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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 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 June 30, 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 19,254,134
- --------------------------------------------------------------------------------
Class Outstanding as of August 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 June 30, 2001 and
December 31, 2000.
Consolidated Condensed Statements of Operations for the Three
Months and Six Months ended June 30, 2001 and 2000.
Consolidated Condensed Statements of Cash Flows for the Three
Months and Six Months ended June 30, 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 - None
Item 3 - None
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - None
Item 6 - Exhibits and Reports on Form 8-K
Signatures
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HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
2001 2000
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 12,739,655 $ 1,532,155
Short-term investments 5,934,649 2,000,000
Receivables 1,211,603 337,403
Prepaid expenses and other current assets 21,799 71,616
------------- -------------
Total current assets 19,907,706 3,941,174
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 150,342 150,342
Laboratory equipment and other 2,810,763 5,236,299
------------- -------------
2,961,105 5,386,641
Less -- Accumulated depreciation and amortization 2,884,062 5,295,963
------------- -------------
77,043 90,678
------------- -------------
OTHER ASSETS:
Long-term investments 2,060,938 --
Deferred financing costs and other assets 187,655 969,631
Restricted cash 821,250 5,000,000
------------- -------------
3,069,843 5,969,631
$ 23,054,592 $ 10,001,483
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,000,000 $ 6,000,000
Accounts payable 706,954 1,084,330
Accrued expenses 1,306,628 1,094,735
Deferred revenue 1,285,225 --
------------- -------------
Total current liabilities 6,298,807 8,179,065
------------- -------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 1,306,000 1,306,000
------------- -------------
8% CONVERTIBLE NOTES PAYABLE 720,069 8,046,420
------------- -------------
DEFERRED REVENUE 12,959,354 --
------------- -------------
STOCKHOLDERS' EQUITY (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 -- 621,206 and 626,170 shares at June 30, 2001
and December 31, 2000, respectively (liquidation
preference of $63,149,000 at June 30, 2001) 6,212 6,262
Series B convertible preferred stock -- Designated -- 85,000 shares
Issued and outstanding -- 76,471 shares at June 30, 2001
(liquidation preference of $7,799,849 at June 30, 2001) 765 --
Common stock, $0.001 par value-- Authorized-- 100,000,000 shares
Issued and outstanding-- 19,233,780 and 18,382,237 shares
at June 30, 2001 and December 31, 2000, respectively 19,234 18,382
Additional paid-in capital 264,986,872 252,645,636
Accumulated deficit (263,222,433) (260,193,046)
Deferred compensation (20,288) (7,236)
------------- -------------
Total stockholders' equity (deficit) 1,770,362 (7,530,002)
------------- -------------
$ 23,054,592 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES:
License revenue $ 220,862 $ -- $ 254,862 $ --
Royalty and other income 32,339 25,189 57,528 102,637
Interest income 134,714 15,734 239,843 50,375
------------ ------------ ------------ ------------
Total revenues 387,915 40,923 552,233 153,012
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development 1,259,014 859,955 2,360,065 2,032,722
General and administrative 1,653,436 874,691 2,999,974 1,777,884
Stock based compensation(1) 923,780 -- 923,780 --
Interest 272,083 558,928 587,152 905,004
------------ ------------ ------------ ------------
Total operating expenses 4,108,313 2,293,574 6,870,971 4,715,610
------------ ------------ ------------ ------------
Other income (Note 8) 6,890,261 -- 6,890,261 --
------------ ------------ ------------ ------------
Income (loss) from continuing operations 3,169,863 (2,252,651) 571,523 (4,562,598)
Loss from discontinued operations -- (181,931) -- (575,946)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 3,169,863 (2,434,582) 571,523 (5,138,544)
EXTRAORDINARY ITEM:
Loss on early retirement of 8% convertible
notes payable -- -- (1,411,876) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) 3,169,863 (2,434,582) (840,353) (5,138,544)
ACCRETION OF PREFERRED STOCK DIVIDENDS (1,181,149) (1,020,687) (2,189,033) (2,091,487)
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS $ 1,988,714 $ (3,455,269) $ (3,029,386) $ (7,230,031)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE APPLICABLE TO
COMMON STOCKHOLDERS:
Basic $ 0.11 $ (0.20) $ (0.17) $ (0.43)
============ ============ ============ ============
Diluted $ 0.06 $ (0.20) $ (0.17) $ (0.43)
============ ============ ============ ============
SHARES USED IN COMPUTING INCOME (LOSS) PER
COMMON SHARE:
Basic 18,854,291 17,243,450 18,671,211 16,758,985
============ ============ ============ ============
Diluted 57,173,932 17,243,450 18,671,211 16,758,985
============ ============ ============ ============
(1) The following summarizes the allocation of
stock based compensation:
Research and development $ 609,177 $ -- $ 609,177 $ --
General and administrative 314,603 -- 314,603 --
------------ ------------ ------------ ------------
Total stock-based compensation $ 923,780 $ -- $ 923,780 $ --
============ ============ ============ ============
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)
SIX MONTHS ENDED
JUNE 30,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (840,353) $ (5,138,544)
Loss from discontinued operations -- (575,946)
------------ ------------
Loss from continuing operations, including extraordinary
item in the six months ended June 30, 2001 (840,353) (4,562,598)
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 --
Issuance of common stock for services rendered 26,000 --
Depreciation and amortization 13,634 78,811
Gain on sale of property and equipment (20,650) --
Stock based compensation 923,780 --
Amortization of deferred compensation 7,096 304,173
Amortization of deferred financing costs 260,021 229,963
Non-cash interest expense 250,556 151,077
Changes in operating assets and liabilities -
Accounts receivable (874,200) --
Prepaid expenses and other current assets 49,817 55,822
Notes receivable from officer -- (5,700)
Accounts payable and accrued expenses (49,211) (408,333)
Deferred revenue 14,814,246 --
------------ ------------
Net cash provided by (used) in continuing
operating activities 15,972,612 (4,156,785)
------------ ------------
Net cash provided by discontinued operations -- 509,699
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term and long-term investments (5,995,587) --
Increase in other assets -- (101,401)
Proceeds from sale of property and equipment 20,650 --
------------ ------------
Net cash provided by investing activities (5,974,937) (101,401)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 31,075 20,855
Proceeds from issuance of convertible promissory notes payable -- 1,486,090
Payments on long-term debt (3,000,000) --
Decrease in restricted cash and other assets 4,178,750 --
------------ ------------
Net cash provided by financing activities 1,209,825 1,506,945
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,207,500 (2,241,542)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,532,155 2,551,671
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,739,655 $ 310,129
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 280,525 $ 592,898
============ ============
Supplemental disclosure of non cash financing and
investing activities:
Exchange of 8% Convertible Notes Payable for
Series B preferred stock $ 7,604,600 $ --
============ ============
Accretion of Series A and Series B preferred stock dividends $ 2,189,033 $ 2,091,487
============ ============
Issuance of common stock in lieu of bonus $ 88,577 $ --
============ ============
Conversion of Series A preferred stock into common stock $ 585 $ 1,307
============ ============
Issuance of stock options to non-employees $ 20,148 $ --
============ ============
Issuance of warrants in connection with consulting
services (Note 10(b)) $ 569,667 $ --
============ ============
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 involved in the discovery and development of
novel therapeutics using synthetic DNA. The Company has established four
technology platforms: immunomodulatory oligonucleotides (IMOs(TM)),
potentiation of cancer therapies, antisense, and proprietary tools for
functional genomics and diagnostics called Cyclicons(TM).
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 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 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 (see Note 7).
(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 June 30, 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 Income (Loss) per Common Share
Net income (loss) per common share, computed in accordance with SFAS No.
128, Earnings per Share is based upon the weighted average number of
outstanding common shares and the dilutive effect of common share
equivalents, such as options and warrants to purchase common stock,
convertible preferred stock and convertible debt, if applicable, that are
outstanding each period (see Note 12).
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
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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 June 30, 2001 and December 31, 2000 consist of the following
(at amortized cost, which approximates fair market value):
JUNE 30 DECEMBER 31
2001* 2000**
----------- -----------
Cash and cash equivalents --
Cash and money market funds ............... $ 3,689,315 $ 238,327
Equity securities ......................... 9,050,340 1,293,828
----------- -----------
Total cash and cash equivalents ... $12,739,655 $ 1,532,155
=========== ===========
Short-term investments have maturities of greater than three months and
consist of primarily corporate bonds. Investments with maturities of
greater than one year have been classified as long-term. The Company had
long-term investments of $2,060,938 with an average maturity period of
approximately 15 months as of June 30, 2001. There were no long-term
investments as of December 31, 2000.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115,
investments that the Company has the positive intent and ability to hold to
maturity are reported at amortized cost, which approximates fair market
value, and are classified as held-to-maturity. All of the Company's
investments as of June 30, 2001 and December 31, 2000 have been deemed to
be held-to-maturity.
----------
* Does not include restricted cash of $821,250 at June 30, 2001 (see
Note 5).
** Does not include restricted cash of $5,000,000 at December 31, 2000
(see Note 6).
(5) $3.0 MILLION NOTE
During November 1998, the Company entered into a $6.0 million 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 note; (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
$2.0 million. The Company has classified the outstanding balance of $6.0
million at December 31, 2000 and $3.0 million at June 30, 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.
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, up to $3.0 million to
the holders in partial satisfaction of the notes. 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 notes held by these entities were paid
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down by $3.0 million, which was distributed proportionately. The sum of
$821,250 was deposited to secure the notes held by clients of Pecks
Management Partners.
In addition, the Company agreed to reduce the conversion price of the note
from $2.40 to $1.50 upon completion of the sale of 60% of the Company's
holdings in MethylGene. The Company also agreed to further reduce the
conversion price from $1.50 to $.50 if the balance of the note is not paid
in full by the Company by September 30, 2001. The Company has the positive
intent and ability to repay the remaining balance of the note by September
30, 2001. Accordingly, under the terms of Emerging Issues Task Force Issue
No. 98-5 (EITF 98-5) Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios and EITF
00-27, Application of Issue No. 98-5 to Certain Convertible Instruments,
the Company will measure and recognize any potential beneficial conversion
at such time that the Company surrenders its unilateral right to prevent
the reduction in the conversion price to $.50.
(6) 8.0% CONVERTIBLE NOTES PAYABLE
In March 2000, the Company commenced 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 June 30, 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 (see
Note 7). 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.
In 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.
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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 June 30, 2001, $720,069 of 8% Notes remained outstanding representing
those noteholders who did not participate in the exchange offer described
above.
Subsequent to June 30, 2001, $340,242 of the 8% Notes were converted into
850,500 shares of common stock and all of the 78,259 Series B Preferred
shares then outstanding were converted into approximately 19,564,750 shares
of common stock. These conversions were based on a reduced conversion price
of $0.40 per share.
(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 Technologies, Inc. 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 June
30, 2001 and December 31, 2000, the Company had accrued approximately
$1,032,000 and $337,000, respectively, for its purchasing shortfall. These
amounts have been paid in full to Avecia and are included in receivables on
the accompanying balance sheets.
(8) SALE OF METHYLGENE, INC. SHARES
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
interest. 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 $7.2 million (US). During the
second quarter of 2001, the Company recorded a gain for this transaction of
approximately $6.9 million, which includes approximately $300,000 in
expenses primarily related to professional fees. This gain is included in
other income on the accompanying consolidated statement of operations.
(9) COLLABORATION AND LICENSE AGREEMENT WITH ISIS PHARMACEUTICALS, INC.
On May 24, 2001, the Company and Isis Pharmaceuticals entered into a
Collaboration and License Agreement (the "Agreement") and related
documents. Under the Agreement, the Company granted Isis an exclusive
license to use and sublicense all of the Company 's antisense chemistry and
delivery patents and technology. Notwithstanding, the Company has retained
the right to
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practice its licensed antisense patent technologies and, under certain
circumstances, to sublicense these technologies to its collaborators. In
exchange for the exclusive license from the Company, Isis has paid the
Company $15.0 million in cash and will issue to the Company shares of Isis
common stock in four installments over the next two years.
Isis has granted the Company a non-exclusive license to use Isis' suite of
RNase H patents that cover the mechanism of action of many antisense drugs.
In return for the non-exclusive license from Isis, the Company will issue
Isis shares of the Company stock over three years.
The number of shares issuable to the Company is based on certain market
conditions as defined in the agreement. Based on the market conditions as
of the closing of the agreement, the shares to be issued by Isis would have
a fair market value of $19.5 million. In addition, the number of shares
issuable to Isis is based on certain market conditions as defined in the
agreement. Based on the market conditions as of the closing of the
agreement the shares to be issued by the Company would have a fair market
value of $6.0 million.
Under the terms of EITF 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services and EITF 00-8 Accounting by a Grantee for an
Equity Instrument to Be Received in Conjunction with Providing Goods or
Services, the shares of common stock to be issued and received to and from
Isis as described above will be measured at the time of issuance and
receipt. As of June 30, 2001 no shares of common stock have been issued by
the Company or Isis related to this transaction.
The Company will recognize revenue related to the Isis transaction ratably
over the life of the license agreement, which is approximately 11 years.
The long-term and short-term portions of the unrecognized revenue related
to the $15.0 million payment received in May 2001 was recorded as deferred
revenue - license agreements on the accompanying balance sheet. Expenses
related to the Agreement of approximately $1.0 million consist of
professional fees and the fair value of warrants issued to a consultant
(see Note 10(b)). These expenses were net against the proceeds received and
will be recognized over the life of the license agreement. During the three
and six month period ended June 30, 2001, the Company recognized
approximately $207,000 of revenues related to this agreement which are
included in license revenues on the accompanying consolidated statement of
operations.
(10) EQUITY
(a) Repricing
In September 1999, the Company's Board of Directors authorized the
repricing of options to purchase 5,251,827 shares of common stock to
$0.50 per share, which represented the market value on the date of the
repricing. These options are subject to variable plan accounting, as
defined in FASB issued Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation
of APB No. 25. FIN 44 became effective on July 1, 2000. The Company is
following the provisions of FIN 44 and will remeasure the intrinsic
value of the repriced options, through the earlier of the date of
exercise, cancellation or expiration, at each reporting date. For the
three and six months ended June 30, 2001, the Company has recognized
approximately $923,000 in compensation expense related to the repriced
options. This amount is included in stock based compensation on the
accompanying consolidated statement of operations.
(b) Warrants
During March 2001, the Company issued warrants to purchase 500,000
shares of common stock to an individual who has been providing
consulting services to the Company related to the Agreement discussed
in Note 9. These warrants are contingent on the closing of the
Agreement. The warrants have an exercise price of $.50, expire five
years from the date of grant and vest 100% upon the closing of the
Agreement. In accordance with EITF 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services the fair value of the
warrants will be measured and accounted for on the date that the
contingency occurs. Upon the closing of the Agreement the Company
calculated the fair value of the warrants of $569,667 using the
Black-Scholes option pricing model.
(c) Amendment to Stock Plan
On June 28, 2001, the stockholder's of the Company approved an
amendment to the 1997 Stock Option Plan (the 1997 Option Plan), which
was adopted by the Compensation Committee on March 28, 2001. Pursuant
to this amendment the
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Company increased the number of options that the Company may issue
under the 1997 Option Plan from 8,500,000 shares to 13,500,000 shares.
The maximum number of shares with respect to which options may be
granted to any employee under the 1997 Option Plan was also increased
from 500,000 shares of common stock during any calendar year to a
limit determined by dividing 1,500,000 by the fair market value of a
share of the Company's common stock at the time of grant, and not to
exceed an overall per participant annual limit of 5,000,000 shares.
(d) Conversion of Warrants and Preferred Stock into Common Stock
On July 5, 2001, Hybridon began a program to exchange its Series B
Convertible Preferred Stock and several classes of its warrants into
shares of Hybridon's common stock. As of August 8, 2001, the following
have been effected:
- All holders of the Company's Series B Preferred Stock have
exchanged their securities for 19,564,750 shares of the Company's
common stock;
- Holders of warrants priced between $0.60 and $2.40 have exchanged
their warrants for approximately 5,613,000 shares of the Company's
common stock; and
- $340,242 in 8% notes were exchanged for 850,500 shares of common
stock.
The Company will be issuing approximately 26,028,000 new shares of
common stock based on exchanges received through August 8, 2001. Also, the
Company realized $168,000 of cash proceeds and $340,242 of debt reduction
through August 8, 2001.
(11) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations". SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. The Company does not expect the adoption of this statement
to have a material impact on their operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets". With the adoption of SFAS
No. 142, goodwill is no longer subject to amortization over its estimated
useful life, but instead goodwill is subject to at least an annual
assessment for impairment by applying a fair-value-based test. The Company
does not expect the adoption of this statement to have a material impact on
their operations.
(12) INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share:
THREE MONTHS SIX MONTHS
ENDED ENDED
---------------------------- ---------------------------
JUNE 30, 2001 JUNE 30, 2001
2001 2000 2001 2000
------------ ----------- ----------- -----------
Numerator:
Income (loss) before extraordinary item $ 3,169,863 $(2,434,582) $ 571,523 $(5,138,544)
Accretion on Series A and B Preferred Stock (1,181,149) (1,020,687) (2,189,033) (2,091,487)
---------------------------- ---------------------------
Numerator for basic income (loss) per share -
before extraordinary item applicable to
common shareholders 1,988,714 (3,455,269) (1,617,510) (7,230,031)
Effect of dilutive securities:
Dividends on Series A and B Preferred Stock 1,181,149 -- -- --
Interest expense related to convertible debt 96,686 -- -- --
---------------------------- ---------------------------
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Numerator for diluted income (loss)
applicable to common shareholders $ 3,266,549 $(3,455,269) $(1,617,510) $ 7,230,031)
============================ ===========================
Denominator:
Denominator for basic income (loss) per share 18,854,291 17,243,450 18,671,211 16,758,985
Effect of dilutive securities:
Common stock options and warrants 4,043,224 -- -- --
Convertible Debt 4,182,995 -- -- --
Series A and B Preferred Stock 30,093,422 -- -- --
---------------------------- ---------------------------
38,319,641 -- -- --
---------------------------- ---------------------------
Denominator for diluted income (loss)
per share 57,173,932 17,243,450 18,671,211 16,758,985
============================ ===========================
Income (loss) per share - basic
Continuing operations $ 0.11 $ (0.19) $ (0.09) $ (0.40)
Discontinued operations -- (0.01) -- (0.03)
---------------------------- ---------------------------
Income (loss) before extraordinary item 0.11 (0.20) (0.09) (0.43)
Extraordinary loss -- -- (0.08) --
---------------------------- ---------------------------
Net income (loss) per share $ 0.11 $ (0.20) $ (0.17) $ (0.43)
============================ ===========================
Earnings (loss) per share - diluted
Continuing operations $ 0.06 $ (0.19) $ (0.09) $ (0.40)
Discontinued operations -- (0.01) -- (0.03)
---------------------------- ---------------------------
Income (loss) before extraordinary item 0.06 (0.20) (0.09) (0.43)
Extraordinary loss -- -- (0.08) --
---------------------------- ---------------------------
Net income (loss) per share $ 0.06 $ (0.20) $ (0.17) $ (0.43)
============================ ===========================
For the three and six month periods ended June 30, 2000, diluted net loss
per 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 totaling 12,092,582, and 54,530,048, which consist
of stock options, warrants, convertible preferred stock and convertible
debt instruments (on an as-converted basis) are not included in the
Company's calculation of diluted net loss per common share for the three
and six month periods ended June 30, 2001, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Hybridon, established in 1989, is a leading company involved in the
discovery and development of novel therapeutics using synthetic DNA. Hybridon
has established four technology platforms: immunomodulatory oligonucleotides
(IMOs(TM)), potentiation of cancer therapies, antisense, and proprietary tools
for functional genomics and diagnostics called Cyclicons(TM).
Hybridon has made a substantial number of synthetic DNA compounds
(IMOs(TM)) that have been shown in tests with cells in the laboratory or in
animals to produce responses in the immune system. When used alone or in
combination with antibodies or vaccines, these synthetic DNA molecules are
thought to have the potential to treat some cancers, allergies, inflammation,
asthma and infectious diseases. A number of these compounds that are potent in
stimulating the immune system have unique chemical modifications not found in
natural DNA.
Hybridon holds a leading position in the development of synthetic DNA
chemistry that is used to make drug candidates designed specifically to inhibit
or to reduce production of proteins that cause a given disease. Synthetic DNA
molecules with these properties are called "antisense" agents. Hybridon's
synthetic DNA compounds, used in combination with certain marketed cancer
therapies, have been shown to enhance the potency of the antitumor activity of
these cancer therapies. Hybridon has also identified advanced antisense drug
candidates targeted to a number of novel gene products linked to cancer. Most
recently, Hybridon has developed several novel, DNA-based tools with broad
application in the area of functional genomics and diagnostics.
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, license
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 $263.2 million through
June 30, 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 August 7, 2001, Hybridon had 16 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 June 30, 2000.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Hybridon had total revenues of $0.4 million and $0.1 million for the three
months ended June 30, 2001 and 2000, respectively, and had total revenues of
$0.6 million and $0.2 million for the six months ended June 30, 2001 and 2000,
respectively. The increase in revenues in 2001 over 2000 is primarily due to the
currently recognized portion of deferred revenue booked as a result of
Hybridon's Collaboration and License Agreements entered into with Isis
Pharmaceuticals, Inc. and EpiGenesis Pharmaceuticals, Inc. along with an
increase in interest income in 2001 resulting from higher cash balances
available for investment from the aforementioned agreements.
Hybridon's research and development expenses were $1.3 million and $0.9
million for the three months ended June 30, 2001 and 2000, respectively, and
$2.4 million and $2.0 million for the six months ended June 30, 2001 and 2000,
respectively. The increase in research and development expenses reflects
increased payroll and laboratory costs during the second quarter of 2001.
Hybridon's general and administrative expenses were $1.7 and $0.9 million
for the three months ended June 30, 2001 and 2000, respectively, and $3.0
million and $1.8 million for the six months ended June 30, 2001 and 2000,
respectively. The increase was primarily due to expenses associated with
licensing transactions and with patent prosecution and filings.
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Hybridon's stock-based compensation expense was $0.9 million for the three
and six months ended June 30, 2001. This is a result of Hybridon's remeasuring
the intrinsic value of repriced stock options. See "Financial Statements - Notes
to Consolidated Condensed Financial Statements" Note 10 (a).
Hybridon's interest expense was $0.3 million and $0.6 million for the three
months ended June 30, 2001 and 2000, respectively, and $0.6 million and $0.9
million for the six months ended June 30, 2001 and 2000, respectively. This
decrease was primarily due to Hybridon's paying down its $6.0 million note to
$3.0 million during the second quarter of 2001 and Hybridon's exchanging the
majority of its 8% convertible notes payable for Series B preferred stock,
during the first quarter of 2001.
Other income consists of a gain recorded from Hybridon's sale of 100% of
its holdings of MethylGene stock. MethylGene is a Canadian pharmaceutical
research company in which Hybridon had a 22% ownership as a result of spinning
out MethylGene in 1996. Hybridon closed the sale of its holdings of shares of
Class A and Class B stock of MethylGene, Inc., to a group of private United
States institutional investors along with three of MethylGene's other
shareholders during late April and early May 2001 at similar terms ($2.85
Canadian or approximately $1.84 US per share as of April 27, 2001). Hybridon
received total proceeds of approximately $7.2 million (US). During the second
quarter of 2001, Hybridon recorded a gain for this transaction of approximately
$6.9 million, which includes approximately $300,000 in expenses primarily
related to professional fees.
As a result of the above factors, Hybridon recorded income from continuing
operations of $3.2 million and loss from continuing operations of $2.3 million
for the three months ended June 30, 2001 and 2000, respectively, and income of
$0.6 million and loss of $4.6 million for the six months ended June 30, 2001 and
2000, respectively. Hybridon incurred net losses from discontinued operations of
zero and $0.2 million for the three months ended June 30, 2001 and 2000,
respectively, and net losses of zero and $0.6 million for the six months ended
June 30, 2001 and 2000, respectively.
Hybridon had an extraordinary loss of $1.4 million for the six months ended
June 30, 2001 resulting from the conversion of the 8% Notes to Series B
Convertible Preferred Stock during the first quarter of 2001. See "Financial
Statements - Notes to Consolidated Condensed Financial Statements" Note 6 for a
discussion of Hybridon's extraordinary loss. As a result, Hybridon recorded a
net loss after extraordinary item of $0.8 million for the six months ended June
30, 2001.
Hybridon recorded preferred stock dividends on the Series A and Series B
convertible preferred stock of $1.2 million and $1.0 million for the three
months ended June 30, 2001 and 2000, respectively, and $2.2 million and $2.1
million for the six months ended June 30, 2001 and 2000, respectively, resulting
in net income applicable to common stockholders of $2.0 million for the three
months ended June 30, 2001 and a net loss applicable to common stockholders of
$3.5 million for the three months ended June 30, 2000, and a net loss of $3.0
million and $7.2 million for the six months ended June 30, 2001 and 2000,
respectively.
The net loss from discontinued operations, as presented on the consolidated
condensed statement of operations for the three and six months ended June 30,
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 six months ended June 30, 2001, Hybridon's continuing operating
activities provided cash of approximately $16.0 million. Hybridon also did not
incur any capital expenditures in this period. The primary use of cash was to
fund Hybridon's operating activities included in its $0.6 million income before
extraordinary items.
Hybridon had cash and cash equivalents of $12.7 million, short-term
investments of $5.9 million and long-term investments of $2.1 million, for a
combined total of $20.7 million at June 30, 2001. Additionally, Hybridon had
$0.8 million of restricted cash at June 30, 2001.
On August 8, 2001, Hybridon's obligations included $1.3 million principal
amount of 9% Notes, a $3.0 million note from Founders Financial Group LP,
formerly Forum Capital Markets, LLC and other lenders, approximately $0.4
million in 8% Convertible Notes and accrued interest as described below, and
approximately $0.4 million of accounts payable. The agreement covering the $3.0
million note 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.
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Hybridon's current cash and liabilities position resulted from the following
transactions:
Sale of Hybridon Specialty Products Division
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 Technologies, Inc. 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.
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 June 30, 2001 and December 31, 2000, Hybridon had
accrued approximately $1,032,000 and $337,000, respectively, for its purchasing
shortfall. These amounts have been paid in full to Avecia and are included in
receivables on the accompanying balance sheets.
Exchange of Preferred Stock for Debt and Release of Restricted Cash
On March 5, 2001, Hybridon exchanged shares of its newly created Series B
Preferred Stock for $7.6 million of its 8% Convertible Notes due 2002. This
transaction also had the effect of releasing for Hybridon's use $5.0 million of
proceeds from the HSP/Avecia transaction. The pledging of the $5.0 million of
proceeds had been a condition of the holders of the 8% Notes and other
noteholders releasing their lien on the HSP assets to permit their sale to
Avecia in September 2000. At June 30, 2001 approximately $720,000 of the 8%
Notes which did not yet participate in the exchange remained outstanding. As
mentioned below, these remaining notes were converted into common stock on July
17, 2001.
Those holders of 8% Notes who participated in the exchange received
approximately 76,000 Series B Preferred shares, each of which had a liquidation
preference of $100 and are senior in right of payment with respect to
liquidation distributions to Hybridon's outstanding Series A convertible
Preferred Stock and common stock. Shares of Series B Preferred accrue dividends
at the rate of 8% per annum which are payable in kind or in cash at Hybridon's
option. Such shares are convertible into shares of common stock at an initial
rate of one share of Series B Preferred for 200 shares of Common stock. As
mentioned below, all outstanding Series B Preferred shares were converted into
common shares during July 2001.
Sale of MethylGene Shares
During late April and May 2001, Hybridon sold its holdings of the Class A
and Class B common stock of MethylGene, Inc. for a total of approximately $7.2
million. The buyers consisted of a private institutional investor and several
Canadian institutional investors. To release the MethylGene shares from liens
held by holders of Hybridon's $6.0 million note, the Company paid such holders
out of the proceeds of the sale the total sum of $3.0 million and agreed to hold
an additional sum of $821,250 in a money market fund to secure payment of the
balance remaining in favor of certain noteholders. Hybridon carries the $821,250
as restricted cash on its balance sheet.
In addition, Hybridon agreed to reduce the conversion price of the
remaining note from $2.40 to $1.50. Hybridon also agreed to further reduce the
conversion price from $1.50 to $.50 if the balance of the note was not paid in
full by Hybridon as of September 30, 2001. Hybridon will measure and recognize
any potential beneficial conversion at such time that Hybridon loses its
unilateral right to prevent the reduction in the conversion price to $.50.
Lenders holding the $3.0 million note include companies which are holders of 5%
or more of Hybridon's common stock.
EpiGenesis Transaction
On April 23, 2001, Hybridon and EpiGenesis Pharmaceuticals Inc. commenced
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
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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 antisense chemistries. Hybridon will
recognize revenue related to the EpiGenesis transaction ratably over the life of
the license agreement.
Isis Transaction
On May 24, 2001, Hybridon and Isis Pharmaceuticals entered into a
Collaboration and License Agreement (the "Agreement") and related documents.
Under the Agreement, Hybridon granted Isis an exclusive license to use and
sublicense all of Hybridon's antisense chemistry and delivery patents and
technology. Notwithstanding, Hybridon has retained the right to practice its
licensed antisense patent technologies and to sublicense these technologies to
its collaborators. In exchange for the exclusive license from Hybridon, Isis has
paid Hybridon $15 million in cash and will issue to Hybridon shares of Isis
common stock in four installments over the next two years.
Isis has granted Hybridon a non-exclusive license to use Isis' suite of
antisense patents that cover the mechanism of action of many antisense drugs. In
return for the non-exclusive license from Isis, Hybridon will issue Isis shares
of Hybridon stock over three years.
The number of shares issuable to Hybridon is based on certain market
conditions as defined in the agreement. Based on the market conditions as of the
closing of the agreement, the shares to be issued by Isis would have a fair
market value of $19.5 million. In addition, the number of shares issuable to
Isis is based on certain market conditions as defined in the agreement. Based on
the market conditions as of the closing of the agreement the shares to be issued
by Hybridon would have a fair market value of $6.0 million. As of June 30, 2001
no shares of common stock have been issued by Hybridon or Isis related to this
transaction.
Hybridon will recognize revenue related to the Isis transaction ratably
over the life of the license agreement, which is approximately 11 years. The
long-term and short-term portions of the unrecognized revenue related to the
$15.0 million payment received in May 2001 was recorded as deferred revenue -
license agreements on the accompanying balance sheet. During the three and six
month period ended June 30, 2001, Hybridon recognized approximately $207,000 of
revenues related to this agreement which are included in license revenues on the
accompanying consolidated statement of operations.
Completion of Early Exercise Program
On July 30, 2001, Hybridon successfully completed its program to encourage
holders of Series B Convertible Preferred Stock and several classes of its
warrants to convert or exchange such securities into shares of Hybridon's common
stock. As of August 8, 2001, the following have been effected:
- All holders of Hybridon's Series B Preferred Stock have exchanged
their securities for 19,564,750 shares of Hybridon's common stock;
- Holders of warrants priced between $0.60 and $2.40 have exchanged
their warrants for approximately 5,613,000 shares of Hybridon's common
stock; and
- $340,242 in 8% notes were exchanged for 850,500 shares of common
stock.
Hybridon will be issuing approximately 26,028,000 new shares of common
stock based on exchanges received through August 8, 2001. Also, Hybridon
realized $168,000 of cash proceeds and $340,242 of debt reduction through August
8, 2001.
ISTORY 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:
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- 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 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Hybridon's Annual Meeting of Stockholders held on June 28, 2001,
the stockholders elected the following two individuals as Class III
Directors to hold office until the 2004 Annual Meeting of
Stockholders:
For Against Withheld
---------- ------- --------
Sudhir Agrawal, D.Phil. 14,628,830 0 7,979
Youssef El-Zein 14,628,230 0 8,579
The term of office as a director for each of the following individuals
continued after the meeting:
Arthur W. Berry
C. Keith Hartley
Nasser Menhall
Camille A. Chebeir
James B. Wyngaarden, M.D.
Paul C. Zamecnik, M.D.
The stockholders also approved an amendment to Hybridon's 1997 Stock
Incentive Plan after it had been adopted by the Hybridon Compensation
Committee. The holders of 9,168,379 shares of common stock voted for
the proposal; the holders of 255,557 shares of common stock voted
against the proposal; the holders of 26,260 shares of common stock
abstained from voting.
Finally, the stockholders ratified the selection of Arthur Andersen
LLP as the independent public accountants to audit Hybridon's
consolidated financial statements. The holders of 14,629,531 shares of
common stock voted for the ratification; the holders of 6,838 shares
of common stock voted against; the holders of 440 shares of common
stock abstained from voting.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.71 Collaboration and License Agreement By and Between Isis
Pharmaceuticals, Inc., and the Company, Dated May 24, 2001.
10.72 Master Agreement Relating to the Cross License of Certain
Intellectual Property and Collaboration By and Between Isis
Pharmaceuticals, Inc. and the Company, Dated May 24, 2001.
10.73 Share Purchase Agreement between the Company and Royal Bank
Ventures, Inc., Fonds De Solidarite Des Travailleurs Du Quebec
(F.T.Q.), and Ontario Teacher's Pension Plan Board, Dated
May 11, 2001.
(b) Reports on Form 8-K
On May 10, 2001, Hybridon filed a Current Report on Form 8-K,
reporting that Hybridon closed the sale of 2,350,000 common shares of
its holding of MethylGene, Inc., a Canadian pharmaceutical research
company to affiliates of Paul Capital Partners, a California
investment fund company specializing in secondary acquisitions. Paul
Capital paid an aggregate sale price of approximately $4.3 million.
On May 29, 2001, Hybridon filed a Current Report on Form 8-K,
reporting that Hybridon closed the sale of 1,552,941 common shares of
its holding of MethylGene, Inc., a Canadian pharmaceutical research
company to Royal Bank Ventures, Inc., Ontario Teachers' Pension Plan
Board, and Fonds de Solidarite des Travailleurs du Quebec
(collectively, the "Purchasers"). The Purchasers paid an aggregate
sale price of approximately $2.8 million.
On June 8, 2001, Hybridon filed a Current Report on Form 8-K,
reporting that Hybridon and Isis Pharmaceuticals, Inc. entered into a
Collaboration and License Agreement (the "Agreement") and related
documents. Under the Agreement, Hybridon granted Isis an exclusive
license to use and sublicense all of Hybridon's antisense chemistry
and delivery patents and technology. Notwithstanding, Hybridon has
retained the right to practice its licensed antisense patent
technologies and to sublicense these technologies to its
collaborators. In exchange for the exclusive license from Hybridon,
Isis has paid Hybridon $15 million in cash and will pay to Hybridon
$19.5 million in Isis common stock over two years. The consideration
for the license was determined by arms-length negotiations.
Isis has granted Hybridon a non-exclusive license to use Isis' suite
of RNase H patents that cover the mechanism of action of many
antisense drugs. In return for the non-exclusive license from Isis,
Hybridon will pay Isis $6 million in Hybridon stock over three years.
On June 11, 2001, Hybridon filed a Current Report on Form 8-K,
reporting that Hybridon plans to have private discussions from time to
time with holders of (a) its Series B Convertible Preferred Stock and
(b) various warrants, to explore their interest in converting such
convertible preferred stock into, or exercise such warrants to
purchase, shares of Hybridon's common stock in the near term.
Hybridon's purpose would be to reduce the number of outstanding
securities which are convertible into or exercisable for the purchase
of shares of Hybridon's common stock and to simplify its capital
structure.
Such discussions have lead to agreements whereby the holders of such
securities accept such proposals and convert their preferred stock, or
exercise their warrants for the purchase of, shares of Hybridon's
common stock.
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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: August 20, 2001 Sudhir Agrawal, D. Phil.
President and Acting Chief
Executive Officer
/s/ Robert G. Andersen
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Date: August 20, 2001 Robert G. Andersen
Chief Financial Officer and Vice
President of Operations and Planning
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