratory diseases. This alliance will concentrate on developing drugs,
which will be delivered directly to the respiratory tract. Hybridon received an
upfront cash payment of $0.5 million and will receive a portion of future
royalties and sublicense fees on any future compounds that use Hybridon's
proprietary chemistries.
Hybridon believes that its existing cash resources including the proceeds
from the sale of MethylGene stock will be sufficient to fund operations through
December 31, 2001. Hybridon will be required to raise substantial additional
funds from external sources to support its operations in 2002 and beyond.
During the second quarter of 2001, Hybridon expects to emerge from a period
of restructuring with its core scientific and management team intact, very
little debt outstanding and a substantial portfolio of patents and patent
applications in place. Hybridon has established a strong proprietary position in
the immune stimulation and antisense fields and expects to be able to continue
its research and development efforts in immune stimulation and antisense. As its
compounds continue to be developed in the clinic and in the research pipeline,
Hybridon will continue to seek opportunities to license the antisense technology
base in chemistry and delivery for use with the proprietary genes of other
companies.
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, product sales
by HSP, the sale of HSP during 2000, the sale of its holdings of shares of
MethylGene and through research and development collaborations and licensing
arrangements.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Hybridon's future capital requirements will depend on many factors,
including the following:
- the amount received under the contingent HSP Sale consideration
- continued scientific progress in its research
- whether or not its drug discovery and development programs succeed
- progress with preclinical and clinical trials
- the time and costs involved in obtaining regulatory approvals
- the costs involved in filing, prosecuting and enforcing patent claims
- competing technological and market developments
- establishing and maintaining collaborative academic and commercial
research, development and marketing relationships
- the costs of manufacturing scale-up and commercialization activities
and arrangements
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission encourages the disclosure of
forward-looking information so that investors can make informed investment
decisions based on a better understanding of a company's future
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prospects. This Report on Form 10-Q and other written and oral statements that
Hybridon makes contain such forward-looking statements that contain expected
results based on management's plans and assumptions. Wherever possible, these
statements are identified by using words such as "anticipates", "believes",
"expects" and "plans" and words and terms of similar substance when referring to
future operating or financial results. These forward-looking statements are
subject to many risks and uncertainties, which could cause actual results to
differ materially from any future results expressed or implied by such
forward-looking statements. Some factors that could cause actual results to
differ significantly are as follows: (1) continued progress of research and
development activities, (2) the time and costs involved in obtaining regulatory
approvals to market products, (3) the ability to protect intellectual property,
including the cost of filing, prosecuting and enforcing patent claims, (4)
competing technological and market developments, (5) ability to obtain
sufficient financing, (6) the time and costs of manufacturing scale-up and
commercialization activities (7) exposure to product liability and other types
of lawsuits, (8) increases in costs and expenses, (9) governmental laws and
regulations such as EPA, FDA and IRS requirements, (10) the future effects of
patent expirations on the Company's competitive position, (11) trends towards
health care cost containment and possible legislation affecting pharmaceutical
pricing and Medicare reimbursement, (12) ability to establish and maintain
research and development collaborations and marketing relationships, (13)
interest rate fluctuations and (14) changes in generally accepted accounting
principals. We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or otherwise.
Certain risks, uncertainties and assumptions are discussed under the "Risk
Factors" and "Forward-Looking Statements" headings on pages 25 through 27 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
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HYBRIDON, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(b) On March 30, 2001, holders of $6.9 million out of a total of $7.6
million in principal amount of Hybridon's 8% Convertible Notes
Due 2002 exchanged their notes for one share of a
newly-designated class of Series B Convertible Preferred Stock
(par value $.01 per share) for each $100.00 in principal amount
of such notes tendered. Shares of the Series B Convertible
Preferred Stock have a face value of $100 per share and are
senior in right of payment with respect to liquidation,
distributions and dividends to the Company's Series A Convertible
Preferred Stock and common stock.
(c) On March 30, 2001, Hybridon completed an exchange offer to the
holders of its 8% Convertible Notes Due 2002 whereby it will
issue a total of 76,046 shares of the newly-designated Series B
Convertible Preferred Stock in exchange for the cancellation of
$7.6 million of principal amount of 8% Notes and accrued
interest. Hybridon relied upon Section 3(a)(9) of the Securities
Act of 1933, as amended, as an exemption from registration of the
newly-designated, Series B Convertible Preferred Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.70 Amended and Restated 1997 Stock Incentive Plan.
(b) Reports on Form 8-K
None.
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SIGNATURE
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.
/s/ Sudhir Agrawal
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Date: May 15, 2001 Sudhir Agrawal, D. Phil.
President and Acting Chief Executive Officer
/s/ Robert G. Andersen
------------------------------------
Date: May 15, 2001 Robert G. Andersen
Chief Financial Officer and Vice President
of Operations and Planning
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