<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 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 SEPTEMBER 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 Identification Number)
incorporation or organization)
345 Vassar Street
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices)
(617) 679-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE $.001 PER SHARE 18,207,573
--------------------------------------- ----------------------------------
Class Outstanding as of November 3, 2000
<PAGE> 2
HYBRIDON, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL STATEMENTS
Item 1- Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 2000 and
December 31,1999.
Consolidated Condensed Statements of Operations for the Three Months
and Nine Months ended September 30, 2000 and 1999.
Consolidated Condensed Statements of Cash Flows for the Nine Months
ended September 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> 3
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 5,236,326 $ 2,551,671
Prepaid expenses and other current assets 44,991 101,914
------------- -------------
Total current assets 5,281,317 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 5,285,197 5,229,514
------------- -------------
65,872 170,448
------------- -------------
OTHER ASSETS:
Deferred financing costs and other assets 1,083,109 1,325,149
Restricted cash 5,000,000 --
Notes receivable from officers -- 270,050
------------- -------------
6,083,109 1,595,199
------------- -------------
NET ASSETS FROM DISCONTINUED OPERATIONS -- 6,091,025
------------- -------------
$ 11,430,298 $ 10,510,257
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,000,000 $ 6,000,000
Net liabilities from discontinued operations 321,240 --
Accounts payable 793,290 1,081,796
Accrued expenses 1,419,706 2,094,988
------------- -------------
Total current liabilities 8,534,236 9,176,784
LINE OF CREDIT 231,167 --
------------- -------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 1,306,000 1,306,000
------------- -------------
8% CONVERTIBLE SUBORDINATED NOTES PAYABLE 7,736,943 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-612,115 and
661,856 shares at September
30, 2000 and December 31, 1999,
respectively 6,121 6,618
(Liquidation preference of $64,820,459
at September 30, 2000)
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding - 17,924,949 and
16,260,722 shares at
September 30, 2000 and December 31, 1999,
respectively 17,925 16,261
Additional paid-in capital 251,769,929 247,813,331
Accumulated deficit (257,781,133) (253,183,130)
Deferred compensation (390,890) (725,383)
------------- -------------
Total stockholders' deficit (6,378,048) (6,072,303)
------------- -------------
$ 11,430,298 $ 10,510,257
============= =============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
1
<PAGE> 4
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Service revenue $ 25,000 $ 112,500 $ 70,000 $ 295,000
Research and development -- 150,000 -- 450,000
Interest income 15,637 12,540 66,012 81,724
Royalty and other income 18,892 51,970 76,529 106,950
------------ ------------ ------------ ------------
59,529 327,010 212,541 933,674
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development 761,227 2,107,745 2,793,949 4,524,896
General and administrative 562,013 884,109 2,339,897 2,946,564
Interest 951,673 208,182 1,856,677 511,131
------------ ------------ ------------ ------------
2,274,913 3,200,036 6,990,523 7,982,591
------------ ------------ ------------ ------------
Net loss from continuing operations (2,215,384) (2,873,026) (6,777,982) (7,048,917)
------------ ------------ ------------ ------------
Net income (loss) from discontinued
operations 5,868,100 141,215 5,292,154 (1,283,539)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 3,652,716 $ (2,731,811) (1,485,828) $ (8,332,456)
------------ ------------ ------------ ------------
ACCRETION OF PREFERRED STOCK DIVIDENDS 1,020,687 1,075,899 3,112,174 3,193,851
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS $ 2,632,029 $ (3,807,710) $ (4,598,002) $ (11,526,307)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE FROM
(Note 4):
Continuing Operations $ (0.12) $ (0.18) $ (0.40) $ (0.45)
Discontinued Operations 0.33 0.01 0.31 (0.08)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE 0.20 (0.17) (0.09) (0.53)
ACCRETION OF PREFERRED STOCK DIVIDENDS (0.06) (0.07) (0.18) (0.20)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE APPLICABLE TO
COMMON STOCKHOLDERS $ 0.15 $ (0.24) $ (0.27) $ (0.74)
============ ============ ============ ============
SHARES USED IN COMPUTING BASIC AND DILUTED NET
LOSS PER COMMON SHARE (Note 4) 17,922,949 15,984,146 17,130,454 15,653,562
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements
2
<PAGE> 5
HYBRIDON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,485,828) $(8,332,456)
Net income (loss) from discontinued
operations 5,292,154 (1,283,539)
----------- -----------
Net loss from continuing operations (6,777,982) (7,048,917)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 104,576 353,576
Amortization of deferred compensation 334,493 576,697
Amortization of deferred financing costs 343,441 80,951
Interest expenses related to the issuance
of common stock warrants 731,196 --
Non-cash interest expense 151,077 --
Changes in operating assets and liabilities-
Prepaid and other current assets 56,923 8,642
Notes receivable from officers -- (8,550)
Accounts payable and accrued expenses (694,049) (394,231)
----------- -----------
Net cash used in continuing operating
activities (5,750,325) (6,431,832)
----------- -----------
Net cash provided by discontinued
operations 154,419 332,431
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets (101,401) --
Proceeds from sale of discontinued operations 11,550,000 --
Increase in Restricted Cash (5,000,000) --
Purchases of property and equipment, net -- (8,302)
----------- -----------
Net cash provided by /(used in)
investing activities 6,448,599 (8,302)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 114,705 --
Net borrowings under line of credit 231,167 --
Proceed from related party notes payable -- 1,000,000
Proceeds from issuance of convertible
promissory notes payable 1,486,090 --
----------- -----------
Net cash provided by financing
activities 1,831,962 1,000,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,684,655 (5,107,703)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,551,671 5,607,882
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,236,326 $ 500,179
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 592,898 $ 532,564
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON CASH ACTIVITIES:
Accretion of Series A convertible preferred
stock dividend $ 3,112,174 $ 3,193,851
=========== ===========
Issuance of common stock in lieu of services $ -- $ 1,000,000
=========== ===========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
<PAGE> 6
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 prior to the disposal thereof.
On September 21, 2000, the Company completed the sale (see Note 2) of its
Hybridon Specialty Products business to a subsidiary of Avecia, Inc. of
Manchester, UK, for up to $15.0 million (the Asset Sale).
On May 30, 2000, the Company entered into a Line of Credit Agreement (see
Note 9) 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 provided the Company with working capital pending the
closing of the Asset Sale. On July 10, 2000 and August 10, 2000, the
Company drew down approximately $0.5 million each under the Line of Credit,
representing a total draw down of $1.0 million. On September 28, 2000 the
Company repaid approximately $0.8 million in cash and converted the
remaining amount, approximately $0.2 million, to common stock in October
2000.
The Company's existing cash resources are expected to be sufficient 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. The Company will be required to raise substantial additional
funds from external sources to support its operations in 2002 and beyond.
(2) ASSET SALE
On September 21, 2000, the Company completed the sale of its Hybridon
Specialty Products business which manufactures, markets, and sells
oligonucleotides, to a subsidiary of Avecia, Inc. of Manchester, UK, for up
to $15.0 million. The Company recorded a gain of approximately $6.1 million
on the Asset Sale at the time of closing, comprised of net proceeds of
approximately $11.5 million, plus an approximately $0.5 million reserve for
certain indemnity purposes, less estimated transaction and other costs of
approximately $1.1 million and the book value of the net assets sold. The
remaining $3.0 million is subject to certain performance contingencies and
will be recorded as a gain when earned. The transaction costs consist
principally of legal and accounting fees, severance arrangements with
certain employees, and other estimated costs associated with consummating
the sale. As a condition of the Asset Sale requested by Avecia, the Company
held a special meeting of shareholders on September 12, 2000, and obtained
the approval of the Asset Sale by the common and preferred stock and the
debt holders.
4
<PAGE> 7
At the closing, the Company received $12.0 million of the proceeds, less a
$450,000 reserve, which was to 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. In October the Company
received $176,144 of that amount; the remaining $273,856 is currently
subject to negotiation. Consequently, the remaining amount is not included
in the calculation of the gain on the Asset Sale which is computed as
follows:
Proceeds $12,000,000
Property and equipment sold, net $4,894,887
Security deposit 90,000
----------
Net book value of assets sold $4,984,887
Current liabilities assumed by the buyer (88,969)
Long term liabilities assumed by the buyer (324,555)
----------
Net assets sold (4,571,363)
Inventory reserve holdback (273,856)
Transaction and other costs (1,053,722)
----------
Gain on sale $6,101,059
==========
The consolidated 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 three and nine months ended September
30, 1999 and 2000, respectively, and as of December 31, 1999. Reported
revenues, expenses, and cash flows exclude the operating results of the
discontinued operations. The net income from discontinued operations, as
presented on the consolidated statement of operations for the three and
nine months ended September 30, 2000, include the gain on sale as
calculated above of $6.1 million as well as the operating loss from
discontinued operations for the three and nine months ended September 30,
2000, totaling $0.2 million and $0.6 million, respectively. For all other
periods presented, the net income/(loss) relates solely to the operating
results of the Hybridon Specialty Products business.
The Company plans to use the proceeds of the Asset Sale for current
operating expenses, including payment of certain current liabilities.
(3) 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 September 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.
5
<PAGE> 8
(4) 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
September 30, 2000 include 5,741,799 common stock options, 13,059,608
common stock warrants, and 30,985,840 shares related to convertible
preferred stock and convertible debt instruments.
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.
Reclassification
Certain prior year account balances have been reclassified to be
consistent with current year's presentation.
(5) 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 September 30, 2000 and December 31, 1999 consisted of the
following (at amortized cost, which approximates fair market value):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Cash and cash equivalents-
Cash and money market funds $ 4,723,160 $ 505,794
Corporate bonds * 5,513,166 2,045,877
---------- ----------
$10,236,326 $2,551,671
=========== ==========
* Includes Restricted cash of $5,000,000 (see Note 9)
6
<PAGE> 9
(6) 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 September 30,
2000, there is approximately $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.
(7) $6.0 MILLION LOAN
During November 1998, the Company obtained a $6.0 million loan pursuant to
a loan agreement with Founders Financial Group LP (formerly Forum Capital
Markets, LLC) (Founders) 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 tangible net worth
requirement, but it has a waiver of compliance with the minimum tangible
net worth requirement at September 30, 2000, and the Lender has agreed not
to require that the Company comply with that requirement for any periods
commencing October 1, 2000 through December 31, 2000. The Company has
classified the outstanding balance of $6.0 million at September 30, 2000 as
a current liability in the accompanying consolidated balance sheet as it
does not expect to remain in compliance with this financial covenant during
2000. For its role in arranging the loan agreement, Founders received $0.4
million, which Founders 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, Founders 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 amount as a deferred financing cost,
which will be amortized to interest expense over the term of the note.
(8) 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 September 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.
7
<PAGE> 10
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. At September 30, 2000, the Company is in
compliance with the covenant regarding consolidated cash balances. 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 of the $6.0 Million Loan (see Note 7) 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 this amount as
a deferred financing cost, which will be amortized to interest expense over
the term of the 8% Convertible Notes.
(9) $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 was intended to provide the
Company with working capital pending the closing of the Asset Sale. On July
10, 2000 and August 10, 2000, the Company drew down approximately $0.5
million each of these dates under the Line of Credit, representing a total
draw down of $1.0 million.
On September 28, 2000, following the close of the transaction with a
subsidiary of Avecia, the Company received a Notice of Repayment from the
LOC Lenders and repaid approximately $0.8 million of principal and interest
in cash and $0.2 million of principal and interest in equivalent shares of
common stock at $1.08 per share (214,043 shares) in October 2000, pursuant
to the terms of the original agreement. The Company has no additional
borrowing capacity under this Line of Credit.
The LOC Lenders, the holders of the 8% Convertible Notes (Note 8), and the
Lender (Note 7) on July 10, 2000 entered into an amendment (the Amendment)
to the Subordination and Intercreditor Agreement. In the Amendment all
parties to the Subordination and Intercreditor Agreement agreed 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 obligation to the holders of the 8% Convertible
Notes and the Lenders. The amount of the pledge will be reduced as the
Company's obligations are converted to equity or repaid. The Company is
entitled to collect and keep interest income generated by the money market
account. 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 has amortized this amount to interest
expense over the term of the Line of Credit.
8
<PAGE> 11
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") prior to the
disposal thereof in September 2000.
Hybridon has incurred total losses of approximately $257.8 million through
September 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.
Hybridon has completed the sale of its Hybridon Specialty Products business
to Avecia Limited ("Avecia"), one of Europe's leading specialty chemicals
companies, through its subsidiary, Boston Biosystems, Inc. Avecia acquired the
oligonucleotide manufacturing business and certain related intellectual property
of Hybridon Specialty Products business for US $15.0 million, of which $12.0
million, less $0.5 million for certain indemnity purposes, is payable at closing
and $3.0 million is payable after one year, subject to offset rights under the
contract (this sale, 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 2001.
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 was intended to provide Hybridon with working capital any time prior to
the earlier of September 30, 2000, and the date the Asset Sale was consummated.
On July 10, 2000 and August 10, 2000, Hybridon drew down approximately $0.5
million on each of these dates under the Line of Credit, representing a total
draw down of $1.0 million. On September 28, 2000 Hybridon paid back
approximately $0.8 million and converted the remaining, approximately $0.2
million to common stock in October 2000. Hybridon has no additional borrowing
capacity under this Line of Credit.
Hybridon's existing cash resources are expected to be sufficient 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. Hybridon
will be required to raise substantial additional funds from external sources to
support its operations in 2002 and beyond.
As of November 3, 2000, Hybridon had 14 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 September 30, 2000 and 1999, and December 31,
1999.
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<PAGE> 12
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Hybridon had total revenues of $0.1 million and $0.3 million for the three
months ended September 30, 2000 and 1999, respectively, and had total revenues
of $0.2 million and $0.9 million for the nine months ended September 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
$25,000 and $0.1 million for the three months ended September 30, 2000 and 1999,
respectively, and $0.1 million and $0.3 million for the nine months ended
September 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 September 30, 2000 and 1999, respectively,
and zero and $0.5 million for the nine months ended September 30, 2000 and 1999,
respectively. This decrease is primarily due to the termination by Searle of its
collaboration agreement with Hybridon.
Hybridon's research and development expenses were $0.8 million and $2.1
million for the three months ended September 30, 2000 and 1999, respectively,
and $2.8 million and $4.5 million for the nine months ended September 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 $0.6 and $0.9 million
for the three months ended September 30, 2000 and 1999, respectively, and $2.3
million and $2.9 million for the nine months ended September 30, 2000 and 1999,
respectively. The decrease for the nine-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 $1.0 million and $0.2 million for the three
months ended September 30, 2000 and 1999, respectively, and $1.9 million and
$0.5 million for the nine months ended September 30, 2000 and 1999,
respectively. This increase is attributable to the issuance of the 8%
convertible subordinated notes in December 1999 and the draw down on the Line of
Credit.
As a result of the above factors, Hybridon incurred net losses from
continuing operations of $2.2 million and $2.9 million for the three months
ended September 30, 2000 and 1999, respectively, and $6.8 million and $7.0
million for the nine months ended September 30, 2000 and 1999, respectively.
Hybridon incurred net income from discontinued operations of $5.9 million and
$0.1 million for the three months ended September 30, 2000 and 1999,
respectively, and net income of $5.3 million and a net loss of $1.3 million for
the nine months ended September 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 September 30, 2000
and 1999, respectively, and $3.1 million and $3.2 million for the nine months
ended September 30, 2000 and 1999, respectively, resulting in a net gain
applicable to common stockholders of $2.6 million and a net loss of $3.8 million
for the three months ended September 30, 2000 and 1999, respectively, and a net
loss of $4.6 million and $11.5 million for the nine months ended September 30,
2000 and 1999, respectively.
The net income from discontinued operations, as presented on the
consolidated statement of operations for the three and nine months ended
September 30, 2000, include the gain on sale as calculated above of $6.1 million
as well as the operating loss from discontinued operations for the three and
nine months ended September 30, 2000, totaling $0.2 million and $0.6 million,
respectively. For all other periods presented, the net income/(loss) relates
solely to the operating results of the Hybridon Specialty Products business.
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<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, Hybridon utilized
approximately $5.8 million to fund continuing operating activities and did not
incur any capital expenditures. For the same period, net cash provided by
discontinued operations was $0.2 million. The primary use of cash for operating
activities was to fund Hybridon's loss, before the gain from discontinued
operations, of $6.8 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 $10.2 million at September 30,
2000, of which $5.0 million is classified as restricted cash. This restricted
cash is pledged the same as collateral, to secure Hybridon's obligation to the
holders of the 8% Convertible Notes and the Lenders. The amount of the pledge
will be reduced as Hybridon's obligations are converted to equity or repaid. On
November 3, 2000, Hybridon's obligations included $1.3 million principal amount
of 9% notes, a $6.0 million loan from Founders Financial Group LP (formerly
Forum Capital Markets, LLC) (Founders) and others (collectively, the "Lender"),
approximately $8.0 million in 8% convertible notes and accrued interest as
described below, the Line of Credit has been repaid or converted to equity as
described below, and approximately $0.6 million of accounts payable. The loan
agreement covering the $6.0 million loan from Founders 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 requirement at
September 30, 2000, and has agreed not to require that Hybridon comply with that
requirement for any periods commencing October 1, 2000 through December 31,
2000.
Hybridon received approximately $11.5 million of the $15.0 million from the
sale of its Hybridon Specialty Products business to Avecia. In October 2000,
Hybridon received approximately $0.2 million. Also, $0.3 million is currently
subject to negotiation. The remaining $3.0 million is payable after one year,
subject to offset rights under the contract, including 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 pursuant
to which the LOC Lenders agreed to provide Hybridon with an 8%, $2.0 million
Line of Credit. The Line of Credit was intended to provide Hybridon with working
capital any time prior to the earlier of September 30, 2000, and the date the
Asset Sale was consummated. On July 10, 2000 and August 10, 2000, Hybridon drew
down approximately $0.5 million each under the Line of Credit representing a
total draw down of $1.0 million. On September 28, 2000, following the close of
the transaction with Avecia, Hybridon received a Notice of Repayment from the
LOC Lenders and repaid approximately $0.8 million of principal and interest in
cash. In October 2000, Hybridon converted $0.2 million of principal and interest
into equivalent shares of common stock at $1.08 per share (214,043 shares),
pursuant to the terms of the original agreement. Hybridon has no additional
borrowing capacity under this Line of Credit.
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.
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 set aside, from the proceeds of the Asset Sale, the sum of
$5.0 million which it classifies as restricted cash on its balance sheet and
pledged the same as collateral to secure its obligation to the 8% Convertible
Noteholders and the Lender. The amount of the pledge will be reduced as the debt
is converted to equity or repaid. Hybridon can collect and keep the interest on
this $5.0 million. 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 (a) issued 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) issued
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.
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<PAGE> 14
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 was payable in two parts: $12.0
million at closing (of which the Purchaser has retained $273,856 and is in
negotiations with Hybridon over that amount, 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.
Hybridon expects that the first installment of the proceeds from the Asset
Sale, in the amount of approximately $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. 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.
Hybridon's future capital requirements will depend on many factors,
including the following:
- the amount received under the contingent Asset Sale consideration
- continued scientific progress in its research
- whether or not its drug discovery and development programs succeed
- progress with preclinical and clinical trials
- the time and costs involved in obtaining regulatory approvals
- the costs involved in filing, prosecuting and enforcing patent claims
- competing technological and market developments
- establishing and maintaining collaborative academic and commercial
research, development and marketing relationships
- the costs of manufacturing scale-up and commercialization activities
and arrangements
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The 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 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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<PAGE> 15
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
Hybridon, Inc. held a special meeting of its Common and Series A Preferred
stockholders on September 12, 2000, to consider and vote on proposals to approve
Hybridon's sale of its Hybridon Specialty Products (HSP) business and to amend
its Certificate of Incorporation to acknowledge that this transaction would not
constitute a liquidation event for the benefit of Series A Preferred
stockholders.
Hybridon believed that under Delaware law a vote was not required but
agreed to a vote because the purchaser required one as a condition to
consummating the transaction.
Proposal to approve the sale of Hybridon's Specialty Products Business...
FOR AGAINST ABSTAIN
Common 12,859,329 31,766 7,643
Preferred 557,998 0 3,690
Proposal to approve the amendment to Hybridon's Certificate of
Incorporation to acknowledge that the sale of the Hybridon Specialty Products
business will not constitute a liquidation event for the benefit of the Series A
or other Preferred stockholders...
FOR AGAINST ABSTAIN
Common 12,864,284 23,031 11,423
Preferred 557,998 0 3,690
The purchaser had the right to terminate the Sale Agreement and decline to
consummate the transaction if the sale was not approved by 75% of the
outstanding Common and Series A Preferred Stock, voting separately. The
purchaser also had the right to terminate the Sale Agreement and decline to
consummate the transaction if 75% of the Series A Preferred Stock did not
approve the amendment to the Certificate of Incorporation. Hybridon obtained the
affirmative vote of the common stockholders representing 72.29% of the common
stock outstanding, however the purchaser elected to waive its termination rights
in connection with the common stock vote and the sale of the Hybridon Specialty
Products business was completed.
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<PAGE> 16
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (EDGAR) (filed herewith)
(b) Reports on Form 8-K
On September 18, 2000, Hybridon filed a Current Report on Form 8-K,
reporting that at a Special Meeting of Shareholders of Hybridon, Inc.,
the common and Series A preferred shareholders, voting separately,
approved the following proposals presented to them:
1) The sale of Hybridon's Hybridon Specialty Products business; and
2) The amendment to the Hybridon's Certificate of Incorporation to
acknowledge that the sale will not constitute a liquidation event
for Preferred Stockholders.
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<PAGE> 17
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: November 14, 2000 Sudhir Agrawal, D. Phil.
President and Acting Chief Executive Officer
/s/ Robert G. Andersen
-----------------------------------
Date: November 14, 2000 Robert G. Andersen
Chief Financial Officer and Vice President
of Operations and Planning
15
