As filed with the Securities and Exchange Commission on August 16, 1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For transition period from _________________.
Commission File Number 0-27352
HYBRIDON, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3072298
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
155 Fortune Blvd.
Milford, Massachusetts 07157
(Address of principal executive offices)
(508) 482-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.001 per share 16,039,084
- --------------------------------------- ----------
Class Outstanding as of August 12, 1999
<PAGE>
HYBRIDON, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL STATEMENTS
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 1999 and
December 31, 1998.
Consolidated Condensed Statements of Operations for the Three Months
and Six Months ended June 30, 1999 and 1998.
Consolidated Condensed Statements of Cash Flows for the Six Months
ended June 30, 1999 and 1998.
Notes to Consolidated Condensed Financial Statements.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.
PART II - OTHER INFORMATION
Items 1-3 - None
Item 4 - Matters to a Vote of Security Holders
Item 5 - None
Item 6 - Exhibits and Reports on Form 8-K
Signatures
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
Assets
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,311,321 $ 5,607,882
Accounts receivable 760,775 1,175,441
Prepaid expenses and other current assets 102,150 110,827
----------- -----------
Total current assets 2,174,246 6,894,150
----------- -----------
Property and Equipment, at cost:
Leasehold improvements 11,127,035 11,127,035
Laboratory and other equipment 11,440,738 11,432,435
----------- -----------
22,567,773 22,559,470
Less--Accumulated depreciation and amortization 15,075,632 13,788,979
----------- -----------
7,492,141 8,770,491
----------- -----------
Other Assets:
Deferred financing costs and other assets 558,407 612,374
Notes receivable from officers 264,350 258,650
----------- -----------
822,757 871,024
----------- -----------
$10,489,144 $16,535,665
=========== ===========
Liabilities and Stockholders' (Deficit) Equity
Current Liabilities:
Current portion of long-term debt $6,075,691 $6,070,951
Accounts payable 2,305,041 2,368,163
Accrued expenses 2,278,801 4,068,679
----------- -----------
Total current liabilities 10,659,533 12,507,793
Long-Term Debt, net of current portion 434,025 473,094
----------- -----------
9% Convertible Subordinated Notes payable 1,306,000 1,306,000
----------- -----------
Stockholders' (Deficit)Equity:
Preferred stock, $.01 par value-
Authorized-5,000,000 shares
Series A convertible preferred stock-
Designated - 1,500,000 shares Issued and
outstanding - 662,099 and 641,259 shares at
June 30, 1999 and December 31, 1998,
respectively 6,621 6,413
(Liquidation preference of
$67,285,900 at June 30, 1999)
Common stock, $.001 par value-
Authorized - 100,000,000 shares
Issued and outstanding - 15,764,825 and
15,304,825 shares, respectively 15,765 15,305
Additional paid-in capital 245,074,889 241,632,024
Accumulated deficit (246,166,434) (238,447,837)
Deferred compensation (841,255) (957,127)
----------- -----------
Total stockholders' (deficit) equity (1,910,414) 2,248,778
----------- -----------
$10,489,144 $16,535,665
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
1
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Product and service revenue $ 1,536,863 $ 681,620 $ 3,066,717 $ 1,506,689
Research and development 150,000 649,915 300,000 799,915
Interest income 16,383 44,602 69,184 62,447
Royalty and other income 14,755 -- 54,980 --
------------ ------------ ------------ ------------
1,718,001 1,376,137 3,490,881 2,369,051
------------ ------------ ------------ ------------
Operating Expenses:
Research and development 3,244,399 5,577,144 6,691,677 11,979,681
General and administrative 940,987 2,648,907 2,062,455 4,314,019
Interest 167,068 976,526 337,394 2,583,963
------------ ------------ ------------ ------------
4,352,454 9,202,577 9,091,526 18,877,663
------------ ------------ ------------ ------------
Loss from operations (2,634,453) (7,826,440) (5,600,645) (16,508,612)
Extraordinary item:
Gain on conversion of 9%
convertible subordinated notes
payable -- 8,876,685 -- 8,876,685
------------ ------------ ------------ ------------
Net Income (Loss) (2,634,453) 1,050,245 (5,600,645) (7,631,927)
------------ ------------ ------------ ------------
Accretion of Preferred Stock
Dividends 1,075,900 620,500 2,117,952 620,500
------------ ------------ ------------ ------------
Net Income (Loss) Applicable to
Common Stockholders $ (3,710,353) $ 429,745 $ (7,718,597) $ (8,252,427)
============ ============ ============ ============
Basic and Diluted Income (Loss) Per
Common Share From (Note 3):
Loss before extraordinary
item $ (0.17) $ (0.69) $ (0.36) $ (2.01)
Extraordinary item -- 0.78 -- 1.08
------------ ------------ ------------ ------------
Net income (loss) per share (0.17) 0.09 (0.36) (0.93)
Accretion of preferred stock
dividends (0.07) (0.05) (0.14) (0.08)
------------ ------------ ------------ ------------
Net income (loss) per share
applicable to common stockholders $ (0.24) $ 0.04 $ (0.50) $ (1.01)
============ ============ ============ ============
Shares Used in Computing Basic and
Diluted Net Income (Loss) Per
Common Share (Note 2) 15,661,492 11,333,604 15,483,158 8,196,627
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements
2
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (5,600,645) $ (7,631,927)
Adjustments to reconcile net loss to net cash used
in operating activities-
Extraordinary gain on conversion of 9% convertible
subordinated notes payable -- (8,876,685)
Depreciation and amortization 1,286,653 1,785,353
Loss on disposal of fixed assets -- 228,000
Amortization of deferred compensation 441,452 108,696
Amortization of deferred financing costs 53,967 225,816
Changes in operating assets and liabilities-
Accounts receivable 414,666 265,580
Prepaid and other current assets 8,677 122,148
Notes receivable from officers (5,700) (5,700)
Accounts payable and accrued expenses (852,999) (330,465)
------------ ------------
Net cash used in operating activities (4,253,929) (14,109,184)
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (8,303) (285,509)
Proceeds from sale of fixed assets -- 400,000
------------ ------------
Net cash provided by (used in) investing activities (8,303) 114,491
------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible preferred stock -- 7,999,960
Net proceeds from issuance of common stock -- 6,876,676
Proceeds from issuance of convertible promissory
notes payable -- 4,233,833
Payments on long-term debt and capital leases (34,329) (2,489,782)
Decrease (increase) in restricted cash and other assets -- 690,486
------------ ------------
Net cash (used in) provided by financing activities (34,329) 17,311,173
------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents (4,296,561) 3,316,480
Cash and Cash Equivalents, beginning of period 5,607,882 2,202,202
------------ ------------
Cash and Cash Equivalents, end of period $ 1,311,321 $ 5,518,682
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 337,394 $ 1,261,502
============ ============
Supplemental Disclosure of Noncash Activities:
Accretion of Series A convertible preferred
stock dividend $ 2,117,952 $ 620,500
============ ============
Issuance of common stock in lieu of services $ 1,000,000 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
(1) ORGANIZATION
Hybridon, Inc. (the Company) was incorporated in the State of Delaware
on May 25, 1989. The Company is engaged in the discovery and development
of novel genetic medicines based primarily on antisense technology.
Since inception, the Company has been engaged primarily in research and
development efforts, development of its manufacturing capabilities and
organizational efforts, including recruiting of scientific and
management personnel and raising capital. To date, the Company has not
received revenue from the sale of biopharmaceutical products developed
by it based on antisense technology. In order to commercialize its own
products, the Company will need to address a number of technological
challenges and comply with comprehensive regulatory requirements.
Accordingly, it is not possible to predict the amount of funds that will
be required or the length of time that will pass before the Company
receives revenues from sales of any of these products. All revenues
received by the Company to date have been derived from collaboration
agreements, interest on investment funds and revenues from the custom
contract manufacturing of synthetic DNA and reagent products by the
Company's Hybridon Specialty Products Division. As a result, although
the Company has begun to generate revenues from its contract
manufacturing business, the Company is dependent on the proceeds from
possible future sales of equity securities, debt financings and research
and development collaborations in order to fund future operations.
The Company is currently seeking debt or equity financing in an amount
sufficient to support its operations through at least the end of 1999,
and in connection therewith, is in negotiations to obtain such
financing. If the Company is unable to obtain additional financing by
September 1999, it will be forced to terminate its operations or seek
relief under applicable bankruptcy law.
On December 3, 1997, the Company was delisted from the Nasdaq Stock
Market, Inc. (NASDAQ) because the Company was not in compliance with the
continued listing requirements of the NASDAQ National Market. The
Company is currently trading on the NASD OTC as a result of the
delisting.
(2) UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited consolidated condensed financial statements included
herein have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission and
include, in the opinion of management, all adjustments, consisting of
normal, recurring adjustments, necessary for a fair presentation of
interim period results. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however,
that its disclosures are adequate to make the information presented not
misleading. The results for the interim periods presented are not
necessarily indicative of results to be expected for the full fiscal
year. It is suggested that these financial statements be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, as filed with the Securities and Exchange
Commission.
4
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss per Common Share
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share. Under SFAS No. 128, basic
net loss per share applicable to common shareholders is computed using
the weighted average number of shares of common stock outstanding during
the period. Diluted net loss per common share is the same as basic net
loss per common as the effects of the Company's potential common stock
equivalents are antidilutive.
Comprehensive Loss
The Company follows the provisions of SFAS No. 130, Reporting
Comprehensive Income. Comprehensive loss is defined as the change in
equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. The Company's
comprehensive loss is the same as the reported net loss for all periods
presented.
Segment Reporting
The Company follows the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected
information for those segments to be reported in interim financial
reports issued to stockholders. SFAS No. 131 also establishes standards
for related disclosures about products and services and geographic
areas. To date, the Company has viewed its operations and manages its
business as principally one operating segment. As a result, the
financial information disclosed herein, represents all of the material
financial information related to the Company's principal operating
segment. All of the Company's revenues are generated in the United
States and substantially all assets are located in the United States.
(4) CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash and
cash equivalents at June 30, 1999 and December 31, 1998 consisted of the
following (at amortized cost, which approximates fair market value):
June 30, December 31,
1999 1998
Cash and cash equivalents-
Cash and money market funds $ 1,115,605 $ 3,865,365
Corporate bond 195,716 1,742,517
----------- -----------
$ 1,311,321 $ 5,607,882
=========== ===========
5
<PAGE>
HYBRIDON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(5) 9.0% CONVERTIBLE SUBORDINATED NOTES
On April 2, 1997, the Company issued $50,000,000 of 9.0% convertible
subordinated notes (the 9% Notes). On May 5, 1998 noteholders holding
$48.7 million of principal value of the 9% Notes tendered such notes in
exchange for Series A convertible preferred stock, approximately
$2,355,000 of accrued interest thereon was converted into shares of
Series A convertible preferred stock and warrants to purchase common
stock. As of June 30, 1999, there is $1.3 million of 9% Notes
outstanding. Under the terms of the 9% Notes, the Company must make
semi-annual interest payments on the outstanding principal balance
through the maturity date of April 1, 2004. If the 9% Notes are
converted prior to April 1, 2000, the Noteholders are entitled to
receive accrued interest from the date of the most recent interest
payment through the conversion date. The 9% Notes are convertible at any
time prior to the maturity date at a conversion price equal to $35.0625
per share, subject to adjustment under certain circumstances, as
defined.
Beginning April 1, 2000, the Company may redeem the 9% Notes at its
option for a 4.5% premium over the original issuance price, provided
that from April 1, 2000 to March 31, 2001, the 9% Notes may not be
redeemed unless the closing price of the common stock equals or exceeds
150% of the conversion price for a period of at least 20 out of 30
consecutive trading days and the 9% Notes redeemed within 60 days after
such trading period. The premium decreases by 1.5% each year through
March 31, 2003. Upon a change of control of the Company, as defined, the
Company will be required to offer to repurchase the 9% Notes at 150% of
the original issuance price.
(6) NOTE PAYABLE TO LENDERS
During November 1998, the Company entered into a $6,000,000 note payable
with Forum Capital Markets, LLC (Forum) and certain investors associated
with Pecks Management Partners Ltd. (collectively, the Lenders). The
terms of the note payable are as follows: (i) the maturity is November
30, 2003; (ii) the interest rate is 8%; (iii) interest is payable
monthly in arrears, with the principal due in full at maturity of the
loan; (iv) the note payable is convertible, at the Lender's option, in
whole or in part, into shares of common stock at a rate equal to $2.40
per share; (v) the note includes a minimum liquidity covenant of
$2,000,000; and (vi) the note payable may not be prepaid, in whole or in
part, at any time prior to December 1, 2000. The Company has received
waivers of noncompliance with the minimum tangible net worth covenant
and for the minimum liquidity covenant through August 31, 1999. The
Company has classified the outstanding balance of $6,000,000 at June 30,
1999 and December 31, 1998 as a current liability in the accompanying
consolidated balance sheet as it does not expect to remain in compliance
with the financial covenants. In connection with refinancing the note
payable to a bank, Forum received $400,000, which was reinvested by
Forum to purchase 160,000 shares of common stock with 40,000 attached
warrants at an exercise price of $3.00 per share. The Company has
recorded the $400,000 as a deferred financing cost, which will be
amortized to interest expense over the term of the note. In addition,
Forum received warrants to purchase 133,333 shares of common stock of
the Company at $3.00 per share. The Company computed the value of the
warrants to be $85,433, by using the Black-Scholes option pricing model.
The Company has recorded this $85,433 as a deferred financing cost,
which will be amortized to interest expense over the term of the note.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Hybridon is engaged in the discovery and development of genetic medicines based
on antisense technology. Hybridon commenced operations in February 1990 and
since that time has been engaged primarily in research and development efforts,
developing its manufacturing capabilities and raising capital. In order to
commercialize its therapeutic products, Hybridon will need to raise substantial
additional funds, as well as to address a number of technological challenges and
comply with comprehensive regulatory requirements. All revenues received by
Hybridon to date have been derived from collaborative agreements, interest on
invested funds and revenues from the custom contract manufacturing of synthetic
DNA and reagent products by Hybridon Specialty Products ("HSP").
Hybridon has incurred cumulative losses from inception through June 30, 1999 of
approximately $246.2 million. Hybridon has significantly reduced its operating
expenses pursuant to a restructuring commenced in the second half of 1997 and
completed in 1998. Hybridon expects that, assuming adequate financing can be
obtained, its research and development expenses will be significant in 1999 and
future years as it pursues its core drug development programs and expects to
continue to incur operating losses and have significant capital requirements
that it will not be able to satisfy with internally generated funds. As of
August 12, 1999, the Company had 52 full-time employees.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Hybridon had total revenues of $1.7 million and $1.4 million for the three
months ended June 30, 1999 and 1998, respectively, and had total revenues of
$3.5 million and $2.4 million for the six months ended June 30, 1999 and 1998,
respectively. Revenues from research and development collaborations were $0.2
million and $0.6 million for the three months ended June 30, 1999 and 1998,
respectively, and $0.3 million and $0.8 million for the six months ended June
30, 1999 and 1998, respectively. This decrease was primarily due to a reduction
in revenues recorded under a License Agreement with MethylGene, Inc., an entity
in which the Company has an approximately 30% equity interest.
Revenues from products and services were $1.5 million and $0.7 million for the
three months ended June 30, 1999 and 1998, respectively, and $3.1 million and
$1.5 million for the six months ended June 30, 1999 and 1998, respectively. The
increase was primarily the result of increased sales to HSP customers and
receipt of service revenues from MethylGene, Inc. and OriGenix Technologies,
Inc., an entity in which the Company has an approximately 49% equity interest.
Hybridon's research and development expenses were $3.2 million and $5.6 million
for the three months ended June 30, 1999 and 1998, respectively, and $6.7
million and $12.0 million for the six months ended June 30, 1999 and 1998,
respectively. The decrease reflects Hybridon's reduction of its operating
expenses in 1997 and 1998 pursuant to the restructuring commenced in 1997 and
completed in 1998 and the lower levels of cash available for expenditures in
1999. The restructuring included the discontinuation of operations at Hybridon's
facilities in Europe, and also resulted in significant reductions in
employee-related expenses, clinical and outside testing, consulting, materials
and lab expenses. Accordingly, research and development salaries and related
costs decreased in 1999 due to the reduction in the number of employees engaged
in research and development.
The facilities expense included in research and development expenses decreased
significantly in 1999 as a result of the relocation of the Company's corporate
offices and lab space in July 1998 from Cambridge to Milford,
1
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Massachusetts. Hybridon's facility costs in 1999 related to research and
development were also reduced by the income received from subleasing its
underutilized laboratory facilities in Cambridge, Massachusetts.
Hybridon's general and administrative expenses were $0.9 million and $2.6
million for the three months ended June 30, 1999 and 1998, respectively, and
$2.1 million and $4.3 million for the six months ended June 30, 1999 and 1998,
respectively. The decrease reflects Hybridon's reduction of its operating
expenses in 1997 and 1998 pursuant to the restructuring commenced in 1997 and
completed in 1998 and its effect on employee-related and consulting expenses.
General and administrative expenses related to business development, public
relations and legal and accounting expenses also decreased in 1999.
The net facilities expense included in general and administrative expenses also
decreased significantly in 1999 as a result of the relocation of the Company's
corporate offices to Milford, Massachusetts in 1998.
Hybridon's patent expenses remained at approximately the same level in 1999 as
1998, as Hybridon continues to limit the scope of patent protection that it
seeks as part of its effort to conserve its cash resources while prosecuting and
maintaining key patents and patent applications.
Hybridon's interest expense was $0.2 million and $1.0 million for the three
months ended June 30, 1999 and 1998, respectively, and $0.3 million and $2.6
million for the six months ended June 30, 1999 and 1998, respectively. The
decrease is attributable to the exchange of approximately $48.7 million of the
9% convertible subordinated notes (the " 9% Notes") issued in the second quarter
of 1997 for Series A Preferred Stock on May 5, 1998. In addition, the
outstanding balance of borrowings to finance the purchase of property and
equipment was reduced in May 1998, resulting in a subsequent reduction in
interest expense.
As a result of the above factors, Hybridon incurred net losses from operations
of $2.6 million and $7.8 million for the three months ended June 30, 1999 and
1998, respectively, and $5.6 million and $16.5 million for the six months ended
June 30, 1999 and 1998, respectively.
Hybridon had extraordinary income of $8.9 million for the three and six months
ended June 30, 1998 resulting from the conversion of $48.7 million principal
amount of 9% Notes to Series A Convertible Preferred Stock in the second quarter
of 1998. As a result of this transaction, the Company recorded a net income
after extraordinary income of $1.1 million for the three months ended June 30,
1998 and reduced its net loss to $7.6 million for the six months ended June 30,
1998.
Hybridon had an accretion of preferred stock dividends of $1.1 million and $0.6
million for the three months ended June 30, 1999 and 1998, respectively, and
$2.1 million and $0.6 million for the six months ended June 30, 1999 and 1998,
respectively, to reflect the accrued portion of dividends payable to the holders
of Series A Preferred Convertible Stock, resulting in a net loss to common
stockholders of $3.7 million and a net gain of $0.4 million for the three months
ended June 30, 1999 and 1998, respectively, and a net loss of $7.7 million and
$8.3 million for the six months ended June 30, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, Hybridon used approximately $4.3
million to fund operating activities. The primary use of cash for operating
activities was to fund Hybridon's operating loss of $5.6 million. Hybridon did
not engage in any significant investing and financing activities during the six
months ended June 30, 1999.
Hybridon had cash and cash equivalents of $1.3 million at June 30, 1999.
However, since that date, Hybridon has expended a portion of such cash resources
and continues to have substantial obligations to lenders, real estate landlords,
trade creditors and others. On August 13, 1999, Hybridon's obligations included
$1.3 million principal amount of 9% Notes, a $6.0 million loan with Forum
Capital Markets, LLC and others, $0.5 million of notes
2
<PAGE>
payable and approximately $2.3 million of accounts payable. Because of
Hybridon's financial condition, many trade creditors are only willing to provide
Hybridon with products and services on a cash on delivery basis. The note to
Forum Capital Markets, LLC and others contains certain financial covenants that
require Hybridon to maintain minimum tangible net worth and minimum liquidity.
Hybridon is not in compliance with such covenants. However, the lender has
granted Hybridon a waiver of compliance with the minimum tangible net worth
requirement and the minimum liquidity requirement at June 30, 1999 and has
agreed not to require compliance with such requirements for any periods
commencing July 1, 1999 through August 31, 1999
Hybridon's ability to continue operations in 1999 depends on its success in
obtaining new funds in the immediate future. Hybridon is currently seeking debt
or equity financing in an amount sufficient to support its operations into 2000,
and in connection therewith, is in negotiations with several parties to obtain
such financing. However, there can be no assurance that Hybridon will obtain any
funds or as to the timing thereof. The Company's existing cash resources and
proceeds of accounts receivable from HSP customers are expected to be sufficient
to fund the Company's operations into September 1999. The Company's management
expects such receivables to be collected no later than September 1999, given
such customers' payment histories, although there can be no assurance thereof.
If the Company is unable to obtain substantial additional new funding by the
beginning of September, 1999, Hybridon will be required to further curtail
significantly one or more of its core drug development programs, obtain funds
through arrangements with collaborative partners or others that may require it
to relinquish rights to certain of its technologies, product candidates or
products which it would otherwise pursue on its own, or terminate operations or
seek relief under applicable bankruptcy laws.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
Since inception, Hybridon has incurred significant losses, which it has funded
through the issuance of equity securities, debt issuances, sales by HSP, and
through research and development collaborations and licensing arrangements.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Even if Hybridon obtains sufficient cash to fund its operations into 2000, it
will be required to raise substantial additional funds through external sources,
including through collaborative relationships and public or private financing,
to support its operations throughout 2000 and beyond. Except for research and
development funding from Searle under its collaborative agreement with Searle
(which is subject to early termination in certain circumstances), Hybridon has
no committed external sources of capital, and, as discussed above, expects no
product revenues for several years from sales of the therapeutic products that
it is developing (as opposed to sales of DNA products and reagents manufactured
and sold by HSP).
No assurance can be given that additional funds will be available to fund
operations for the balance of 1999 or in future years, or, if available, that
such funds will be available on acceptable terms. If additional funds are raised
by issuing equity securities, further dilution to then existing stockholders
will result. Additionally, the terms of any such additional financing may
adversely affect the holdings or rights of then existing stockholders.
Hybridon's future capital requirements will depend on many factors, including
continued scientific progress in its research, drug discovery and development
programs, the magnitude of these programs, progress with preclinical and
clinical trials, sales of DNA products and reagents to third parties by HSP and
the margins on such sales, the time and costs involved in obtaining regulatory
approvals, the costs involved in filing, prosecuting and enforcing patent
claims, competing technological and market developments, Hybridon's ability to
establish and maintain collaborative academic and commercial research,
development and marketing
3
<PAGE>
relationships, its ability to obtain third-party financing for leasehold
improvements and other capital expenditures and the costs of manufacturing
scale-up and commercialization activities and arrangements.
YEAR 2000; CONTINGENCY PLANS
As has been widely publicized, many computer systems and microprocessors are not
programmed to accommodate dates beyond the year 1999. Hybridon's exposure to
this year 2000 ("Y2K") problem comes not only from its own internal computer
systems and microprocessors, but also from the systems and microprocessors of
its key suppliers, including utility companies and payroll services.
Hybridon believes that all of its internal systems will be Y2K compliant by the
end of 1999. Hybridon is currently evaluating all of its internal computer
systems and microprocessors in light of the Y2K problem. As part of this
process, Hybridon has conducted an inventory of its automated instruments and
other computerized equipment and is contacting applicable vendors for
information regarding Y2K compliance. Hybridon will then upgrade or otherwise
modify its internal computer systems and microprocessors, to the extent
necessary. Testing of all its internal computer systems and microprocessors has
been completed. Hybridon does not expect the cost of bringing all systems and
microprocessors into Y2K compliance to be material. Approximately 60% of
Hybridon's systems either have been found compliant or have already been brought
into compliance.
Hybridon's Y2K compliance efforts are in addition to other planned information
technology ("IT") projects. While these efforts have caused and may continue to
cause delays in other IT projects, Hybridon does not expect that any of these
delays will have a significant effect on Hybridon's business or that any of
Hybridon's other IT projects will be canceled or postponed to pay for the Y2K
upgrades.
With regard to potential supplier Y2K problems, Hybridon has compiled a list of
its critical suppliers, and has sent and received back a Y2K questionnaire from
each of them in order to permit Hybridon to ascertain the Y2K compliance status
of each. Hybridon has not yet uncovered any key supplier Y2K problems that could
have a material effect on its business. If through continued monitoring of these
suppliers Hybridon becomes aware of any such problems and is not satisfied that
those problems are being adequately addressed, it will take appropriate steps to
find alternative suppliers.
It has been acknowledged by governmental authorities that Y2K problems have the
potential to disrupt global economies, that no business is immune from the
potentially far-reaching effects of Y2K problems, and that it is difficult to
predict with certainty what will happen after December 31, 1999. Consequently,
it is possible that Y2K problems will have a material effect on Hybridon's
business even if Hybridon takes all appropriate measures to ensure that it and
its key suppliers are Y2K compliant.
It is possible that the conclusions reached by Hybridon from its analysis to
date will change, which could cause Hybridon's Y2K cost estimates and target
completion dates to change.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements contained in this Report on Form 10-Q may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. For this purpose, any
statements herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes," "anticipates,"
"plans," "expects" and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements are based on
management's current expectations and involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of Hybridon to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. These forward looking statements are subject to a number of
uncertainties and other factors, many of which are outside
4
<PAGE>
Hybridon's control, that could cause Hybridon's actual results to differ
materially from those indicated by such statements.
For a more complete discussion of the factors that could cause actual results to
differ materially from such forward looking statements, see the discussion
thereof contained under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors that May Affect
Future Results" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, which information is incorporated herein by reference.
Hybridon disclaims any intention or obligation to update or revise any forward
looking statements, whether as a result of new information, future events or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Historically, Hybridon's primary exposures have been related to
nondollar-denominated operating expenses in Europe. As of June 30, 1999,
Hybridon's assets and liabilities related to nondollar-denominated currencies
were not material.
5
<PAGE>
HYBRIDON, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In April, 1999, the Company issued 300,000 shares of Common Stock
to Pillar Investments Ltd. ("Pillar") as part of an advisory agreement dated May
5, 1998 entered into by the Company and Pillar, pursuant to which Pillar acts as
the Company's non-exclusive financial advisor. The Common Stock was issued in
reliance on an exemption from securities registration under Section 4(2) under
the Securities Act of 1933, as amended.
In May, 1999, the Company issued 150,000 shares of Common Stock
and 173,333 warrants to purchase additional shares of Common Stock at $3.00 per
share to Forum Capital Markets, LLC ("Forum") as part of a loan agreement
entered into by the Company and Forum. The Common Stock and warrants were issued
in reliance on an exemption from securities registration under Section 4(2)
under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 8,
1999, the stockholders re-elected the following three individuals as Class I
Directors to hold office until the 2002 Annual Meeting of Stockholders:
For Against Abstain
--- ------- -------
Nasser Menhall 9,381,406 157,799 0
Arthur W. Berry 9,379,726 159,479 0
Harold L. Purkey 9,379,726 159,479 0
The term of office as a Director for each of the following
individuals continued after the meeting:
Sudhir Agrawal, D. Phil.
Camille A. Chebeir
Yousef El-Zein
E. Andrews Grinstead, III
H.F. Powell
Dr. James B. Wyngaarden
Dr. Paul C. Zamecnik
<PAGE>
The stockholders also approved a proposal to amend the Company's
1997 Stock Incentive Plan. The holders of 7,603,125 shares of Common Stock voted
for the proposal, the holders of 110,631 shares of Common Stock voted against
the proposal, the holders of 159,470 shares of Common Stock abstained from
voting and the holders of 1,665,979 shares of Common Stock were broker
non-votes.
The stockholders also approved a proposal to amend the Company's
1995 Director Stock Option Plan. The holders of 7,550,065 shares of Common Stock
voted for the proposal, the holders of 163,411 shares of Common Stock voted
against the proposal, the holders of 159,750 shares of Common Stock abstained
from voting and the holders of 1,665,979 shares of Common Stock were broker
non-votes.
Finally, the stockholders ratified the selection of Arthur
Andersen LLP as the independent public accountants to audit the Company's
consolidated financial statements. The holders of 9,532,615 shares of Common
Stock voted for the ratification, the holders of 4,200 shares of Common Stock
voted against and the holders of 2,390 abstained from voting.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (EDGAR)
(b) No current reports on Form 8-K were filed during the six months
ended June 30, 1999.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HYBRIDON, INC.
August 16, 1999 /s/ E. Andrews Grinstead, III
- --------------- ------------------------------
Date E. Andrews Grinstead, III
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
August 16, 1999 /s/ Robert G. Andersen
- --------------- ------------------------------
Date Robert G. Andersen
Treasurer (Principal Financial
and Accounting
Officer)
<PAGE>
HYBRIDON, INC.
EXHIBIT INDEX
27.1 Financial Data Schedule (EDGAR)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,311,321
<SECURITIES> 0
<RECEIVABLES> 760,775
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,174,246
<PP&E> 22,567,773
<DEPRECIATION> 15,075,632
<TOTAL-ASSETS> 10,489,144
<CURRENT-LIABILITIES> 10,659,533
<BONDS> 1,740,025
0
6,621
<COMMON> 15,765
<OTHER-SE> (1,932,800)
<TOTAL-LIABILITY-AND-EQUITY> 10,489,144
<SALES> 3,066,717
<TOTAL-REVENUES> 3,490,881
<CGS> 0
<TOTAL-COSTS> 8,754,132
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 337,394
<INCOME-PRETAX> (5,600,645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,600,645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,600,645)
<EPS-BASIC> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
