1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 1997 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)
organization or incorporation)
620 Memorial Drive
Cambridge, MA 02139
-------------------
(Address of principal executive offices, including zip code)
(617) 528-7000
-------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports 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 25,260,252
- --------------------------------------- ----------
Class Outstanding as of July 31, 1997
2
HYBRIDON, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF JUNE 30, 1997 AND
DECEMBER 31, 1996
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 AND
CUMULATIVE FROM MAY 25, 1989 (INCEPTION) TO JUNE 30,
1997
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1996, AND CUMULATIVE
FROM MAY 25, 1989 (INCEPTION) TO JUNE 30, 1997
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
3
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, DECEMBER 31,
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 8,594,921 $ 12,633,742
Short-term investments 20,052,761 3,785,146
Accounts receivable 644,505 573,896
Prepaid expenses and other current assets 1,660,867 1,545,324
------------- -------------
Total current assets 30,953,054 18,538,108
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 13,606,246 9,257,516
Laboratory equipment 6,051,548 5,884,861
Equipment under capital leases 5,353,458 2,904,688
Office equipment 1,760,020 1,496,639
Furniture and fixtures 515,012 499,958
Construction-in-progress 2,086,000 2,193,400
------------- -------------
29,372,284 22,237,062
Less--Accumulated depreciation and amortization 8,837,668 6,596,294
------------- -------------
20,534,616 15,640,768
------------- -------------
OTHER ASSETS:
Restricted cash 350,000 437,714
Notes receivable from officers 322,641 317,978
Deferred financing costs and other assets 3,698,501 1,152,034
Investment in real estate partnership 5,450,000 5,450,000
------------- -------------
9,821,142 7,357,726
------------- -------------
$ 61,308,812 $ 41,536,602
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations $ 1,887,863 $ 1,308,511
Accounts payable 3,895,988 4,064,419
Accrued expenses 3,786,842 4,190,766
Deferred revenue -- 86,250
------------- -------------
Total current liabilities 9,570,693 9,649,946
------------- -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
NET OF CURRENT PORTION 10,019,593 9,031,852
------------- -------------
CONVERTIBLE SUBORDINATED NOTES 50,000,000 --
------------- -------------
STOCKHOLDERS' EQUITY(DEFICIT):
Preferred stock, $.01 par value-
Authorized--5,000,000 shares
Issued and outstanding--None -- --
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding--25,250,252 shares
at June 30, 1997, and 25,146,577 shares
at December 31, 1996 respectively
25,250 25,147
Additional paid-in capital 173,636,989 173,227,358
Deficit accumulated during the development stage (180,736,741) (149,193,775)
Deferred Compensation (1,206,972) (1,203,926)
------------- -------------
Total stockholders' equity(deficit) (8,281,474) 22,854,804
------------- -------------
$ 61,308,812 $ 41,536,602
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
CUMULATIVE FROM
MAY 25,1989
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION)
JUNE 30, JUNE 30, TO JUNE 30, 1997
1997 1996 1997 1996
REVENUES:
Research and development $ 186,250 $ 458,150 $ 780,150 $ 717,500 $ 5,334,413
Product Revenue 727,704 -- 1,075,858 -- 2,156,033
Interest income 486,502 340,622 603,914 635,495 2,745,531
Royalty and other income 14,971 62,321 14,971 62,321 77,292
------------ ------------ ------------ ------------- -------------
1,415,427 861,093 2,474,893 1,415,316 10,313,269
------------ ------------ ------------ ------------- -------------
OPERATING EXPENSES:
Research and development 14,969,366 9,700,841 26,445,805 17,084,138 145,077,705
General and administrative 2,524,046 2,804,907 5,954,499 5,223,293 42,744,367
Interest 1,447,348 29,978 1,617,555 69,581 3,227,938
------------ ------------ ------------ ------------- -------------
18,940,760 12,535,726 34,017,859 22,377,012 191,050,010
------------ ------------ ------------ ------------- -------------
Net loss $(17,525,333) $(11,674,633) $(31,542,966) $ (20,961,696) $(180,736,741)
------------ ------------ ------------ ------------- -------------
NET LOSS PER COMMON SHARE
(Note 2) $ (.69) $ (.48) $ (1.25) $ (.89)
============ ============ ============ =============
SHARES USED IN COMPUTING NET LOSS
PER COMMON SHARE (Note 2) 25,241,956 24,518,126 25,211,845 23,613,260
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED CUMULATIVE FROM
JUNE 30, MAY 25, 1989
(INCEPTION) TO
JUNE 30,
1997 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(31,542,966) $(20,961,696) $(180,736,741)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 2,241,374 985,840 8,939,109
Issuance of common stock for services rendered 146,875 -- 146,875
Compensation on grant of stock options, warrants and restricted stock 188,412 -- 7,996,143
Amortization of discount on convertible promissary notes payable -- -- 690,157
Amortization of deferred financing costs 250,395 -- 467,127
Noncash interest on convertible promissory notes payable -- -- 260,799
Changes in operating assets and liabilities-
Accounts Receivable (70,609) -- (644,505)
Prepaid and other current assets (108,610) (931,251) (1,653,933)
Notes receivable from officers (4,663) (4,953) (322,641)
Amounts payable to related parties -- (12,500) (200,000)
Accounts payable and accrued expenses (572,356) (269,454) 7,682,830
Deferred revenue (86,250) -- --
------------ ------------ -------------
Net cash used in operating activities (29,558,398) (21,194,014) (157,374,780)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments (16,267,615) (19,282,850) (20,052,761)
Purchases of property and equipment, net (5,838,183) (3,991,072) (27,640,893)
Decrease (increase) in restricted cash and other assets 133,878 184,588 (1,530,305)
Investment in real estate partnership -- (4,230,539) (5,450,000
------------ ------------ -------------
Net cash used in investing activities (21,971,920) (27,319,873) (54,673,959)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock -- -- 96,584,154
Proceeds from issuance of common stock related to
stock options and restricted stock grants 62,327 260,426 1,236,929
Proceeds from issuance of common stock related to stock warrants 9,075 3,185,816
Net proceeds from issuance of common stock -- 52,231,244 52,355,324
Repurchase of common stock -- -- (263)
Proceeds from notes payable -- -- 9,450,000
Proceeds from issuance of convertible promissory notes payable 50,000,000 59,191,744
Proceeds from long-term debt -- -- 662,107
Payments on long-term debt and capital leases (895,183) (206,913) (2,696,796)
Proceeds from sale/leaseback 1,165,236 2,042,811 3,960,752
(Increase) decrease in deferred financing costs (2,849,958) 526,721 (3,286,107)
------------ ------------ -------------
Net cash provided by financing activities 47,491,497 54,854,289 220,643,660
------------ ------------ -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,038,821) 6,340,042 8,594,921
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,633,742 5,284,262 --
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,594,921 $ 11,624,664 $ 8,594,921
============ ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 492,555 $ 69,581 $ 2,102,938
============ ============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION
Hybridon, Inc. (the Company) was incorporated in the State of Delaware on
May 25, 1989. The Company is engaged in the discovery and development of
novel genetic medicines based primarily on antisense technology.
The Company is in the development stage. Since inception, the Company has
been engaged primarily in research and development efforts, development
of its manufacturing capabilities and organizational efforts, including
recruitment of scientific and management personnel and raising capital. To
date, the Company has not received revenue from the sale of
biopharmaceutical products developed by it based on antisense technology.
In order to commercialize its own products, the Company will need to
address a number of technological challenges and comply with comprehensive
regulatory requirements. Accordingly, it is not possible to predict the
amount of funds that will be required or the length of time that will pass
before the Company receives revenues from sales of any of these products.
All revenues received by the Company to date have been derived from
collaborative agreements, interest on invested funds and revenues from the
custom contract manufacturing of synthetic DNA and reagent products by the
Company's Hybridon Specialty Products Division. As a result, although the
Company has begun to generate revenues from its contract manufacturing
business, the Company is dependent on the proceeds from possible future
sales of equity securities, debt financings and research and development
collaborations in order to fund future operations.
7
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
(1) ORGANIZATION (Continued)
The unaudited consolidated condensed financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission and include, in
the opinion of management, all adjustments, consisting of normal,
recurring adjustments, necessary for a fair presentation of interim period
results. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes, however, that its disclosures
are adequate to make the information presented not misleading. The results
for the interim periods presented are not necessarily indicative of
results to be expected for the full fiscal year. It is suggested that
these financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
as filed with the Securities and Exchange Commission.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss per Common Share
Net loss per common share is computed using the weighted average number of
shares of common stock outstanding during the period. Pursuant to the
requirements of the Securities and Exchange Commission, common stock
issued by the Company during the 12 months immediately preceding its
initial public offering, plus shares of common stock that became issuable
during the same period pursuant to the grant of common stock options and
preferred and common stock warrants, has been included in the calculation
of weighted average number of shares outstanding for the period from
January 1, 1996 through February 2, 1996 (using the treasury-stock method
and the initial public offering price of $10 per share). In addition, the
calculation of the weighted average number of shares outstanding includes
shares of common stock as if all shares of preferred stock were converted
into common stock on the respective original dates of issuance.
8
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
(3) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Accordingly, the Company has classified its
cash equivalents and short-term investments as held-to-maturity, and has
recorded them at amortized cost, which approximates market value.
Short-term investments mature within one year of the balance sheet date.
Cash equivalents have original maturities of less than three months. Cash
and cash equivalents and short-term investments at June 30, 1997 and
December 31, 1996 consisted of the following:
June 30, December 31,
1997 1996
Cash and Cash Equivalents-
Cash and money market funds $ 3,621,326 $10,144,367
U.S. government securities 974,701 2,489,375
Commercial paper and certificates of deposit 3,998,894 --
----------- -----------
$ 8,594,921 $12,633,742
=========== ===========
Short-term Investments-
U.S. government securities $ - $ 3,785,146
Commercial paper and certificates of deposit 20,052,761 --
----------- -----------
$20,052,761 $ 3,785,146
=========== ===========
(4) CONVERTIBLE SUBORDINATED NOTES PAYABLE
On April 2, 1997, the Company issued $50,000,000 of 9% convertible
subordinated notes (the Notes). Under the terms of the Notes, the Company
must make semi-annual interest payments on the outstanding principal
balance through the maturity date of April 1, 2004. If the Notes are
converted prior to April 1, 2000, the Noteholders are entitled to receive
accrued interest from the date of the most recent interest payment through
the conversion date. The Notes are subordinate to substantially all of the
Company's existing indebtedness. The Notes are convertible at any time
prior to the maturity date at a conversion price equal to $7.0125, subject
to adjustment under certain circumstances, as defined.
Beginning April 1, 2000, the Company may redeem the Notes at its option
for a 4.5% premium over the original issuance price, provided that from
April 1, 2000 to March 31, 2001, the Notes may not be redeemed unless the
closing price of the common stock equals or
9
HYBRIDON, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
(4) CONVERTIBLE SUBORDINATED NOTES PAYABLE (continued)
exceeds 150% of the conversion price for a period of at least 20 out of 30
consecutive trading days and the Notes redeemed within 60 days after such
trading period. The premium decreases by 1.5% each year through March 31,
2003. Upon a change of control of the Company, as defined, the Company
will be required to offer to repurchase the Notes at 150% of the original
issuance price.
(5) NEW ACCOUNTING STANDARD
On March 31, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share. SFAS No. 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. SFAS No. 128 is
effective for fiscal years ending after December 15, 1997 and early
adoption is not permitted. When adopted by the Company, SFAS No. 128 will
require restatement of prior years' earnings per share. The Company will
adopt SFAS No. 128 for its fiscal year ended December 31, 1997. The
Company believes that the adoption of SFAS No. 128 will not have a
material effect on its financial statements.
(6) SUBSEQUENT EVENTS
In July 1997, the Company stopped the development of GEM 91, its first
generation antisense drug for the treateent of AIDS and HIV infection,
based on a review of new data from an open label Phase II clinical trial
of patients with advanced HIV infection. In the Phase II trial, three of
the nine subjects tested experienced decreases in platelet counts that
required dose interruption. In addition, a review of the data showed
inconsistent responses to the treatment and failed to confirm the
decrease in cellular viremia observed in an earlier clinical trial. As a
result, the Company now plans to focus its resources on core drug
development programs involving four second generation antisense compounds
based on the Company's proprietary mixed backbone chemistries.
The Company is implementing a restructuring plan to reduce expenditures
on a phased basis over the balance of 1997 in an effort to conserve its
cash resources. As part of this restructuring plan, in addition to
stopping the clinical development of GEM 91, the Company is reducing or
suspending selected programs unrelated to the four core programs. To
begin the implementation of these changes the Company terminated the
employment of 28 employees at its Cambridge and Milford, Massachusetts
facilities in July 1997 and plans to substantially reduce operations at
its Paris, France office and terminate 11 employees at that location in
August 1997. The Company is continuing to review its expenditure rate and
implement additional measures to conserve its cash resources.
Because of the significant costs involved in terminating employees and
substantially reducing operations at its Paris, France office, the Company
does not expect its expenditure rate to materially decrease until at least
October 1997. The Company estimates that restructuring charges from the
actions taken to date and the substantial reduction of operations at its
Paris, France office will total between approximately $2.0 million and
$3.0 million, and expects that it will recognize such charges in the third
quarter of 1997 and that it will make the associated cash payments over
the third and fourth quarters of 1997.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company is engaged in the discovery and development of genetic medicines
based primarily on antisense technology. The Company commenced operations in
February 1990 and since that time has been engaged primarily in research and
development efforts, development of its manufacturing capabilities and
organizational efforts, including recruitment of scientific and management
personnel and raising capital. To date, the Company has not received revenue
from the sale of biopharmaceutical products developed by it based on antisense
technology. In order to commercialize its own products, the Company will need to
address a number of technological challenges and comply with comprehensive
regulatory requirements. Accordingly, it is not possible to predict the amount
of funds that will be required or the length of time that will pass before the
Company receives revenues from sales of any of these products. All revenues
received by the Company to date have been derived from collaborative agreements,
interest on invested funds and revenues from the custom contract manufacturing
of synthetic DNA and reagent products by the Company's Hybridon Specialty
Products Division.
In July 1997, the Company stopped the development of GEM 91, its first
generation antisense drug for the treatment of AIDS and HIV infection, based on
a review of new data from an open label Phase II clinical trial of patients
with advanced HIV infection. In the Phase II trial, three of the nine subjects
tested experienced decreases in platelet counts that required dose
interruption. In addition, a review of the data showed inconsistent responses
to the treatment and failed to confirm the decrease in cellular viremia
observed in an earlier clinical trial. As a result, the Company now plans to
focus its resources on core drug development programs involving four second
generation antisense compounds based on the Company's proprietary mixed
backbone chemistries.
The Company is implementing a restructuring plan to reduce expenditures on a
phased basis over the balance of 1997 in an effort to conserve its cash
resources. As part of this restructuring plan, in addition to stopping the
clinical development of GEM 91, the Company is reducing or suspending selected
programs unrelated to the four core programs. To begin the implementation of
these changes the Company terminated the employment of 28 employees at its
Cambridge and Milford, Massachusetts facilities in July 1997 and plans to
substantially reduce operations at its Paris, France office and terminate 11
employees at that location in August 1997. The Company is continuing to review
its expenditure rate and implement additional measures to conserve its cash
resources.
Because of the significant costs involved in terminating employees and
substantially reducing operations at its Paris, France office, the Company does
not expect its expenditure rate to materially decrease until at least October
1997. The Company estimates that restructuring charges from the actions taken to
date and the substantial reduction of operations at its Paris France office will
total between approximately $2.0 million and $3.0 million, and expects that it
will recognize such charges in the third quarter of 1997 and that it will make
the associated cash payments over the third and fourth quarters of 1997.
The Company has incurred losses since its inception and, despite its
restructuring plan, expects to incur significant operating losses in the future.
The Company expects that its research and development expenses will continue to
be significant during the balance of 1997 and in future years as it pursues its
four core development programs. The Company has incurred cumulative losses from
inception through June 30, 1997 of approximately $180.7 million.
This Quarterly Report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans,"
11
"intends," "may," and other similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the Company's actual results to differ materially from those indicated by
such forward-looking statements. These factors include the matters set forth
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors that May Affect Future Results" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
which is hereby incorporated herein by this reference. Any statement contained
in such matters shall be deemed to be modified or superseded for purposes of
this Quarterly Report on Form 10-Q to the extent that a statement contained
herein modifies or supersedes such statement. Moreover, there can be no
assurance that the Company will be able to successfully implement its
restructuring plan or as to the timing thereof.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1997 and 1996
Revenues
The Company had total revenues of $1,415,000 and $861,000 in the three months
ended June 30, 1997 and 1996, respectively, and $2,475,000 and $1,415,000 in the
six months ended June 30, 1997 and 1996, respectively.
Revenues from research and development collaborations were $186,000 and $458,000
for the three months ended June 30, 1997 and 1996, respectively, and $780,000
and $718,000 for the six months ended June 30, 1997 and 1996, respectively.
Revenues for the three months ended June 30, 1997 decreased because the research
funding, which the Company received under the Company's collaboration with F.
Hoffmann-La Roche Ltd. ("Roche") during the three months ended June 30, 1996,
was terminated by Roche as of March 31, 1997 in connection with Roche's
termination of the research phase of the collaboration. Despite the decrease in
revenues for the three months ended June 30, 1997 as a result of the termination
of research funding by Roche, revenues for the six months ended June 30, 1997
were comparable to revenues for the six months ended June 30, 1996 because of
the inclusion of revenues earned under the Company's collaboration with G.D.
Searle & Co. ("Searle") during the full six months ended June 30, 1997. During
the six months ended June 30, 1996, the Company did not receive revenues under
the Searle collaboration until the second quarter of 1996.
Revenues from the custom contract manufacturing of synthetic DNA and reagent
products by the Hybridon Specialty Products Division were $727,000 and
$1,075,000, respectively, for the three and six months ended June 30, 1997.
The Hybridon Specialty Products Division commenced operations in June
1996. Accordingly, the Company did not receive any revenues from the custom
contract manufacturing of synthetic DNA and reagent products during the six
months ended June 30, 1996.
Interest income was $487,000 and $341,000 for the three months ended June 30,
1997 and 1996, respectively, and $604,000 and $635,000 for the six months ended
June 30, 1997 and 1996, respectively. The increase in interest income in the
three months ended June 30, 1997 was the result of more favorable interest
rates during such period then during the three months ended June 30, 1996.
12
Research and Development Expenses
The Company had research and development expenses of $14,969,000 and $9,701,000
in the three months ended June 30, 1997 and 1996, respectively, and $26,446,000
and $17,084,000 in the six months ended June 30, 1997 and 1996, respectively.
The increase in research and development expenses for the three and six months
ended June 30, 1997 primarily reflected increased expenses related to ongoing
clinical trials of the Company's product candidates, including trials of GEM 91
(which were terminated in July of 1997) and trials of two different formulations
of GEM 132 (an antisense compound for the treatment of systemic CMV and CMV
retinitis), which were first initiated with respect to GEM 132 intravenous in
Europe during the third quarter of 1996 and with respect to GEM 132 intravitreal
for the treatment of CMV retinitis in the United States during the first quarter
of 1997. The increase also reflected increased salaries and related costs,
facilities equipment costs related to additional laboratories, consulting and
professional expenses and expenses related to the production of GEM 91, GEM 132
and preclinical compounds. Research and development staffing and related costs
increased significantly as the number of employees engaged in research and
development activities increased from 157 employees as of March 31, 1997 to 161
employees as of June 30, 1997.
General and Administrative Expenses
The Company had general and administrative expenses of $2,524,000 and $2,805,000
in the three months ended June 30, 1997 and 1996, respectively, and $5,954,000
and $5,223,000 in the six months ended June 30, 1997 and 1996, respectively. The
decrease in general and administrative expenses for the three months ended June
30, 1997 was attributable primarily to a reduction in travel and consulting
expenses in such period. The increase in general and administrative expenses for
the six months ended June 30, 1997 was attributable primarily to increased
expenses in the three months ended March 31, 1997 related to certain financing
activities which were terminated during such period and a one-time charge
related to the Company's investment in MethylGene, Inc., a Canadian company in
which the Company owns a minority interest.
Interest Expense
The Company had interest expense of $1,447,000 and $30,000 in the three months
ended June 30, 1997 and 1996, respectively, and $1,618,000 and $70,000 in the
six months ended June 30, 1997 and 1996, respectively. The increase in interest
expense for the three and six months ended June 30, 1997 reflected an increase
in the debt outstanding during the three months ended June 30, 1997 associated
with the Company's issuance of $50,000,000 of 9% Convertible Subordinated Notes
(the "Notes") on April 2, 1997 and interest incurred on borrowing to finance the
purchase of property and equipment, and leasehold improvements.
Net Loss
As a result of the above factors, the Company incurred net losses of $17,525,000
and $11,675,000 for the three months ended June 30, 1997 and 1996, respectively,
and $31,543,000 and $20,962,000 for the six months ended June 30, 1997 and 1996,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30,1997, the Company used $29,558,000 of net
cash for operating activities, principally for ongoing research and development
programs, and $5,838,000 of net cash for investment in property and equipment,
consisting primarily of costs related to leasehold improvements, equipment and
furnishings of the Cambridge facility which the Company moved into on February
1, 1997.
On April 2, 1997, the Company sold $50.0 million of Notes to certain investors.
The Notes bear interest at a rate of 9% per annum and have a maturity date of
April 1, 2004. Under the Notes, the Company is required to make semi-annual
interest payments on the outstanding principal balance through the maturity date
of April 1, 2004. The Notes are unsecured and subordinate to substantially all
of the Company's existing indebtedness. The Notes are convertible at the option
of the holder into the Company's Common Stock at any time prior to maturity,
unless previously redeemed or repurchased by the Company under certain specified
circumstances, at a conversion price of $7.0125 per share (subject to
adjustment). Upon change of control of the Company (as defined), the Company is
required to offer to repurchase the Notes at 150% of the original issuance
price.
13
The Company had cash, cash equivalents and short term investments of $28,648,000
at June 30, 1997. Based on its current operating plan, including the expenditure
rate reduction initiatives being undertaken by the Company as part of its
restructuring plan, the Company believes that its existing capital resources,
together with the committed collaborative research and development payments from
Searle, and anticipated sales of the Hybridon Specialty Products Division and
margins on such sales, will be adequate to fund the Company's capital
requirements into the fourth quarter of 1997. The Company will require
substantial additional funds from external sources in the fourth quarter of 1997
to support the Company's operations through the end of the fourth quarter of
1997 and thereafter.
A significant factor affecting the Company's future capital requirements is the
level of sales of the Hybridon Specialty Products Division and the margins on
such sales. Revenues from the sale of custom contract manufacturing of synthetic
DNA and reagent products by the Hybridon Specialty Products Division were lower
than anticipated in the three months ended June 30, 1997. During such period,
the Company received repeat customer orders and expanded its customer base from
17 customers to 30 customers. The Company expects revenues from sale of custom
contract manufacturing of synthetic DNA and reagent products by the Hybridon
Specialty Products Division in the three months ending September 30, 1997 to
exceed revenues in the three months ended June 30, 1997. However, based on the
Hybridon Specialty Products Division's backlog of orders at June 30, 1997, the
Company believes that such revenues may be lower than initially anticipated for
the three months ending September 30, 1997 and for the balance of 1997.
The Company intends to seek additional equity, debt and lease financing to fund
future operations. The Company also intends to seek additional collaborative
development and commercialization relationships with potential corporate
partners in order to fund certain of its programs. Except for research and
development funding from Searle under Hybridon's collaborative agreement with
Searle (which is subject to early termination in certain circumstances),
Hybridon has no committed external sources of capital, and, as discussed above,
expects no product revenues for several years from sales of the products that
it is developing (as opposed to sales of DNA products and reagents
manufactured on a custom contract basis by the Hybridon Specialty Products
Division). If the Company is unable to obtain necessary additional funds, it
may be required to further scale back or eliminate certain of its core
development programs, license to third parties certain technologies which the
Company would otherwise pursue on its own, sell certain assets or business
units to third parties, conduct a financing which could be dilutive to holders
of the Company's existing securities and contain certain terms that would
adversely affect the rights of holders of the Company's existing securities or
cease operations.
14
HYBRIDON, INC.,
PART II
OTHER INFORMATION
Item 2 Changes in Securities
During the three months ended June 30, 1997, the Company issued and sold
the following securities that were not registered under the Securities
Act of 1933, as amended (the "Securities Act"):
1. On April 2, 1997, the Company issued $50,000,000 of its 9%
Convertible Subordinated Notes Due 2004 to an investment bank (the
"Bank") pursuant to Rule 506 under the Securities Act.
2. On April 2, 1997, the Company issued to the Bank warrants to
purchase 356,506 shares of Common Stock at an exercise price of
$7.0125 per share pursuant to Section 4(2) of the Securities Act.
Item 4 Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 19, 1997, the
following proposals were adopted by the vote specified below:
1. Election of Class II Directors
For Withheld Authority
--- ------------------
Mohamed A. El-Khereiji 15,046,792 14,666
Jerry A. Weisbach 15,027,192 34,266
James B. Wyngaarden 15,046,892 14,566
Paul C. Zamecnik 15,047,092 14,366
2. Adoption of the 1997 Stock Incentive Plan
For Against Abstain Broker Nonvotes
10,704,147 244,725 12,641 4,099,945
3. Ratification of the Selection of Independent Auditors
For Against Abstain Broker Nonvotes
15,003,091 9,801 48,566 --
15
Item 5. Other Information
1. Effective July 28, 1997, Jerry A. Weisbach, a Class II director of
the Company resigned from the Board of Directors of the Company.
2. Effective August 11, 1997, J. Robert Buchanan, a Class I director
of the Company, resigned from the Board of Directors of the
Company.
3. On August 8, 1997, the Company withdrew Post-effective Amendment
No. 1 to its Registration Statement on Form S-3 ( Registration No.
333-28409) ( the "Registration Statement"). The Company filed
Post-effective Amendment No. 1 to the Registration Statement on
July 25, 1997 to remove from registration the 5,000,000 shares of
Common Stock registered under the Registration Statement. Although
the Company is not offering shares of Common Stock pursuant to the
Registration Statement at this time, the Company may do so in the
future at such time as it considers, in its sole discretion, to
be appropriate.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits listed in the Exhibit Index immediately preceding such
Exhibits are filed as part of this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
On April 14, 1997, the Company filed a Current Report on Form 8-K
dated April 2, 1997 announcing the completion of the sale of
$50,000,000 of the Company's 9% Convertible Subordinated Notes Due
2004.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYBRIDON, INC.
August 13, 1997 /s/ E. Andrews Grinstead III
- --------------- ----------------------------
Date E. Andrews Grinstead, III
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
August 13, 1997 /s/ Anthony J. Payne
- --------------- --------------------
Date Anthony J. Payne
Senior Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
HYBRIDON, INC.
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
*10.1 Amendment No. 1 to License Agreement, dated as February 21, 1990 and
restated as of September 8, 1993, by and between the Worcester
Foundation for Biomedical Research, Inc. and the Company, dated as
of November 26, 1996.
10.2 Letter Agreement dated May 12, 1997 between the Company and Pillar
S.A. amending the Consulting Agreement dated as of March 1, 1994
between the Company and Pillar S.A..
10.3 Amendment dated July 15, 1997 to the Series G Convertible Preferred
Stock and Warrant Purchase Agreement dated as of September 9, 1994
among the Company and certain purchasers, as amended.
10.4 Sixth Amendment to the lease dated April 1997 between the Company and
Charles River Building Limited Partnership for space located at 620
Memorial Drive, Cambridge, Massachusetts.
11 Computation of Net Loss Per Common Share.
27 Financial Data Schedule (EDGAR)
99 Pages 39-48 of the Company's Annual Report on Form 10-K for the
period ended December 31, 1996 (which is not deemed to be filed
except to the extent that portions thereof are expressly incorporated
by reference herein).
* Confidential treatment requested as to certain portions of exhibit,
which portions have been omitted and filed separately with the
commission