As filed with the Securities and Exchange Commission on August 14, 2000
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, 2000, 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
incorporation or organization) Identification 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 17,789,444
--------------------------------------- --------------------------------
Class Outstanding as of August 4, 2000
<PAGE>
HYBRIDON, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL STATEMENTS
Item 1- Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 2000 and
December 31,1999.
Consolidated Condensed Statements of Operations for the Three
Months and Six Months ended June 30, 2000 and 1999.
Consolidated Condensed Statements of Cash Flows for the Six Months
ended June 30, 2000 and 1999.
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>
<TABLE>
<CAPTION>
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
2000 1999
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 310,129 $ 2,551,671
Prepaid expenses and other current assets 46,092 101,914
------------- -------------
Total current assets 356,221 2,653,585
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 150,342 150,342
Laboratory and other equipment 5,200,727 5,249,620
------------- -------------
5,351,069 5,399,962
Less--Accumulated depreciation and amortization 5,259,432 5,229,514
------------- -------------
91,637 170,448
------------- -------------
OTHER ASSETS:
Deferred financing costs and other assets 1,196,587 1,325,149
Notes receivable from officers 275,750 270,050
------------- -------------
1,472,337 1,595,199
------------- -------------
NET ASSETS FROM DISCONTINUED OPERATIONS 5,005,380 6,091,025
------------- -------------
$ 6,925,575 $ 10,510,257
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 13,736,943 $ 6,000,000
Accounts payable 837,343 1,081,796
Accrued expenses 1,931,108 2,094,988
------------- -------------
Total current liabilities 16,505,394 9,176,784
------------- -------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 1,306,000 1,306,000
------------- -------------
8% CONVERTIBLE SUBORDINATED NOTES PAYABLE - 6,099,776
------------- -------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value-
Authorized--5,000,000 shares
Series A convertible preferred stock-
Designated - 1,500,000 shares
Issued and outstanding--628,115 and 661,856 shares at June 30,
2000 and December 31, 1999, respectively 6,281 6,618
(Liquidation preference of $63,799,772 at June 30, 2000)
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding - 17,610,779 and 16,260,722 shares at June 30,
2000 and December 31, 1999, respectively 17,611 16,261
Additional paid-in capital 249,924,660 247,813,331
Accumulated deficit (260,413,161) (253,183,130)
Deferred compensation (421,210) (725,383)
------------- -------------
Total stockholders' deficit (10,885,819) (6,072,303)
------------- -------------
$ 6,925,575 $ 10,510,257
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Service revenue $ - $ 72,500 $ - $ 182,500
Research and development - 150,000 45,000 300,000
Interest income 15,734 16,383 50,375 69,184
Royalty and other income 25,189 14,755 57,637 54,980
-------------- --------------- -------------- --------------
40,923 253,638 153,012 606,664
-------------- --------------- -------------- --------------
OPERATING EXPENSES:
Research and development 859,955 1,019,076 2,032,722 2,417,151
General and administrative 874,691 940,987 1,777,884 2,062,455
Interest 558,928 150,123 905,004 302,949
-------------- --------------- --------------- --------------
2,293,574 2,110,186 4,715,610 4,782,555
-------------- --------------- -------------- --------------
Net loss from continuing operations (2,252,651) (1,856,548) (4,562,598) (4,175,891)
--------------- --------------- ------------- --------------
Net loss from discontinued operations (181,931) (777,905) (575,946) (1,424,754)
-------------- --------------- ------------- --------------
NET LOSS $ (2,434,582) $ (2,634,453) $ (5,138,544) $ (5,600,645)
--------------- --------------- ------------- --------------
ACCRETION OF PREFERRED STOCK DIVIDENDS 1,020,687 1,075,900 2,091,487 2,117,952
-------------- --------------- ------------- --------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (3,455,269) $ (3,710,353) $ (7,230,031) $ (7,718,597)
============= =============== ============= ==============
BASIC AND DILUTED LOSS PER COMMON
SHARE FROM (Note 3):
Continuing Operations $ (0.13) $ (0.12) $ (0.27) $ (0.27)
Discontinued Operations (0.01) (0.05) (0.03) (0.09)
------------ ------------ ------------ ------------
NET LOSS PER SHARE (0.14) (0.17) (0.31) (0.36)
ACCRETION OF PREFERRED STOCK
DIVIDENDS (0.06) (0.07) (0.12) (0.14)
------------ ------------ ------------ ------------
NET LOSS PER SHARE APPLICABLE TO
COMMON STOCKHOLDERS $ (0.20) $ (0.24) $ (0.43) $ (0.50)
======== ======== ======== ========
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER COMMON SHARE (Note
3) 17,243,450 15,661,492 16,758,985 15,483,158
============ =============== ============= ==============
The accompanying notes are an integral part of these consolidated condensed financial statements
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Hybridon, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (5,138,544) $ (5,600,645)
Net loss from discontinued operations (575,946) (1,424,754)
---------------- ----------------
Net loss from continuing operations (4,562,598) (4,175,891)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 78,811 303,745
Amortization of deferred compensation 304,173 441,452
Amortization of deferred financing costs 229,963 53,967
Non-cash interest expense 151,077 -
Changes in operating assets and liabilities-
Prepaid and other current assets 55,822 8,677
Notes receivable from officers (5,700) (5,700)
Accounts payable and accrued expenses (408,333) (644,958)
---------------- ----------------
Net cash used in continuing operating activities (4,156,785) (4,018,708)
---------------- ----------------
Net cash provided by/(used in) discontinued
operations 509,699 (269,551)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets (101,401) -
Purchases of property and equipment, net - (8,302)
--------------- ----------------
Net cash used in investing activities (101,401) (8,302)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 20,855 -
Proceeds from issuance of convertible promissory notes payable 1,486,090 -
--------------- ---------------
Net cash provided by financing activities 1,506,945 -
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,241,542) (4,296,561)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,551,671 5,607,882
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 310,129 $ 1,311,321
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 592,898 $ 337,394
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NON CASH ACTIVITIES:
Accretion of Series A convertible preferred stock dividend $ 2,091,487 $ 2,117,952
=============== ===============
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 and licensing agreements,
interest on investment funds and revenues from the custom contract
manufacturing of synthetic DNA and reagent products by the Company's
Hybridon Specialty Products business.
On June 29, 2000, the Company entered into an Asset Purchase Agreement
(see Note 9) to sell the assets of its Hybridon Specialty Products
business to Boston Biosystems, Inc., a Delaware corporation which is a
wholly owned subsidiary of Avecia, Inc., for an amount up to $15.0
million (this sale, the Asset Sale). Consummation of the Asset Sale is
subject to approval by the Company's Common and Preferred shareholders.
On May 30, 2000, the Company entered into a Line of Credit Agreement (see
Note 8) pursuant to which certain lenders (the LOC Lenders) agreed to
provide the Company with an 8%, $2.0 million credit facility (the Line of
Credit or LOC) which is intended to provide the Company with working
capital pending the closing of the Asset Sale. On July 10, 2000, the
Company drew down approximately $0.5 million under the Line of Credit.
The Company's existing cash resources, including the LOC, are expected to
be sufficient to fund operations into the fourth quarter of 2000. The
Company expects the Asset Sale to be completed by the end of September
2000. If the Asset Sale is not completed, the Company's existing cash
resources and the LOC may not be sufficient to fund its operations and
permit the company to avoid a default under one or more of its
outstanding debt obligations. The Company's ability to continue
operations would then depend on the willingness of its obligors to waive
any such default and on its success in obtaining new funding from future
sales of equity securities, debt financings and research and development
collaborations.
4
<PAGE>
(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. The financial statements of the Company have been restated to
reflect the financial results of the Hybridon Specialty Products business
as a discontinued operation for the periods ended June 30, 1999, and
December 31, 1999. 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, 1999, as filed with the Securities and
Exchange Commission.
(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. The Company's potential common stock
equivalents as of June 30, 2000 include 6,102,532 shares of common stock
options and 13,277,365 shares of common stock warrants.
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.
5
<PAGE>
Reclassification
Certain prior year account balances have been reclassified to be
consistent with current year's presentation.
(4) CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
ninety days or less when purchased to be cash equivalents. Cash and cash
equivalents at June 30, 2000 and December 31, 1999 consisted of the
following (at amortized cost, which approximates fair market value):
June 30, December 31,
2000 1999
---- ----
Cash and cash equivalents-
Cash and money market funds $ 214,278 $ 505,794
Corporate bonds 95,851 2,045,877
------------ -------------
$ 310,129 $ 2,551,671
============ =============
(5) 9.0% CONVERTIBLE SUBORDINATED NOTES
On April 2, 1997, the Company issued $50.0 million of 9.0% convertible
subordinated notes (the 9% Notes). On May 5, 1998 noteholders holding
$48.6 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, 2000, 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. 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 are 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) $6.0 MILLION LOAN
During November 1998, the Company obtained a $6.0 million loan pursuant
to a loan agreement with Forum Capital Markets, LLC (Forum) and certain
investors associated with Pecks Management Partners Ltd. (collectively,
the Lender). The terms of the loan 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 loan 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 loan agreement includes covenants to maintain minimum
liquidity of $2.0 million and minimum tangible net worth of $6.0 million;
and (vi) the loan may not be prepaid, in whole or in part, at any time
prior to December 1, 2000. The Company is not in compliance with the
minimum
6
<PAGE>
tangible net worth requirement or the minimum liquidity covenant, but it
has received waivers of noncompliance with these covenants through
September 30, 2000. The Company has classified the outstanding balance of
$6.0 million at June 30, 2000 as a current liability in the accompanying
consolidated balance sheet as it does not expect to remain in compliance
with the financial covenants. For its role in arranging the loan
agreement, Forum received $0.4 million, which Forum reinvested by
purchasing 160,000 shares of common stock with 40,000 attached warrants
with an exercise price of $3.00 per share. The Company has recorded the
$0.4 million 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, 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.
(7) 8.0% CONVERTIBLE SUBORDINATED NOTES
In March 2000, the Company completed its offering of the 8% Convertible
Subordinated Notes (the 8% Convertible Notes). As of June 30, 2000, the
Company had received approximately $7.6 million in principal with respect
to the 8% Convertible Notes. Under the terms of the 8% Convertible Notes,
the Company must make semiannual interest payments on the outstanding
principal balance through the maturity date of November 30, 2002. The 8%
Convertible Notes are convertible at any time prior to the maturity date
at a conversion price equal to $0.60 per share of common stock (the
Conversion Ratio), subject to adjustment under certain circumstances, as
defined. If the 8% Convertible Notes are prepaid before the maturity
date, all noteholders are entitled to receive warrants to purchase the
number of shares of common stock equal to the number of shares of common
stock that would be issued using the Conversion Ratio, with an exercise
price of $0.60 per share of common stock.
In connection with the 8% Convertible Notes, the Company must comply with
certain covenants. These covenants include, without limitation, the
requirement that the Company make all payments of interest when due and
maintain consolidated cash balances of at least $1.5 million as of the
last day of any calendar month. While as of June 30, 2000, the Company is
not in compliance with the covenant regarding consolidated cash balances,
it has received waivers of noncompliance. Because there is no guaranty
that the Company will receive waivers in the future, the Company has
classified the outstanding balance on the 8% Convertible Notes as a
current liability in the accompanying consolidated balance sheet as of
June 30, 2000. If an event of default (as defined) occurs, the
noteholders may declare the unpaid principal and interest due and payable
immediately. If the Company defaults with respect to payment of interest,
the Company will be required to pay interest at a default rate equal to
12%.
In addition, in connection with the issuance of the 8% Convertible Notes,
the Lender (see Note 6) received a warrant to purchase 2,750,000 shares
of common stock at $.60 per share. The warrant was granted as
consideration to the Lender for relinquishing to holders of the 8%
Convertible Notes seniority upon liquidation of the Company. The Company
computed the value of the warrant to be $547,328, using the Black-Scholes
option-pricing model. The Company has recorded the $547,328 as a deferred
financing cost, which will be amortized to interest expense over the term
of the 8% Convertible Notes.
7
<PAGE>
(8) $2.0 MILLION LINE OF CREDIT
On May 30, 2000, the Company entered into a Line of Credit Agreement
pursuant to which the LOC Lenders agreed to provide the Company with the
Line of Credit (see Note 1). The Line of Credit is intended to provide
the Company with working capital pending the closing of the Asset Sale.
The Company may draw upon the facility by notice at any time prior to the
earlier of September 30, 2000, and the date the Asset Sale is
consummated. The Company may specify a draw date of not earlier than
seven business days following the notice. Each draw is subject to
conditions that are standard for similar transactions of this sort,
including the absence of defaults, the absence of material adverse
changes and the continued effectiveness of the agreement providing for
the Asset Sale. On July 10, 2000, the Company drew down approximately
$0.5 million under the Line of Credit Agreement.
Amounts drawn down under the Line of Credit will mature and become due
and payable on the earlier of September 30, 2000, and the date the Asset
Sale is consummated. At the maturity date, each LOC Lender may elect
either (a) to convert its portion of the amount outstanding under the LOC
into shares of common stock at the rate of one share for each $1.08 of
principal and interest then accrued (the $1.08 conversion price being
equal to the closing price of the common stock at the time the LOC
Lenders agreed to enter into the Line of Credit Agreement) or (b) to have
the Company repay in cash the amount outstanding under the LOC.
The LOC Lenders, the holders of the 8% Convertible Notes (Note 7), and
the Lender (Note 6) on July 10, 2000 entered into an amendment (the
Amendment) to the Subordination and Intercreditor Agreement between the
Company, the holders of the 8% Convertible Notes, and the Lender. That
agreement, entered into December 7, 1999, provided that the successors to
the $6.0 million loan would subordinate their rights to payment and their
security interest in the collateral (consisting of substantially all of
the Company's assets) to those of holders of the 8% Convertible Notes.
The Amendment provides that the LOC Lenders will have rights to payment
and interest in the collateral which are equal with those of the holders
of the 8% Notes and senior to the rights of the Lenders.
In the Amendment all parties to the Subordination and Intercreditor
Agreement agree to release their lien on the portion of the collateral
that includes assets to be conveyed in the Asset Sale. In return for this
partial release, the Company undertook in the Amendment that upon
consummation of the Asset Sale it would set aside from the proceeds
thereof the sum of $5.0 million with which it will purchase a money
market instrument and pledge the same as collateral to secure its
obligations to the LOC Lenders, the holders of the 8% Convertible Notes
and the Lenders. The amount of the pledge will be reduced as the debt is
converted to equity or repaid. The lenders that are party to the
Subordination and Intercreditor Agreement, as amended, will continue to
have a lien on substantially all of the Company's assets remaining after
the Asset Sale.
In connection with the Line of Credit, the Company has agreed (a) to
issue to the representatives of the LOC Lenders warrants to purchase up
to 500,000 shares of common stock at an exercise price of $1.08 per share
and (b) to issue to the LOC Lenders, proportionate to their respective
interests in the Line of Credit, warrants to purchase 1,000,000 shares of
common stock at an exercise price of $1.08 per share. The Company
computed the value of the warrants to be $731,136, using the
Black-Scholes option-pricing model. The Company will amortize this amount
to interest expense over the term of the Line of Credit.
8
<PAGE>
(9) ASSET PURCHASE AGREEMENT
On June 29, 2000, the Company entered into an Asset Purchase Agreement to
sell the assets of its Hybridon Specialty Products business, which
manufactures, markets, and sells oligonucleotides. The Company expects to
record a gain on the Asset Sale at the time of closing, composed of net
proceeds of $12.0 million, less estimated transaction and other costs and
net assets sold. The remaining $3.0 million, subject to offset, will be
recorded as a gain on the Asset Sale after it is earned. This gain will
be recognized when it is realized on the closing date of the Asset Sale
which is expected to take place by the end of September 2000. The
transaction costs consist principally of legal and accounting fees,
severance arrangements with certain employees, and other estimated costs
associated with consummating the sale. Closing is subject to various
conditions, including the approval of the holders of 75% of the common
and preferred stock, and of 100% of the debt holders. A special meeting
of shareholders is scheduled for September 12, 2000.
At the closing, the Company will receive $12.0 million of the proceeds,
less an approximately $450,000 reserve, which will be held for 30 days as
security for the value of the purchased inventory and against prepayments
for uncompleted work received by the Company in advance of the sale. One
year later, subject to certain conditions, the Company will receive an
additional $3 million. The conditions to the second payment include the
Company 's compliance with material purchases under a supply agreement
that requires it to buy certain amounts of oligonucleotides from Boston
Biosystems, Inc., the buyer in the Asset Sale.
The net assets as of June 30, 2000 included in the sale consist of the
following :
Property and equipment, net $ 5,336,000
Security deposit 90,000
------------
Total assets $ 5,426,000
Current liabilities ( 86,000)
Long term liabilities (348,000)
------------
$ 4,992,000
============
The Company plans to use the proceeds of the Asset Sale for current
operating expenses, including payment of certain current liabilities.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Hybridon is involved in the discovery and development of genetic
medicines based on antisense technology. Hybridon began operations in February
1990 and since that time has been involved primarily in research and development
efforts, developing its manufacturing capabilities, and raising capital. In
order to commercialize its therapeutic products, Hybridon will need to address a
number of technological challenges and comply with comprehensive regulatory
requirements. All revenues received by Hybridon to date have been from
collaborative agreements, interest on invested funds and revenues from the
custom contract manufacturing of synthetic DNA and reagent products by its
manufacturing business, Hybridon Specialty Products ("HSP").
Hybridon has incurred total losses of approximately $260.0 million
through June 30, 2000. Hybridon expects that its research and development and
general and administrative expenses will be significant in 2000 and future years
as it pursues its core drug development programs and expects to continue to
incur operating losses and significant capital needs beyond its internally
generated funds.
Hybridon has entered into an Asset Purchase Agreement to sell the
assets of its Hybridon Specialty Products business to Boston Biosystems, Inc., a
Delaware corporation that is a wholly owned subsidiary of Avecia, Inc., for an
amount up to $15.0 million (that sale, the "Asset Sale"). Although an Asset
Purchase Agreement has been signed by the parties, the sale is subject to
approval by Hybridon's common and preferred shareholders. The Asset Purchase
Agreement requires the approval of 75% of the common and preferred stock, and of
100% of the debt holders. A shareholder meeting is scheduled for September 12,
2000 for the shareholders to vote on the transaction. Even if the transaction
receives shareholder approval, the purchase price will still be subject to
adjustment based on the amount of the inventory included in the sale and certain
payments received in respect of the business before the closing. At the closing,
Hybridon will receive $12.0 million of the proceeds, less an approximately
$450,000 reserve, which will be held for 30 days as security for the value of
the purchased inventory and against prepayments for uncompleted work received by
Hybridon in advance of the sale. One year later, subject to certain conditions,
Hybridon will receive an additional $3 million, subject to offset rights granted
to Boston Biosystems. The conditions to the second payment include Hybridon 's
performance under a supply agreement that requires it to buy certain amounts of
oligonucleotides.
On May 30, 2000, Hybridon entered into a Line of Credit Agreement with
certain lenders who provided Hybridon with an 8%, $2.0 million credit facility
which is intended to provide Hybridon with working capital pending the closing
of the Asset Sale. On July 10, 2000, Hybridon drew down approximately $0.5
million under the Line of Credit Agreement.
Hybridon's existing cash resources, including the $2.0 million line of
credit, are expected to be sufficient to fund operations into the fourth quarter
of 2000. Hybridon expects the Asset Sale to be completed by the end of September
2000. However, Hybridon can give no assurances that the Asset Sale will be
completed, given the conditions it is subject to, and, even on completion of the
sale, payment of a portion of the purchase price is subject to the reserve and
the right of offset. If the Asset sale is not completed, Hybridon's existing
cash resources and the Line of Credit may not be sufficient to fund its
operations and permit Hybridon to avoid a default under one or more of its
outstanding debt obligations. Hybridon's ability to continue operations would
then depend on the willingness of its obligors to waive any such default and on
its success in obtaining new funding from future sales of equity securities,
debt financings, and research and development collaborations.
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As of August 4, 2000, Hybridon had 38 full-time employees. Upon the
closing of the Asset Sale, Hybridon estimates it will have approximately 13
full-time employees.
The financial statements of Hybridon have been restated to reflect the
financial results of the Hybridon Specialty Products business as a discontinued
operation for the periods ended June 30, 2000 and 1999, and December 31, 1999.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Hybridon had total revenues of $40,293 and $0.3 million for the three
months ended June 30, 2000 and 1999, respectively, and had total revenues of
$0.2 million and $0.6 million for the six months ended June 30, 2000 and 1999,
respectively.
Receipt of service revenues from MethylGene, Inc. and OriGenix
Technologies, Inc., entities in which Hybridon has an equity interest, were zero
and $0.1 million for the three months ended June 30, 2000 and 1999,
respectively, and zero and $0.2 million for the six months ended June 30, 2000
and 1999, respectively. This decrease represents a decrease in support services
provided to these entities by Hybridon.
Revenues from research and development collaborations were zero and
$0.2 million for the three months ended June 30, 2000 and 1999, respectively,
and $45,000 and $0.3 million for the six months ended June 30, 2000 and 1999,
respectively. This decrease was primarily due to the termination by Searle of
its collaboration agreement with Hybridon.
Hybridon's research and development expenses were $0.9 million and $1.0
million for the three months ended June 30, 2000 and 1999, respectively, and
$2.0 million and $2.4 million for the six months ended June 30, 2000 and 1999,
respectively. This decrease reflects Hybridon's lower levels of cash available
for expenditures in 2000. Research and development salaries and related costs
remained at approximately the same level in 2000 as 1999. Hybridon's patent
expenses remained at approximately the same level in 2000 as 1999.
Hybridon's general and administrative expenses were $0.9 million for
both the three months ended June 30, 2000 and 1999, and $1.8 million and $2.1
million for the six months ended June 30, 2000 and 1999, respectively. The
decrease for the six-month period reflects Hybridon's lower levels of cash
available for expenditures in 2000. General and administrative expenses related
to business development and public relations remained at approximately the same
level in 2000 as 1999, as did legal and accounting expenses.
Hybridon's interest expense was $0.6 million and $0.2 million for the
three months ended June 30, 2000 and 1999, respectively, and $0.9 million and
$0.3 million for the six months ended June 30, 2000 and 1999, respectively. This
increase is attributable to the issuance of the 8% convertible subordinated
notes in December 1999.
As a result of the above factors, Hybridon incurred net losses from
continuing operations of $2.3 million and $1.9 million for the three months
ended June 30, 2000 and 1999, respectively, and $4.6 million and $4.2 million
for the six months ended June 30, 2000 and 1999, respectively. Hybridon incurred
net losses from discontinued operations of $0.2 million and $0.8 million for the
three months ended June 30, 2000 and 1999, respectively, and $0.6 million and
$1.4 million for the six months ended June 30, 2000 and 1999, respectively.
Hybridon recorded preferred stock dividends on the Series A convertible
preferred stock of $1.0 million and $1.1 million for the three months ended June
30, 2000 and
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1999, respectively, and $2.1 million for both the six months ended June 30, 2000
and 1999, respectively, resulting in a net loss applicable to common
stockholders of $3.5 million and $3.7 million for the three months ended June
30, 2000 and 1999, respectively, and $7.2 million and $7.7 million for the six
months ended June 30, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, Hybridon utilized
approximately $4.2 million to fund continuing operating activities and did not
incur any capital expenditures. For the same period, discontinued operations
required $0.5 million to fund discontinued activities. The primary use of cash
for operating activities was to fund Hybridon's loss of $4.6 million. Hybridon
expects to purchase a minimal amount of capital equipment in 2000 as part of its
effort to conserve cash resources.
Hybridon had cash and cash equivalents of $0.3 million at June 30,
2000. However, since that date, Hybridon has spent a portion of such cash
resources and continues to have substantial obligations to lenders, real estate
landlords, trade creditors and others. On August 4, 2000, Hybridon's obligations
included $1.3 million principal amount of 9% notes, a $6.0 million loan from
Forum Capital Markets, LLC and others (collectively, the "Lender"),
approximately $7.7 million in 8% convertible notes and accrued interest as
described below, approximately $0.5 million from the Line of Credit as described
below, and approximately $0.9 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 loan agreement
covering the $6.0 million loan from Forum Capital Markets and others contains
certain financial covenants that require Hybridon to maintain minimum tangible
net worth and minimum liquidity requirements. The Lender has granted Hybridon a
waiver of compliance with the minimum tangible net worth and the minimum
liquidity requirements at June 30, 2000, and have agreed not to require that
Hybridon comply with those requirements for any periods commencing July 1, 2000
through September 30, 2000.
On June 29, 2000, Hybridon announced that it and Avecia Limited
("Avecia"), one of Europe's leading specialty chemicals companies, have agreed
that Avecia, through its subsidiary, Boston Biosystems, Inc., will acquire the
oligonucleotide manufacturing business and related intellectual property of
Hybridon Specialty Products business for US $15.0 million, of which $12.0
million is payable at closing and $3.0 million is payable after one year,
subject to offset rights under the contract (that acquisition, the "Asset
Sale"). Avecia and Hybridon have also agreed that through 2002 Avecia will
supply oligonucleotides for Hybridon and its associated operations. Hybridon
will be required to purchase certain amounts of oligonucleotides from Avecia
until approximately the end of 2002. The Asset Sale, which requires Hybridon
shareholder approval and is subject to other conditions, is expected to be
completed by the end of September 2000.
On May 30, 2000, Hybridon entered into a Line of Credit Agreement
pursuant to which certain lenders (the "LOC Lenders") agreed to provide Hybridon
with an 8%, $2.0 million credit facility (the "Line of Credit" or "LOC"). The
Line of Credit is intended to provide Hybridon with working capital pending the
closing of the Asset Sale. Hybridon may draw upon the Line of Credit by notice
at any time prior to the earlier of September 30, 2000, and the date the Asset
Sale is consummated. Hybridon may specify a draw date of not earlier than seven
business days following the notice. Each draw is subject to conditions that are
standard for transactions of this sort, including the absence of defaults, the
absence of material adverse changes and the continued effectiveness of the
agreement providing for the Asset Sale. On July 10, 2000, Hybridon drew down
approximately $0.5 million under the Line of Credit.
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Amounts drawn down under the Line of Credit will mature and become due
and payable on the earlier of September 30, 2000, and the date the Asset Sale is
consummated. At the maturity date, each LOC Lender may elect either (a) to
convert its portion of the amount outstanding under the LOC into shares of
Hybridon's common stock at the rate of one share for each $1.08 of principal and
interest then accrued (the $1.08 conversion price being equal to the closing
price of Hybridon's common stock at the time the LOC Lenders expressed their
willingness to enter into the Line of Credit Agreement) or (b) to have Hybridon
repay in cash the amount outstanding under the LOC.
The LOC Lenders have joined with the holders of Hybridon's 8%
Convertible Notes issued in 1999 and the Lender in a July 10, 2000 amendment
(the "Amendment") to the Subordination and Intercreditor Agreement Hybridon, the
8% Convertible Noteholders, and the Lender were parties. That agreement, entered
into December 7, 1999, provided that the successors to the $6.0 million loan
would subordinate their rights to payment and their security interest in the
collateral (consisting of substantially all of Hybridon's assets) to those of
the 8% Convertible Noteholders. The Amendment provides that the LOC Lenders will
have rights to payment and interest in the collateral which are equal with those
of the 8% Convertible Noteholders and senior to the rights of the Lender.
In the Amendment all parties to the Subordination and Intercreditor
Agreement agree to release their lien on the portion of the collateral that
includes assets to be conveyed in the Asset Sale. In return for this partial
release, Hybridon undertook in the Amendment that upon consummation of the Asset
Sale it would set aside from the proceeds thereof the sum of $5.0 million with
which it will purchase a money market instrument and pledge the same as
collateral to secure its obligations to the LOC Lenders, the 8% Convertible
Noteholders and the Lender. The amount of the pledge will be reduced as the debt
is converted to equity. The lenders that are party to the Subordination and
Intercreditor Agreement, as amended, will continue to have a lien on
substantially all of the assets of Hybridon remaining after the Asset Sale.
In connection with the Line of Credit, Hybridon has agreed (a) to issue
to the representatives of the LOC Lenders warrants to purchase up to 500,000
shares of Hybridon's common stock at an exercise price of $1.08 per share and
(b) to issue to the LOC Lenders, proportionate to their respective interests in
the Letter of Credit, warrants to purchase 1,000,000 shares of Hybridon's common
stock at an exercise price of $1.08 per share.
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
The Asset Sale
The purchase price in the Asset Sale is payable in two parts: $12.0
million at closing (of which the Purchaser will retain $450,000 for 30 days as
security for the value of the purchased inventory and against prepayments for
uncompleted work received by Hybridon in advance of the Asset Sale, and $3.0
million, payable one year from the date of closing. Receipt of the additional
$3.0 million payment one year from the date of closing is subject to additional
conditions, notably Hybridon's purchase of certain quantities of product from
Boston Biosystems under a supply agreement, and is also subject to offset rights
granted to Boston Biosystems.
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There can be no assurance that the Asset Sale can be completed, as the
closing is subject to conditions, including the approval of the transaction by
holders of at least 75% of Hybridon's common and preferred Stock. Hybridon's
existing cash resources, including the Line of Credit, are expected to be
sufficient to fund operations through Hybridon's receipt of proceeds of the
Asset Sale (see "Liquidity and Capital Resources") and into the fourth quarter
of 2000. The Asset Sale is expected to be completed by the end of September
2000. If the Asset Sale is not completed, Hybridon's existing cash resources and
the Line of Credit may not be sufficient to fund its operations and permit
Hybridon to avoid a default under one or more of its outstanding debt
obligations. Hybridon's ability to continue operations would then depend on the
willingness of its obligors to waive any such default and on its success in
obtaining new funding.
Hybridon expects that the first installment of the proceeds from the
Asset Sale, in the amount of $12 million, should enable it to operate into the
third quarter of 2001, at which time it expects to collect the second
installment of the proceeds from the Asset Sale in the amount of $3.0 million,
which should enable it to sustain its operations through the year 2001, assuming
that Avecia claims no offset pursuant to offset rights granted it. Hybridon will
generate a gain on the transaction, and upon closing and receipt of the first
installment of the purchase price, Hybridon will have $5.0 million of restricted
cash that will be available to fund its operations. Even though Hybridon expects
to have sufficient cash to fund its operations through 2001, it will be required
to raise substantial additional funds from external sources to support its
operations in 2002 and beyond.
Assuming the completion of the Asset Sale, Hybridon's future capital
requirements will depend on many factors, including the following:
o whether or not it receives the contingent Asset Sale consideration
o continued scientific progress in its research
o whether or not its drug discovery and development programs succeed
o progress with preclinical and clinical trials
o the time and costs involved in obtaining regulatory approvals
o the costs involved in filing, prosecuting and enforcing patent
claims
o competing technological and market developments
o establishing and maintaining collaborative academic and commercial
research, development and marketing relationships
o its ability to obtain third-party financing for leasehold
improvements and other capital expenditures
o the costs of manufacturing scale-up and commercialization
activities and arrangements
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The statements contained in this Report on Form 10-Q that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. Hybridon
intends that all forward-looking statements be subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect Hybridon's views as of the date they are made
with respect to future events and financial performance, but are subject to many
risks and uncertainties, which could cause actual results to differ materially
from any future results expressed or implied by such forward-looking
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statements. Examples of such risks and uncertainties include the risks detailed
above and in the Risk Factors section of Hybridon's Annual Report on Form 10-K
for the year ended December 31, 1999, which information is incorporated herein
by reference.
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HYBRIDON, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Hybridon's Annual Meeting of Stockholders held on June 29, 2000, the
stockholders elected the following three individuals as Class II Directors to
hold office until the 2003 Annual Meeting of Stockholders:
For Against Abstain
--- ------- -------
Camille A. Chebeir 13,060,167 364,703 0
James B. Wyngaarden, M.D. 13,058,467 366,403 0
Paul C. Zamecnik, M.D. 13,059,667 365,203 0
The term of office as a director for each of the following individuals
continued after the meeting:
Arthur W. Berry
C. Keith Hartley
Nasser Menhall
Sudhir Agrawal, D.Phil.
Youssef El-Zein
E. Andrews Grinstead, III
The stockholders also approved a proposal to amend Hybridon's 1997
Stock Incentive Plan. The holders of 9,016,979 shares of common stock voted for
the proposal; the holders of 472,306 shares of common stock voted against the
proposal; the holders of 235,590 shares of common stock abstained from voting;
and the holders of 7,769,208 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 Hybridon's consolidated financial
statements. The holders of 13,191,370 shares of
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common stock voted for the ratification; the holders of 4,200 shares of common
stock voted against; the holders of 229,250 shares of common stock abstained
from voting; and the holders of 4,069,213 shares of common stock were broker
non-votes.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Line of Credit Security Agreement dated as of May 30, 2000,
between Hydridon and certain lenders (filed herewith).
10.2 First Amendment and Restated Subordination and Intercreditor
Agreement between Hybridon, holders of its 8% Convertible
Notes, and certain other lenders (filed herewith).
27.1 Financial Data Schedule (EDGAR) (filed herewith)
(b) Reports on Form 8-K
On June 29, 2000, Hybridon filed a Current Report on Form 8-K,
reporting that Hybridon and Avecia Limited, one of Europe's leading
specialty chemicals companies, have agreed on terms for Avecia to
acquire the DNA manufacturing business and related intellectual
property of Hybridon.
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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.
/s/ Sudhir Agrawal
Date: August 14, 2000 -------------------------------------
Sudhir Agrawal, D. Phil.
President and Acting Chief Executive
Officer
/s/ Robert G. Andersen
Date: August 14, 2000 -------------------------------------
Robert G. Andersen
Chief Financial Officer and Vice
President of Operations and Planning
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