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: 0-27352
September 30, 1997 Commission File Number
HYBRIDON, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3072298
(State or other jurisdiction of (I.R.S. Employer
organization or incorporation) Identification Number)
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 25,292,252
- --------------------------------------- ----------
Class Outstanding as of October 31, 1997
2
HYBRIDON, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND CUMULATIVE FROM MAY 25,
1989 (INCEPTION) TO SEPTEMBER 30, 1997
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996, AND CUMULATIVE FROM MAY 25,
1989 (INCEPTION) TO SEPTEMBER 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 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
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 5,892,967 $ 12,633,742
Short-term investments 8,898,715 3,785,146
Accounts receivable 297,351 573,896
Prepaid expenses and other current assets 1,956,043 1,545,324
------------- -------------
Total current assets 17,045,076 18,538,108
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 14,266,008 9,257,516
Laboratory equipment 6,681,385 5,884,861
Equipment under capital leases 5,371,707 2,904,688
Office equipment 1,785,376 1,496,639
Furniture and fixtures 684,595 499,958
Construction-in-progress 1,176,785 2,193,400
------------- -------------
29,965,856 22,237,062
Less--Accumulated depreciation and amortization 10,678,014 6,596,294
------------- -------------
19,287,842 15,640,768
------------- -------------
OTHER ASSETS:
Restricted cash 1,326,840 437,714
Notes receivable from officers 262,026 317,978
Deferred financing costs and other assets 3,230,945 1,152,034
Investment in real estate partnership 5,450,000 5,450,000
------------- -------------
10,269,811 7,357,726
------------- -------------
$ 46,602,729 $ 41,536,602
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 8,062,535 $ 1,308,511
Accounts payable 4,476,576 4,064,419
Accrued expenses 7,128,573 4,190,766
Deferred revenue -- 86,250
------------- -------------
Total current liabilities 19,667,684 9,649,946
------------- -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 3,556,763 9,031,852
------------- -------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 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--25,292,252 shares at September 30, 1997, and
25,146,577 shares at December 31, 1996 respectively 25,292 25,147
Additional paid-in capital 173,672,464 173,227,358
Deficit accumulated during the development stage (199,171,091) (149,193,775)
Deferred Compensation (1,148,383) (1,203,926)
------------- -------------
Total stockholders' equity(deficit) (26,621,718) 22,854,804
------------- -------------
$ 46,602,729 $ 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 NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996 1997
REVENUES:
Research and development $ 200,000 $ 358,750 $ 980,150 $ 1,076,250 $ 5,534,413
Product revenue 155,368 611,520 1,231,226 611,520 2,311,401
Interest income 294,246 560,376 898,160 1,195,871 3,039,777
Royalty and other income 18,247 -- 33,218 62,321 95,539
------------ ------------ ------------ ------------ -------------
667,861 1,530,646 3,142,754 2,945,962 10,981,130
------------ ------------ ------------ ------------ -------------
OPERATING EXPENSES:
Research and development 11,338,913 10,242,296 37,784,718 27,326,434 156,416,618
General and administrative 3,057,380 2,766,429 9,011,879 7,989,722 45,801,747
Restructuring charge 3,100,000 -- 3,100,000 -- 3,100,000
Interest 1,605,918 18,070 3,223,473 87,651 4,833,856
------------ ------------ ------------ ------------ -------------
19,102,211 13,026,795 53,120,070 35,403,807 210,152,221
------------ ------------ ------------ ------------ -------------
Net loss $(18,434,350) $(11,496,149) $(49,977,316) $(32,457,845) $(199,171,091)
------------ ------------ ------------ ------------ -------------
NET LOSS PER COMMON SHARE
(Note 2) $ (.73) $ (.45) $ (1.98) $ (1.35)
============ ============ ============ ============
SHARES USED IN COMPUTING NET
LOSS PER COMMON SHARE (Note 2) 25,277,563 25,732,987 25,234,031 23,989,439
============ ============ ============ ============
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)
CUMULATIVE FROM
MAY 25,1989
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(49,977,316) $(32,457,845) $(199,171,091)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 4,081,720 1,626,080 10,779,455
Issuance of common stock for services rendered 146,875 -- 146,875
Compensation on grant of stock options, warrants and 261,519 -- 8,069,250
restricted stock
Amortization of discount on convertible promissory notes -- -- 690,157
payable
Amortization of deferred financing costs 358,904 -- 575,636
Noncash interest on convertible promissory notes payable -- -- 260,799
Write-down of assets related to restructuring 331,000 331,000
Changes in operating assets and liabilities-
Accounts receivable 276,545 -- (297,350)
Prepaid and other current assets (541,718) (1,427,049) (2,087,042)
Notes receivable from officers 55,952 (7,371) (262,026)
Amounts payable to related parties -- 21,500 (200,000)
Accounts payable and accrued expenses 3,349,962 756,899 11,605,147
Deferred revenue (86,250) -- --
------------ ------------ -------------
Net cash used in operating activities (41,742,807) (31,487,786) (169,559,190)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments (5,113,569) (11,063,626) (8,898,715)
Purchases of property and equipment, net (6,645,439) (7,576,520) (28,448,149)
Decrease (increase) in restricted cash and other assets (626,985) 418,118 (2,291,168)
Investment in real estate partnership -- (3,751,552) (5,450,000)
------------ ------------ -------------
Net cash used in investing activities (12,385,993) (21,973,580) (45,088,032)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock -- -- 96,584,154
Proceeds from issuance of common stock related to stock 83,327 598,676 1,257,929
options and restricted stock grants
Proceeds from issuance of common stock related to stock 9,075 1,539,386 3,185,816
warrants
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 (1,169,656) (351,849) (2,971,268)
Proceeds from sale/leaseback 1,165,236 -- 3,960,752
(Increase) decrease in deferred financing costs (2,699,957) 526,721 (3,136,106)
------------ ------------ -------------
Net cash provided by financing activities 47,388,025 54,544,178 220,540,189
------------ ------------ -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,740,775) 1,082,812 5,892,967
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,633,742 5,284,262 --
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,892,967 $ 6,367,074 $ 5,892,967
============ ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 786,005 $ 87,651 $ 2,396,388
============ ============ =============
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
recruiting of scientific and management personnel and raising capital. To
date, the Company has not received revenue from the sale of
biopharmaceutical products developed by it based on antisense technology.
In order to commercialize its own products, the Company will need to
address a number of technological challenges and comply with
comprehensive regulatory requirements. Accordingly, it is not possible to
predict the amount of funds that will be required or the length of time
that will pass before the Company receives revenues from sales of any of
these products. All revenues received by the Company to date have been
derived from collaboration agreements, interest on investment funds and
revenues from the custom contract manufacturing of synthetic DNA and
reagent products by the Company's Hybridon Specialty Products Division.
As a result, although the Company has begun to generate revenues from its
contract manufacturing business, the Company is dependent on the proceeds
from possible future sales of equity securities, debt financings and
research and development collaborations in order to fund future
operations. Based on its current operating plan, the Company believes
that its existing resources, together with committed collaborative
research payments, the Company will have sufficient capital requirements
to fund its operations into December 1997. As noted, the Company will
require substantial additional funding to enable the Company to continue
operations beyond such time.
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.
7
(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.
(3) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company applies Statement of Financial Accounting Standards (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 September 30, 1997 and December 31, 1996
consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1997 1996
Cash and cash equivalents-
Cash and money market funds $5,892,967 $10,144,367
U.S. government securities -- 2,489,375
---------- -----------
$5,892,967 $12,633,742
========== ===========
Short-term investments-
U.S. government securities $ -- $ 3,785,146
Commercial paper and certificates of deposit 8,898,715 --
---------- -----------
$8,898,715 $ 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 per share, subject to adjustment under certain circumstances, as
defined.
8
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 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 STANDARDS
On March 31, 1997, the Financial Accounting Standards Board (FASB) 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.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires disclosure of all components of
comprehensive income on an annual basis and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances from
nonowner sources. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997. Unless
impracticable, companies would be required to restate prior period
information upon adoption.
(6) RESTRUCTURING
In July and August 1997 the Company implemented 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's first generation antisense drug for the treatment of AIDS and
HIV the Company reduced or suspended selected programs unrelated to its
core drug development programs involving four second generation antisense
compounds based on the Company's proprietary mixed backbone chemistries.
To begin the implementation of these changes the Company terminated the
employment of 34 employees at its Cambridge and Milford, Massachusetts
facilities in July 1997 and substantially reduced operations at its
Paris, France office and terminated 10 employees at that location in
August 1997.
Also, in connection with the restructuring the Company entered into two
different sub-leasing arrangements. The Company has sub-leased one
facility in Cambridge, MA and a portion of its corporate headquarters
located at 620 Memorial Drive, Cambridge, MA. The Company incurred
expenses relating to these sub-leases for broker fees and renovation
expenses incurred in preparing the Memorial Drive space for the new
tenant. In addition, the Company plans to sub-lease its office in Paris,
France and has accrued the remaining lease payments net of anticipated
sub-lease income.
The Company is continuing to review its expenditure rate and implement
additional measures to conserve its cash resources. See Note 9(a).
9
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 following are the significant components
of the charge for restructuring:
Employee severance, benefits and related costs $2,214,000
Development programs terminated 356,000
Facility costs 330,000
Writedown of assets to net realizable value 200,000
----------
$3,100,000
==========
The total cash impact of the restructuring amounted to approximately $2.7
million. The total cash paid as of September 30, 1997 was approximately
$500,000 and the remaining amount of approximately $2.2 million will be
paid through the first quarter of 1998.
(7) NOTE PAYABLE TO A BANK
The note payable to Silicon Valley Bank (the "Bank") contains certain
financial covenants that require the Company to maintain minimum tangible
net worth (as defined) and minimum liquidity (as defined) and prohibits
the payment of dividends. The Company has secured the obligations under
the note with a lien on all of its assets. If, at specified times, the
Company's minimum liquidity is less than $15,000,000, $10,000,000, or
$5,000,000, the Company is required to pledge cash collateral to the bank
equal to 25%, 50% or 100%, respectively, of the then outstanding balance
under the note, pursuant to a cash pledge agreement. The notes also
contain certain non-financial covenants. As of September 30, 1997, the
Company's minimum liquidity had fallen below $15,000,000 and subsequent
to September 30, 1997 the Company pledged cash collateral to the bank of
$1,750,000. If the Company does not obtain additional financing by the
end of November, the Company's minimum liquidity as of November 30, 1997
may be less than $5,000,000 and the balance of the note will need to be
pledged by December 31, 1997. The Company has classified the entire
balance as a current liability in the accompanying September 30, 1997
balance sheet as it does not currently have the financing to remain in
compliance with the financial covenants as of November 19, 1997 (see
Note 9(c)). Failure by the Company to pledge cash collateral when
required would result in a default under the Company's credit facility
with the bank.
(8) RESTRICTED CASH
In November 1997 the Company was notified by Bank Fur Vermogensanlagen
Und Handel AG ("BVH") that the Federal Banking Supervisory Office
("BAKred") in Germany had imposed a moratorium, effective as of August
19, 1997 on BVH and had closed BVH for business. Accordingly, the Company
classified its $1,021,000 deposit with BVH as restricted at September 30,
1997. The Company has contacted BVH and is actively pursuing the release
of its deposit or sale of the deposit to a third party, including
possibly an entity affiliated with a director of the Company. The Company
expects to recover substantially all of its deposit in BVH through such
means. However, the timing of the recovery may be over a period of up to
one year. There can be no assurance that the Company will be able to
recover any or all of its deposit or that the Company will not be
required to write off all or a portion of the $1,021,000.
(9) SUBSEQUENT EVENTS
a) Additional Restructuring
In November 1997, the Company implemented an additional restructuring
plan by reducing the number of employees in its Cambridge and Milford,
Massachusetts facilities by approximately 50 employees. The Company
estimates that the restructuring charge with respect to such reductions,
which will be taken in the fourth quarter of 1997, will total between
approximately $1.5 million and $2.0 million, and expects that it will
make the associated cash payments through the first quarter of 1998.
b) NASDAQ Delisting
On September 19, 1997, the Company received a notice of delisting from
the Nasdaq Stock Market, Inc. ("NASDAQ") indicating that because the
Company was not in compliance with the continued listing requirements of
the Nasdaq National Market, the Company's Common Stock would be delisted
from the Nasdaq National Market. The Company appealed the decision with
NASDAQ and a hearing was held on November 6, 1997. On November 17, 1997,
NASDAQ informed the Company that the Company's Common Stock would not be
delisted and would continue to trade on the Nasdaq National Market,
subject to certain specified conditions, including (i) the closing of a
minimum $12,000,000 from the Private Offering on or before December 1,
1997, (ii) the closing of an additional minimum $20,000,000 from the
Private Offering on or before January 2, 1998, (iii) the closing of
certain corporate transactions on or before January 2, 1998, and (iv)
the filing of a report on or before January 2, 1998 evidencing that the
Company had a minimum of $12,000,000 in net tangible assets as of
November 30, 1997, with pro forma adjustments for any transactions
occurring prior to the filing of such report. The Company is seeking
clarification with respect to certain of these conditions. There can be
no assurance that the Company will be able to satisfy one or more of
these conditions and that the Company's Common Stock will continue to be
listed on the Nasdaq National Market.
c) Private Offering of Equity Securities
The Company has entered into a letter of intent with a placement agent
related to a proposed "best efforts" private offering (the "Private
Offering") by the placement agent on behalf of the Company of shares of
the Company's Common Stock pursuant to which the Company is seeking to
sell at one or more closing s up to $50.0 million of its Common Stock
(with a minimum first closing of $12.5 million). If the Private Offering
is consummated as contemplated by the letter of intent, the Common Stock
to be issued and sold in the Private Offering will be offered and sold at
all closings at an effective price per share equal to the lowest of (i)
$1.25 per shares, (ii) 85% of the closing bid price of the Company's
Common Stock at the time the Private Offering is commenced, (iii) the
average closing bid price of the Company's Common Stock for the 30
consecutive days immediately preceding any closing and (iv) the average
closing bid price of the Company's Common Stock for the five consecutive
trading days immediately preceding any closing. The letter of intent also
contemplates that the purchasers of Common Stock sold in the Private
Offering will be afforded significant contractual voting rights and other
protective provisions. For example, if the average closing price of the
Company's Common Stock for 20 consecutive trading days immediately
preceding the first anniversary of the Final closing Date is less than
125% of the offering price, the Company will be required to issue to the
purchasers additional shares of Common Stock such that the value of their
original investment, plus these newly issued shares, equals 125% of their
original investment; provided that the Company will not be obligated in
any event to issue at such time a number of shares in excess of the
number of shares originally issued. The Company has agreed that the
placement agent will serve as its exclusive agent for a period of up to
120 days and that the Company will not engage in specified activities
pending completion or termination of the Private Offering, subject to
certain specified limitations.
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 and August 1997 the Company implemented 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's first generation antisense
drug for the treatment of AIDS and HIV infection, the Company reduced or
suspended selected programs unrelated to its core drug development programs
involving four second generation antisense compounds based on the Company's
proprietary mixed backbone chemistries. To begin the implementation of these
changes the Company terminated the employment of 34 employees at its Cambridge
and Milford, Massachusetts facilities in July 1997 and substantially reduced
operations at its Paris, France office and terminated 10 employees at that
location in August 1997.
Also, in connection with the restructuring the Company entered into two
different sub-leasing arrangements. The Company has sub-leased one facility in
Cambridge, MA and a portion of its corporate headquarters located at 620
Memorial Drive, Cambridge, MA. The Company incurred expenses relating to these
sub-leases for broker fees and renovation expenses incurred in preparing the
Memorial Drive space for the new tenant. In addition, the Company plans to
sub-lease its office in Paris, France and has accrued the remaining lease
payments net of anticipated sub-lease income.
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 recorded a restructuring charge of $3,100,000 from the actions
taken to date and will make the remaining associated cash payments through the
first quarter of 1998.
In November 1997, the Company implemented an additional restructuring plan by
further reducing the number of employees in its Cambridge and Milford,
Massachusetts facilities by approximately 50 employees. The Company estimates
that the restructuring charge to be taken in the fourth quarter will total
between approximately $1.5 million and $2.0 million, and expects that it will
make the related cash payments through the first quarter of 1998.
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 September 30, 1997 of approximately, $199,171,000.
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," "intends," "may," and
other similar expressions are intended to identify forward-looking statements.
11
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 Nine Months Ended September 30, 1997 and 1996
REVENUES
The Company had total revenues of $668,000 and $1,531,000 in the three months
ended September 30, 1997 and 1996, respectively, and $3,143,000 and $2,946,000
in the nine months ended September 30, 1997 and 1996, respectively.
Revenues from research and development collaborations were $200,000 and $359,000
for the three months ended September 30, 1997 and 1996, respectively, and
$980,000 and $1,076,000 for the nine months ended September, 1997 and 1996,
respectively. Revenues for the three months ended September 30, 1997 decreased
because the research funding, which the Company received under the Company's
research phase of a collaboration with F. Hoffmann-La Roche Ltd. ("Roche") was
terminated as of March 31, 1997 in connection with Roche's termination of the
research phase of the collaboration. On September 3, 1997 the Company
announced that it had received notification that Roche had decided not to pursue
further its antisense collaboration with Hybridon, and was terminating the
development phase of the collaboration effective February 28, 1998. During the
three and nine months ended September 30, 1997 and 1996, revenues also included
payments under the Company's collaboration with G. D. Searle & Co. (Searle).
Revenues from the custom contract manufacturing of synthetic DNA and reagent
products by the Hybridon Specialty Products Division ("HSPD") were $155,000 and
$1,231,000, respectively, for the three and nine months ended September 30,
1997. Revenues from the custom contract manufacturing of synthetic DNA and
reagent products by HSPD for the three and nine months ended September 30 were
$612,000. HSPD commenced operations in the third quarter of 1996. The decrease
in revenues for the three months ended September 30, 1997 was the result of a
decrease in orders due to the timing of customer requirements. The Specialty
Products Division currently has firm bookings of $800,000 which it anticipates
shipping in the three months ending December 31, 1997. There can be no assurance
however that such bookings will not be cancelled prior to shipping or that
shipping will occur in the three months ending December 31, 1997.
Interest income was $294,000 and $560,000 for the three months ended September
30, 1997 and 1996, respectively, and $898,000 and $1,196,000 for the nine months
ended September 30, 1997 and 1996, respectively. The decrease in interest income
in the three and nine months ended September 30, 1997 was the result of lower
cash balances in such periods than in the corresponding periods in 1996.
RESEARCH AND DEVELOPMENT EXPENSES
The Company had research and development expenses of $37,785,000 and $27,326,000
in the nine months ended September 30, 1997 and 1996, respectively. The increase
in research and development expenses for the nine months ended September 30,
1997 primarily reflected increased
12
expenses related to ongoing clinical trials of the Company's product candidates,
including trials of GEM 91 (which were terminated in July of 1997), 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, and trials of the Company's second generation
GEM 92 product for the treatment of AIDS and HIV infection which were initiated
in Europe in 1997. The increase in research and development expenses for the
nine months ended September 30, 1997 also reflects an increase in preclinical
costs related to GEM 132, GEM 92 and the Company's GEM 231 product for the
treatment of solid tumors for which an Investigational New Drug application was
filed in November 1997 with respect to which the Company anticipates initiating
clinical trials for this product during the beginning of 1998. Significant
preclinical costs were incurred to meet the filing requirements to launch the
domestic clinical trials for GEM 132 intravitreal and systemic, and GEM 231.
The $11,339,000 in research and development expenses for the three months ended
September 30, 1997 is $1,097,000 higher than the corresponding quarter of 1996
and $3,630,000 lower than the research and development expenses reported for the
three months ended June 30, 1997. This decrease from the second quarter of 1997
is substantially due to the Company suspending development of GEM 91, its first
generation antisense drug for the treatment of AIDS and HIV infection and the
related restructuring efforts at the Company. All ongoing research and
development efforts related to GEM 91 at the Company and at all clinical sites
were suspended in July. Also, during July 1997 as part of the Company's
restructuring, approximately 24 research and development positions were
eliminated. As part of the restructuring all outside testing and consulting
arrangements were reviewed and where appropriate the terms were renegotiated or
the arrangements were cancelled. The Company does not anticipate that its
expenditure rate will materially decrease as a result of these measures until at
least October 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company had general and administrative expenses of $9,012,000 and $7,990,000
in the nine months ended September 30, 1997 and 1996, respectively. The increase
in general and administrative expenses for the nine months ended September 30,
1997 was attributable primarily to increased public relations and business
development costs as the Company continued to focus its efforts on obtaining
financing and strategic pharmaceutical collaborations. In addition, during the
nine months ended September 30, 1997 the increase was due to higher facilities
costs related to its Cambridge facility, 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.
The Company had general and administrative expenses of $3,057,000 and
$2,766,000 in the three months ended September 30, 1997 and 1996,
respectively. This increase is primarily due to the increase in facilities
costs and the termination of certain financing activities during the period. In
July 1997, as part of the restructuring, approximately 7 general and
administrative positions were eliminated. Also as part of the restructuring all
expenses including outside consulting, public relations, travel and
entertainment were reviewed and where appropriate eliminated or significantly
reduced.
13
RESTRUCTURING CHARGE
In July and August 1997, the Company implemented 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 reduced or suspended selected
programs unrelated to its four core programs. To begin the implementation of
these changes the Company terminated the employment of 34 employees at its
Cambridge and Milford, Massachusetts facilities in July 1997 and substantially
reduced operations at its Paris, France office and terminated 10 employees at
that location in August 1997. Because of the significant costs involved in
terminating employees and substantially reducing operations at its Paris, France
offices, the Company does not expect its expenditure rate to materially decrease
until at least October 1997. Also, in connection with the restructuring the
Company entered into two different sub-leasing arrangements. The Company has
sub-leased one facility in Cambridge, MA and a portion of its corporate
headquarters located at 620 Memorial Drive, Cambridge, MA. The Company incurred
expenses relating to these sub-leases for broker fees and renovation expenses
incurred in preparing the Memorial Drive space for the new tenant. In addition,
the Company plans to sub-lease its office in Paris, France and has accrued the
remaining lease payments net of anticipated sub-lease income. As a result of the
above actions the Company has recorded a restructuring charge of $3,100,000 in
the three and nine months ending September 30, 1997.
The Company is continuing to review its expenditure rate and implement
additional measures to conserve its cash resources. In November 1997, the
Company implemented an additional restructuring plan by reducing the number of
employees at its Cambridge and Milford, Massachusetts facilities by
approximately 50 employees. The Company estimates that the restructuring charges
taken in the fourth quarter of 1997 will range between $1,500,000 and
$2,000,000, and expects to make the related cash payments during the fourth
quarter of 1997 and through the first quarter of 1998.
INTEREST EXPENSE
The Company had interest expense of $1,606,000 and $18,000 in the three months
ended September 30, 1997 and 1996, respectively, and $3,223,000 and $88,000 in
the nine months ended September 30, 1997 and 1996, respectively. The increase in
interest expense for the three and nine months ended September 30, 1997
reflected an increase in the debt outstanding 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 $18,434,000
and $11,496,000 for the three months ended September 30, 1997 and 1996,
respectively, and $49,977,000 and $32,458,000 for the nine months ended
September 30, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30,1997, the Company used $41,743,000 of
net cash for
14
operating activities, principally for ongoing research and development programs,
and $11,364,000 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.
The Company had cash, cash equivalents and short term investments of $14,792,000
at September 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 December 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.
The Company is seeking additional equity, debt and lease financing to fund
future operations as well as additional collaborative development and
commercialization relationships with potential corporate partners in order to
fund certain of its programs. In particular, the Company is exploring selling
certain assets or business units to third parties or conducting a financing
which could be significantly 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.
In connection with these efforts, the Company has entered into a letter of
intent with a placement agent related to a proposed "best efforts" private
offering (the "Private Offering") by the placement agent on behalf of the
Company of shares of the Company's Common Stock pursuant to which the Company is
seeking to sell at one or more closings up to $50.0 million of its Common Stock
(with a minimum first closing of $12.5 million). If the Private Offering is
consummated as contemplated by the letter of intent, the Common Stock to be
issued and sold in the Private Offering will be offered and sold at all closings
at an effective price per share equal to the lowest of (i) $1.25 per share, (ii)
85% of the closing bid price of the Company's Common Stock at the time the
Private Offering is commenced, (iii) the average closing bid price of the
Company's Common Stock for the 30 consecutive trading days immediately preceding
any closing and (iv) the average closing bid price of the Company's Common Stock
for the five consecutive trading days immediately preceding any closing. The
letter of intent also contemplates that the purchasers of Common Stock sold in
the Private Offering will be afforded significant contractual voting rights and
other protective provisions. For example, if the average closing price of the
Company's Common Stock for 20 consecutive trading days immediately preceding the
first anniversary of the Final Closing Date is less than 125% of the offering
price, the Company will be required to issue to the purchasers additional shares
of Common Stock such that the value of their original investment, plus these
newly issued shares, equals 125% of their original investment; provided that the
Company will not be obligated in any event to issue at such time a number of
shares in excess of the number of shares originally issued. The Company has
agreed that the placement agent will serve as its exclusive agent for a period
of up to 120 days and that the Company will not engage in specified activities
pending completion or termination of the Private Offering, subject to certain
specified limitations.
If none of these transactions are consummated by the second week in December,
the Company will likely cease operations or be required to seek relief under the
applicable bankruptcy laws. There can be no assurance that the Company will be
able to consummate any of these transactions including the financing
contemplated in the letter of intent by the second week in December, if at all,
or as to the terms of any such transactions.
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).
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.
The note payable to Silicon Valley Bank (the "Bank") contains certain financial
covenants that require the Company to maintain minimum tangible net worth (as
defined) and minimum liquidity (as defined) and prohibits the payment of
dividends. The Company has secured the obligations under the note with a lien on
all of its assets. If, at specified times, the Company's minimum liquidity is
less than $15,000,000, $10,000,000, or $5,000,000, the Company is required to
pledge cash collateral to the bank equal to 25%, 50% or 100%, respectively, of
the then outstanding balance under the note, pursuant to a cash pledge
agreement. The notes also contain certain non-financial covenants. As of
September 30, 1997, the Company's minimum liquidity had fallen below $15,000,000
and subsequent to September 30, 1997 Company pledged cash collateral to the bank
of $1,750,000. If the Company does not obtain additional financing by the end of
November, the Company's minimum liquidity as of November 30, 1997 may be less
than $5,000,000 and the balance of the note will need to be pledged by December
31, 1997. The Company has classified the entire balance as a current liability
in the accompanying September 30, 1997 balance sheet as it does not currently
have the financing to remain in compliance with the financial covenants as of
November 19, 1997 (see Note 9(c)) during the fourth quarter of 1997. Failure by
the Company to pledge cash collateral when required would result in a default
under the Company's credit facility with the bank.
15
HYBRIDON, INC.
PART II
OTHER INFORMATION
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ITEM 5. OTHER INFORMATION
On September 18, 1997, the Company received a notice of delisting from
The Nasdaq Stock Market, Inc. ("NASDAQ") indicating that because the
Company was not in compliance with the continued listing requirements
of the Nasdaq National Market, the Company's Common Stock would be
delisted from the Nasdaq National Market. The Company appealed the
decision with NASDAQ and a hearing was held on November 6, 1997. On
November 17, 1997, NASDAQ informed the Company that the Company's
Common Stock would not be delisted and would continue to trade on the
Nasdaq National Market, subject to certain specified conditions,
including (i) the closing of a minimum $12,000,000 from the Private
Offering on or before December 1, 1997, (ii) the closing of an
additional minimum $20,000,000 from the Private Offering on or before
January 2, 1998, (iii) the closing of certain corporate transactions
on or before January 2, 1998 and (iv) the filing of a report on or
before January 2, 1998 evidencing that the Company had a minimum of
$12,000,000 in net tangible assets as of November 30, 1997, with pro
forma adjustments for any transactions occurring prior to the filing
of such report. The Company is seeking clarification with respect to
certain of these conditions. There can be no assurance that the
Company will be able to satisfy one or more of these conditions and
that the Company's Common Stock will continue to be listed on the
Nasdaq National Market.
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
1. On July 25, 1997, the Company filed a Current Report on
Form 8-K dated July 25, 1997 reporting, among other things, its
announcement that (i) it had elected to stop further development
of its lead compound GEM 91, (ii) it would be focusing its
resources on its second generation chemistries and (iii) its
goal for the second half of 1997 was to effect a reduction in its
expenditure rate on a phased basis over the balance of 1997.
2. On September 5, 1997, the Company filed a Current
Report on Form 8-K dated September 3, 1997 reporting its
announcement of the termination of the Company's research and
development collaboration with Hoffman-La Roche Ltd.
3. On September 19, 1997, the Company filed a Current
Report on Form 8-K dated September 19, 1997 reporting its
announcement of the scheduled delisting of its Common Stock from
the Nasdaq National Market.
4. On September 24, 1997, the Company filed a Current
Report on Form 8-K dated September 23, 1997 reporting its
announcement that the Company was moving forward with the appeal
process with respect to the scheduled delisting.
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.
November 13, 1997 /s/ E. Andrews Grinstead III
- ----------------- -----------------------------------------------
Date E. Andrews Grinstead, III
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
November 13, 1997 /s/ Lynne J. Rudert
- ----------------- ----------------------------------------------
Date Lynne J. Rudert
Director of Finance and Controller
(Chief Accounting Officer)
17
HYBRIDON, INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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).