As filed with the Securities and Exchange Commission on November 16, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
-------
For the Quarter Ended: September 30, 1998 Commission File Number 0-27352
Hybridon, Inc.
--------------
(Exact name of registrant as specified in its charter)
Delaware 04-3072298
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
organization or incorporation)
155 Fortune Blvd.
Milford, MA 01757
-----------------
(Address of principal executive offices, including zip code)
(508) 482-7500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.001 per share 15,256,825
- - --------------------------------------- -----------------------
Class Outstanding as of November 13, 1998
1
HYBRIDON, INC.
Form 10-Q
INDEX
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 1998 and
December 31, 1997.
Consolidated Condensed Statements of Operations for the Three Months
ended and Nine Months ended September 30, 1998 and 1997 and Cumulative
from May 25, 1989 (Inception) to September 30, 1998
Consolidated Condensed Statements of Cash Flows for the Nine Months
ended September 30, 1998 and 1997 and Cumulative from May 25,
1989 (Inception) to September 30, 1998
Notes to Consolidated Condensed Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II - Other Information
Items 1 through 4 - None
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K.
Signatures
2
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 882,825 $ 2,202,202
Accounts receivable 825,668 529,702
Accounts receivable related to real estate limited partnership 5,450,000 --
Prepaid expenses and other current assets 448,372 1,005,825
----------- -----------
Total current assets 7,606,865 3,737,729
----------- -----------
PROPERTY AND EQUIPMENT, NET 8,953,117 19,230,804
----------- -----------
OTHER ASSETS:
Restricted cash 659,618 3,050,982
Notes receivable from officers 255,800 247,250
Deferred financing costs and other assets 923,162 3,354,767
Investment in real estate partnership -- 5,450,000
----------- -----------
1,838,580 12,102,999
----------- -----------
$18,398,562 $35,071,532
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 3,030,981 $ 7,868,474
Accounts payable 4,387,353 8,051,817
Accrued expenses 3,003,934 11,917,298
------------- -------------
Total current liabilities 10,422,268 27,837,589
------------- -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 573,017 3,282,123
------------- -------------
9% CONVERTIBLE SUBORDINATED NOTES PAYABLE 1,306,000 50,000,000
------------- -------------
STOCKHOLDERS' EQUITY(DEFICIT):
Preferred stock, $.01 par value-
Authorized--5,000,000 shares
Issued and outstanding--None -- --
Series A convertible preferred stock, $.01 par value-
Authorized--5,000,000 shares
Issued and outstanding--624,790 shares at September 30, 1998 6,248 --
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding--15,254,825 and 5,059,650 shares at
September 30, 1998, and December 31, 1997, respectively 15,255 5,060
Additional paid-in capital 240,301,274 173,695,698
Deficit accumulated during the development stage (233,294,707) (218,655,101)
Deferred compensation (930,793) (1,093,837)
------------- -------------
Total stockholders' equity(deficit) 6,097,277 (46,048,180)
------------- -------------
$ 18,398,562 $ 35,071,532
============= =============
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative
from
May 25, 1989
Three Months Ended Nine Months Ended (Inception) to
September 30, September 30, September 30,
1998 1997 1998 1997 1998
REVENUES:
Research and development $ 150,000 $ 200,000 $ 949,915 $ 980,150 $ 6,449,178
Product and service revenue 846,746 155,368 2,353,435 1,231,226 5,310,472
Interest income 44,010 294,246 106,457 898,160 3,327,196
Royalty and other income -- 18,247 -- 33,218 110,321
------------ ------------ ------------ ------------- -------------
1,040,756 667,861 3,409,807 3,142,754 15,197,167
------------ ------------ ------------ ------------- -------------
OPERATING EXPENSES:
Research and development 5,201,246 11,338,913 17,180,927 37,784,718 182,640,742
General and administrative 1,503,845 3,057,380 5,217,864 9,011,879 53,034,480
Restructuring charge -- 3,100,000 -- 3,100,000 11,020,000
Interest 296,344 1,605,918 2,880,307 3,223,473 9,026,337
------------ ------------ ------------ ------------- -------------
7,001,435 19,102,211 25,279,098 53,120,070 255,721,559
------------ ------------ ------------ ------------- -------------
Loss from operations (5,960,679) (18,434,350) (21,869,291) (49,977,316) (240,524,392)
EXTRAORDINARY ITEM:
Gain on conversion of 9% convertible
subordinated notes -- -- 8,876,685 -- 8,876,685
------------ ------------ ------------ ------------- -------------
NET LOSS $ (5,960,679) $(18,434,350) $(12,992,606) $ (49,977,316) $(231,647,707)
============ ============ ============ ============= =============
BASIC AND DILUTED LOSS
PER COMMON SHARE FROM
(Note 3):
OPERATIONS $ (0.39) $ (3.65) $ (2.05) $ (9.90)
EXTRAORDINARY GAIN -- -- 0.83 --
-------------- -------------- -------------- --------------
NET LOSS $ (0.39) $ (3.65) $ (1.22) $ (9.90)
============== ============== ============== ==============
SHARES USED IN COMPUTING BASIC 15,254,825 5,055,513 10,648,116 5,046,806
AND DILUTED NET LOSS PER COMMON ============== ============== ============== ===============
SHARE (Note 3)
The accompanying notes are an integral part of these consolidated condensed financial statements
4
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative
from
May 25, 1989
Nine Months Ended (inception) to
September 30, September 30,
1998 1997 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,992,606) $(49,977,316) $(231,647,707)
Adjustments to reconcile net loss to net cash
used in operating activities--
Extraordinary gain on conversion of 9% convertible
subordinated notes payable (8,876,685) -- (8,876,685)
Depreciation and amortization 2,419,269 4,081,720 13,605,723
Loss on disposal of fixed assets 424,675 -- 424,675
Issuance of common stock for services rendered 1,195,398 146,875 1,342,273
Compensation on grant of stock options, warrants and
restricted stock 163,044 261,519 8,286,842
Amortization of discount on convertible promissory notes
payable -- -- 690,157
Amortization of deferred financing costs 240,611 358,904 937,080
Noncash interest on convertible promissory notes payable -- -- 260,799
Write-down of assets related to restructuring 6,600,000 331,000 7,200,000
Changes in operating assets and liabilities-
Accounts receivable (295,966) 276,545 (825,668)
Prepaid and other current assets 557,703 (541,718) (448,122)
Notes receivable from officers (8,550) 55,952 (255,800)
Amounts payable to related parties -- -- (200,000)
Accounts payable and accrued expenses (6,871,326) 3,349,962 13,097,789
Deferred revenue -- (86,250) --
------------ ------------ -------------
Net cash used in operating activities (17,444,433) (41,742,807) (196,408,644)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments -- (5,113,569) --
Purchases of property and equipment, net (340,507) (6,645,439) (29,652,972)
Proceeds from sale of fixed assets 460,000 -- 460,000
Investment in real estate partnership -- -- (5,450,000)
------------ ------------ -------------
Net cash provided by (used in) investing activities 119,493 (11,759,008) (34,642,972)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock 6,804,562 -- 103,388,716
Proceeds from issuance of common stock related to stock
options and restricted stock grants -- 83,327 1,260,928
Proceeds from issuance of common stock related to stock
warrants -- 9,075 3,185,816
Net proceeds from issuance of common stock 6,876,676 -- 59,232,000
Repurchase of common stock -- -- (263)
Proceeds from notes payable -- -- 9,450,000
Proceeds from issuance of convertible promissory notes
payable 4,233,832 50,000,000 63,425,576
Proceeds from long-term debt -- -- 662,107
Payments on long-term debt and capital leases (4,236,693) (1,169,656) (7,602,573)
Proceeds from sale/leaseback -- 1,165,236 4,001,018
Decrease (increase) in restricted cash and other assets 2,327,186 (626,985) (1,811,945)
(Increase) decrease in deferred financing costs -- (2,699,957) (3,256,939)
------------ ------------ -------------
Net cash provided by financing activities 16,005,563 46,761,040 231,934,441
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,319,377) (6,740,775) 882,825
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,202,202 12,633,742 --
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 882,825 $ 5,892,967 $ 882,825
============ ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,494,323 $ 786,005 $ 5,124,773
============ ============ =============
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION
Hybridon, Inc. (the "Company") was incorporated in the State of Delaware on May
25, 1989. The Company is engaged in the discovery and development of novel
genetic medicines based primarily on antisense technology. The Company is in
the development stage. Since inception, the Company has been engaged primarily
in research and development efforts, development of its manufacturing
capabilities and organizational efforts, including recruiting of scientific and
management personnel and raising capital. To date, the Company has not received
revenue from the sale of biopharmaceutical products developed by it based on
antisense technology. In order to commercialize its own products, the Company
will need to address a number of technological challenges and comply with
comprehensive regulatory requirements. Accordingly, it is not possible to
predict the amount of funds that will be required or the length of time that
will pass before the Company receives revenues from sales of any of these
products. Revenues received by the Company to date have been derived primarily
from collaboration agreements, interest on investment funds, revenues from the
custom contract manufacturing of synthetic DNA and reagent products by the
Company's Hybridon Specialty Products Division. As a result, although the
Company has begun to generate revenues from its custom contract manufacturing
business, the Company is dependent on the proceeds from possible future sales
of equity securities, debt financings and research and development
collaborations in order to fund future operations.
On May 5, 1998, the Company completed a private offering of equity securities
raising total gross proceeds of approximately $27.3 million from the issuance
of 9,597,476 shares of common stock, 114,285 shares of Series A convertible
preferred stock and warrants to purchase 2,657,219 shares of common stock at
$2.40 per share. The gross proceeds include the conversion of approximately
$6.2 million of accounts payable, capital lease obligations and other
obligations into common stock. The Company incurred approximately $2.6 million
of cash expenses related to the private offering and issued 597,699 shares of
common stock and warrants to purchase 1,720,825 shares of common stock at $2.40
per share to the placement agents. The compensation received by Pillar
Investments Ltd. ("Pillar"), a company affiliated with certain directors of the
Company, with respect to the offshore component of the private offering (the
"Offshore Offering") consisted of (i) 9% of gross proceeds of such Offshore
Offering and (ii) a non-accountable expense allowance equal to 4% of gross
proceeds of such Offshore Offering. Pillar received approximately $1.6 million
and warrants to purchase 1,111,630 shares of common stock at $2.40 per share.
On February 6, 1998, the Company commenced an exchange offer to the holders of
the 9% Convertible Subordinated Notes (the "9% Notes") (see Note 6) to exchange
the 9% Notes for Series A convertible preferred stock and certain warrants of
the Company. On May 5, 1998, noteholders holding $48.7 million of principal and
$2,361,850 of accrued interest tendered such principal and accrued interest to
the Company for 510,505 shares of Series A convertible preferred stock and
warrants to purchase 3,002,958 shares of common stock with an exercise price of
$4.25 per share. In accordance with Statement of Financial Accounting ("SFAS")
No.15, Accounting by Debtors and Creditors for Troubled Debt Restructurings,
the Company recorded an extraordinary gain of approximately $8.9 million
related to the conversion. The extraordinary gain represents the difference
between the carrying value of the 9% Notes and the fair value of the Series A
convertible preferred stock, as determined by the per share sales price of
Series A convertible preferred stock sold in the private offering described
above, and warrants to purchase common stock issued by the Company.
6
(2) UNAUDITED INTERIM FINANCIAL STATEMENTS
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited consolidated condensed financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and include, in the
opinion of management, all adjustments, consisting of normal, recurring
adjustments, necessary for a fair presentation of interim period results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that its disclosures are adequate to make the
information presented not misleading. The results for the interim periods
presented are not necessarily indicative of results to be expected for the full
fiscal year. It is suggested that these financial statements be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997, as filed with the Securities and Exchange Commission.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss per Common Share
The Company applies SFAS No. 128, Earnings per Share, in calculating earnings
per share. Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share for the periods presented is the same as basic net loss per
share as the inclusion of the potential common stock equivalents would be
antidilutive.
(4) CASH EQUIVALENTS
The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Under SFAS No. 115, debt securities that the Company has the
positive intent and ability to hold to maturity are recorded at amortized cost
and are classified as held-to-maturity securities. These securities include cash
equivalents and restricted cash. Cash equivalents have original maturities of
less than three months. Cash and cash equivalents at September 30, 1998 and
December 31, 1997 consisted of the following:
September 30, December 31,
1998 1997
Cash and cash equivalents
Cash and money market funds $ 400,949 $1,702,272
Corporate bond 481,876 499,930
---------- ----------
$ 882,825 $2,202,202
========== ==========
Restricted cash - long-term
Certificates of deposit $ -- $2,016,364
Savings account 659,618 1,034,618
---------- ----------
$ 659,618 $3,050,982
========== ==========
7
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(5) ACCOUNTS RECEIVABLE RELATED TO REAL ESTATE LIMITED PARTNERSHIP
Under the terms of the Cambridge, Massachusetts building lease (the "Cambridge
Lease"), the Company accounted for $5,450,000 of its payments for a portion of
the costs of construction of the leased premises as contributions to the capital
of the Cambridge landlord in exchange for a limited partnership interest in the
Cambridge landlord (the "Partnership Interest"). Under the terms of the
Partnership Interest, the Company has the right at any time prior to February
2000 to sell the Partnership Interest back to the other limited partners of the
landlord. In April 1998, the Company exercised its right to sell back the
Partnership Interest and accordingly the contribution to the real estate
partnership has been classified as a current asset at September 30, 1998.
Subsequent to September 30, 1998, the sale of the building was finalized and the
Company received payment in November 1998.
(6) 9.0% CONVERTIBLE SUBORDINATED NOTES
On April 2, 1997, the Company issued $50,000,000 of the 9% Notes. As discussed
in Note 1, on May 5, 1998 noteholders holding $48.7 million of principal value
of the 9% Notes tendered such notes in exchange for Series A convertible
preferred stock and warrants to purchase common stock. In addition, $2,361,850
of accrued interest thereon was converted into shares of Series A convertible
preferred stock and warrants to purchase common stock. As of September 30, 1998,
there is $1.3 million principal amount of 9% Notes outstanding. Under the terms
of the 9% Notes, the Company must make semi-annual interest payments on the
outstanding principal balance through the maturity date of April 1, 2004. If the
9% Notes are converted prior to April 1, 2000, the Noteholders are entitled to
receive accrued interest from the date of the most recent interest payment
through the conversion date. The 9% Notes are subordinate to substantially all
of the Company's existing indebtedness. The 9% Notes are convertible at any time
prior to the maturity date at a conversion price equal to $35.0625 per share,
subject to adjustment under certain circumstances, as defined.
Beginning April 1, 2000, the Company may redeem the 9% Notes at its option for a
4.5% premium over the original issuance price, provided that from April 1, 2000
to March 31, 2001, the 9% Notes may not be redeemed unless the closing price of
the common stock equals or exceeds 150% of the conversion price for a period of
at least 20 out of 30 consecutive trading days and the 9% Notes redeemed within
60 days after such trading period. The premium decreases by 1.5% each year
through March 31, 2003. Upon a change of control of the Company, as defined, the
Company will be required to offer to repurchase the 9% Notes at 150% of the
original issuance price.
(7) NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires disclosure of all components of
comprehensive income on an annual and interim basis.
8
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The Company's total comprehensive net loss for the three and
nine month periods ended September 30, 1998 and 1997 were the same as reported
net loss for those periods.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable, companies would
be required to restate prior period information upon adoption. The Company
believes that the adoption of SFAS No. 131 will not have a material impact on
its financial results or financial position.
(8) RESTRUCTURING
Beginning in July 1997, the Company implemented a restructuring plan to reduce
expenditures on a phased basis over the balance of 1997 in an effort to conserve
its cash resources. As a part of this restructuring plan, the Company recorded
an $11,020,000 restructuring charge in 1997 to provide for (i) the termination
of certain research programs, (ii) the abandonment of certain leased facilities
(net of sublease income and related disposal of fixed assets), (iii) severance
obligations to nearly 100 terminated employees and (iv) the cancellation of
certain other contracts. During the third quarter of 1998, the Company completed
its restructuring plan after moving its corporate headquarters to Milford,
Massachusetts.
(9) NOTE PAYABLE TO A BANK
In December 1996, the Company entered into a five year $7,500,000 note payable
with a bank. The note contains certain financial covenants that require the
Company to maintain minimum tangible net worth and minimum liquidity and
prohibits the payment of dividends. The note is payable in 59 equal installments
of $62,500 commencing on February 1, 1997 with a balloon payment of the then
remaining outstanding principal balance due on January 1, 2002. During 1997, the
Company's minimum liquidity had fallen below the required amount and the Company
deposited $1,758,542 as collateral under the cash pledge agreement. During 1998,
the bank withdrew the full amount of the restricted cash and applied it against
the outstanding balance of the note. The minimum liquidity requirements were
subsequently amended to provide that if as of the fifteenth and last day of each
calendar month the Company does not have minimum liquidity of at least
$4,000,000, as defined, the Company will be required to immediately repay to the
bank 100% of the then outstanding balance. As of September 30, 1998, $2,895,000
was outstanding under the note, which is classified as a current liability in
the accompanying September 30, 1998 consolidated balance sheet. During August
1998, the Company placed $1.6 million in escrow at the bank's request, which was
withdrawn and applied against the outstanding balance of the note by the bank.
Also, upon the closing of the sale of the Partnership Interest (see Note 5) the
Company was required to pay down an additional $750,000 on the note. The Company
is also required to pay to the bank one-half of any proceeds received from the
sale of certain assets. The Company intends to make payments relating to these
items to the bank during November 1998 in the event the Loan is not purchased as
described in Note 13. On September 29, 1998, the Company received a waiver of
noncompliance since the Company was not in compliance with the minimum
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
liquidity and minimum tangible net worth covenants associated with the note.
Following the sale of the partnership interest, the Company was in compliance
with all such covenants.
(10) METHYLGENE, INC. LICENSING AGREEMENT
In January 1996, the Company and MethylGene, Inc. ("MethylGene") (a Canadian
company which is approximately 30% owned by the Company) entered into a
licensing agreement for the purpose of researching and developing compounds for
the treatment of cancer and other indications. In May 1998, this agreement was
amended to grant MethylGene a non-exclusive right to use any and all antisense
chemistries discovered by the Company or any of its affiliates for a period
commencing on May 5, 1998 and ending on the earlier of (i) the effective date of
termination by MethylGene of its contract for development services to be
provided by the Company, (ii) May 5, 1999, unless MethylGene exercises its
option to continue contracting for development services, or (iii) May 5, 2000.
As additional consideration for this non-exclusive right, MethylGene is required
to pay the Company certain milestone amounts, as defined, and transfer 300,000
shares of MethylGene's class B shares to the Company. The Company has placed no
value on these shares. In the third quarter of 1998, the Company recorded
$250,000 of revenue received from MethylGene.
(11) UNITS ISSUED TO PRIMEDICA CORPORATION
The Company has issued 250,000 shares of common stock and 62,500 warrants to
purchase common stock to Primedica Corporation ("Primedica") for $250 in cash
and future services to be provided. The services shall commence upon the
Company's request after (i) the Company's securities are listed on a nationally
recognized exchange, and (ii) the average closing price of the Company's common
stock is at least $2.00 per share for the twenty day trading period preceding
the contract commencement date. In the event that the Company does not use these
services as a result of the failure to meet the contract conditions, Primedica
may forfeit to the Company all or part of the common stock and warrants held by
Primedica. The Company has recorded these shares as issued and outstanding at
September 30, 1998 at par value. The Company will record an expense for these
services as the services are provided.
HYBRIDON, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The accompanying consolidated financial statements include the following
information:
Cumulative
from May 25,
Nine Months Ended 1989 (Inception)
September 30, to September 30,
1998 1997 1998
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Issuance of Series A convertible preferred stock in
exchange for conversion of 9% convertible subordinated
notes payable and accrued interest $51,061,850 $ -- $51,061,850
Accretion of Series A convertible preferred stock dividends $ 1,647,000 $ -- $ 1,647,000
Issuance of common stock in exchange for conversion of
convertible subordinated notes payable $ 4,800,000 $ -- $ 4,800,000
Issuance of common stock in exchange for conversion of
accounts payable, capital lease obligations and accrued
interest $ 6,434,308 $ -- $ 6,434,308
Issuance of common stock for services rendered $ 1,195,398 $ -- $ 1,342,272
(13) SUBSEQUENT EVENT
Subsequent to September 30, 1998, Forum Capital Markets, LLC ("Forum") and Pecks
Management Partners Ltd. ("Pecks"; Forum and Pecks collectively, the "Lender"),
affiliates of two members of the Company's Board of Directors, agreed to
purchase the Company's note payable to the bank (see Note 9). In connection with
this purchase, the Lender will lend an additional amount to the Company as soon
as practicable so as to increase the outstanding principal amount of the note
payable to $6,000,000. In addition, the terms of the note payable will be
amended as follows: (i) the maturity will be extended to November 30, 2003; (ii)
the interest rate will be decreased to 8%; (iii) interest will be payable
monthly in arrears, with the principal due in full at maturity of the note
payable; (iv) the note payable will be convertible, at the Lender's option, in
whole or in part, into shares of common stock of the Company; (v) the threshold
of the minimum liquidity covenant will be reduced from $4,000,000 to $2,000,000;
and (vi) the note payable may not be prepaid, in whole or in part, at any time
prior to December 1, 2000. The other terms of the note payable will remain
unchanged. In connection with the purchase of the note payable, Forum will
receive a fee of $400,000, which will be reinvested by Forum by purchasing from
the Company common or preferred stock and warrants, and will also receive
warrants to purchase $400,000 of shares of common stock of the Company.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is engaged in the discovery and development of genetic medicines
based on antisense technology. The Company commenced operations in February 1990
and since that time has been engaged primarily in research and development
efforts, development of its manufacturing capabilities and organizational
efforts, including recruitment of scientific and management personnel, and
raising capital. To date, the Company has not received revenue from the sale of
biopharmaceutical products developed by it. In order to commercialize its own
products, the Company will need to address a number of technological challenges
and comply with comprehensive regulatory requirements. Accordingly, it is not
possible to predict the amount of funds that will be required or the length of
time that will pass before the Company receives revenues from sales of any of
these products. All revenues received by the Company to date have been derived
from collaborative and service agreements, interest on invested funds and
revenues from the custom contract manufacturing of synthetic DNA and reagent
products by the Hybridon Specialty Products ("HSP") Division.
The Company has incurred cumulative losses from inception through September 30,
1998 of approximately $231.6 million. In the second half of 1997, the Company
commenced a restructuring program that has significantly reduced the Company's
operating expenses and cost requirements in 1998 from 1997 levels. However, the
Company expects that its research and development expenses will continue to be
significant in the fourth quarter of 1998 and in future years as it pursues its
core drug development programs and expects to continue to incur operating losses
and have significant capital requirements that it will not be able to satisfy
with internally generated funds. The Company continues to explore opportunities
to reduce operating expenses in an effort to conserve its cash resources. The
number of employees has continued to decline through attrition; as of November
10, 1998, the Company had 49 full-time employees.
RESULTS OF OPERATIONS
The Company had total revenues of $1,041,000 and $668,000 in the three months
ended September 30, 1998 and 1997, respectively, and $3,410,000 and $3,143,000
in the nine months ended September 30, 1998 and 1997, respectively. Revenues
from research and development collaborations were $150,000 and $200,000 for the
three months ended September 30, 1998 and 1997, respectively, and $950,000 and
$980,000 for the nine months ended September 30, 1998 and 1997, respectively.
Product and service revenue from the HSP Division was $847,000 and $155,000
for the three months ended September 30, 1998 and 1997, respectively, and
$2,353,000 and $1,231,000 for the nine months ended September 30, 1998 and 1997,
respectively. Included in the three months ended September 30, 1998 was $250,000
of revenue received under its License Agreement with MethylGene, Inc.
("MethylGene") for certain services provided. The increase in product and
service revenue in 1998 was a result of an expansion in the customer base and
increasing sales to existing customers and revenue earned under the License
Agreement with MethylGene.
Interest income was $44,000 and $294,000 for the three months ended September
30, 1998 and 1997, respectively, and $106,000 and $898,000 for the nine months
ended September 30, 1998 and 1997, respectively. The decrease in interest income
is attributable to the decrease in cash and investments held by the Company in
1998 as compared to 1997.
10
The Company had research and development expenses of $5,201,000 and $11,339,000
for the three months ended September 30, 1998 and 1997, respectively, and
$17,181,000 and $37,785,000 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in research and development expenses in 1998
reflects the restructuring program that was commenced during the second half of
1997 and completed in the third quarter of 1998. The restructuring included the
discontinuation of operations at the Company's facilities in Europe, termination
of the clinical development of GEM 91 and the reduction or suspension of
selected programs unrelated to the Company's core advanced chemistry antisense
drug development program, including the termination of its ribozyme program. The
restructuring resulted in significant reductions in employee-related expenses,
clinical and outside testing, consulting, materials and lab expenses. The
Company's facility costs in 1998 were also reduced by the income received from
subleasing its underutilized facilities. The Company has now relocated its
headquarters to its manufacturing facility, which is located in Milford,
Massachusetts.
The Company had general and administrative expenses of $1,504,000 and $3,057,000
for the three months ended September 30, 1998 and 1997, respectively, and
$5,218,000 and $9,012,000 for the nine months ended September 30, 1998 and 1997,
respectively. The decrease in general and administrative expenses in 1998
resulted primarily from the Company's restructuring program initiated during the
second half of 1997 and its effect on employee-related expenses, consulting and
net facilities costs.
The Company had interest expense of $296,000 and $1,606,000 for the three months
ended September 30, 1998 and 1997, respectively, and $2,880,000 and $3,223,000
for the nine months ended September 30, 1998 and 1997, respectively. The
decrease in interest expense in 1998 is mainly attributable to the conversion of
approximately $48.7 million of the 9% Convertible Subordinated Notes (the "9%
Notes"), issued in the second quarter of 1997, to Series A Convertible Preferred
Stock on May 5, 1998.
As a result of the above factors, the Company incurred losses from operations of
$5,961,000 and $18,434,000 for the three months ended September 30, 1998 and
1997, respectively, and $21,869,000 and $49,977,000 for the nine months ended
September 30, 1998 and 1997, respectively.
The Company had extraordinary income of $8,877,000 for the nine months ended
September 30, 1998 resulting from the conversion of the 9% Notes to Series A
Convertible Preferred Stock in the second quarter of 1998. See "Item 1 -
Financial Statements - Notes to Consolidated Condensed Financial Statements" for
a discussion of the Company's extraordinary income. As a result of this
transaction, the Company reduced its net loss to $12,993,000 for the nine months
ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998, the Company's net cash used in
operating activities amounted to $17,444,000. The Company's operating cash
requirements were funded primarily through the utilization of existing cash and
proceeds raised in private equity offerings conducted in the first half of 1998,
the collection of its accounts receivable from sales and services provided by
the Company, collaborative payments received, the rental payments from its
underutilized facilities, and the sale of equipment. The Company believes that
its existing and expected capital resources will be adequate to fund the
Company's cash requirements into 1999.
11
The Company's existing capital resources include the following amounts received
in the fourth quarter of 1998. First, $6,163,000 received in connection with
relocation of the Company's corporate headquarters to Milford, Massachusetts,
and the sale of the Company's interest in the Charles River Building Limited
Partnership, which owned the Company's former headquarters facility; this amount
includes a portion of the security deposit relating to the Company's lease to
its former headquarters facility and the release of $660,000 in restricted cash.
Second, $254,000 was received in connection with the sale in October 1998 of
certain equipment and furniture.
The Company's expected capital resources include committed collaborative
research and development payments from Searle, additional amounts expected to be
advanced under the Credit Facility (as described below), research and
development funding expected from MethylGene, Inc. and the profit margins on
anticipated sales by the HSP Division.
In June 1998, the Company relocated its headquarters from Cambridge,
Massachusetts to its manufacturing facility in Milford, Massachusetts. The
Cambridge facility was re-leased in September 1998 to a third party, subject to
a sublease of a portion of the facility. As a result, the Company was relieved
of its substantial lease obligations for the Cambridge facility, subject to a
contingent continuing liability for any defaults which may arise under the
sublease.
Forum Capital Markets, LLC ("Forum") and Pecks Management Partners Ltd.
("Pecks"; Forum and Pecks collectively, the "Lender"), affiliates of two members
of the Company's Board of Directors, have agreed to purchase the loan made by
Silicon Valley Bank to the Company pursuant to the Loan and Security Agreement
dated December 31, 1996, between the Company and Silicon Valley Bank, as amended
(the "Loan"), the outstanding principal amount of which is currently
approximately $2.8 million.
In connection with the purchase of the Loan, the Lender will lend an additional
amount to the Company as soon as practicable so as to increase the outstanding
principal amount of the Loan to $6,000,000. In addition, the terms of the Loan
will be amended as follows: (i) the maturity will be extended to November 30,
2003; (ii) the interest rate will be decreased to 8%; (iii) interest will be
payable monthly in arrears, with the principal due in full at maturity of the
Loan; (iv) the Loan will be convertible, at the Lender's option, in whole or in
part, into shares of common stock, par value $.001 per share, of the Company
("Common Stock") at a rate equal to the mid-point between the bid and ask price
on the date of closing of the purchase of the Loan; (v) the threshold of the
Minimum Liquidity covenant will be reduced from $4,000,000 to $2,000,000; and
the Loan may not be prepaid, in whole or in part, any time prior to December 1,
2000. The other terms of the Loan will remain unchanged.
In connection with the purchase of the Loan, Forum will receive a fee of
$400,000, which will be reinvested by Forum by purchasing from the Company
either (i) shares of Common Stock or shares of preferred stock of the Company
and accompanying warrants on the same terms as they are sold to investors in the
Company's next equity offering to occur after November 13, 1998 (the "Placement
Price"), or (ii) if no equity offering is consummated prior to May 1, 1999,
160,000 shares of Common Stock at $3.00 per share and warrants to purchase an
additional 40,000 shares of Common Stock at $3.00 per share. In addition, Forum
will receive warrants exercisable until maturity of the Loan to purchase
$400,000 of shares of Common Stock priced at the Placement Price or, if no
equity offering is consummated prior to May 1, 1999, at $3.00 per share. These
shares and warrants will be issued as soon as practicable following satisfaction
of Section 4.10 of the Indenture dated as of March 26, 1997, governing the 9%
Notes.
The Company will be required to raise substantial additional funds through
external sources, including through collaborative relationships and public or
private financings, to support its operations and, except for research and
development funding from Searle (which is subject to early termination in
certain circumstances), revenue expected to be received from MethylGene
12
and sale of DNA products and reagents manufactured on a custom contract basis by
the HSP Division, the Company has no current external sources of capital, and,
as discussed above, expects no product revenues for at least several years from
sales of products that it is developing.
No assurance can be given that such additional funds will be available to fund
the Company's operations or, if available, that such funds will be available on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders will result. Additionally, the
terms of any such additional financing may adversely affect the holdings or
rights of then existing stockholders.
If adequate funds are not available, the Company may be required to further
curtail significantly one or more of its core drug development programs, obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates or products which the Company would otherwise pursue on its own or
terminate operations.
The Company's future capital requirements will depend on many factors, including
continued scientific progress in its research, drug discovery and development
programs, the magnitude of these programs, progress with preclinical and
clinical trials, sales of DNA products and reagents to third parties by the HSP
Division and the margins on such sales, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, the ability of
the Company to establish and maintain collaborative academic and commercial
research, development and marketing relationships, the ability of the Company to
obtain third-party financing for leasehold improvements and other capital
expenditures and the costs of manufacturing scale-up and commercialization
activities and arrangements.
YEAR 2000
As has been widely publicized, many computer systems and microprocessors are not
programmed to accommodate dates beyond the year 1999. The Company's exposure to
this year 2000 ("Y2K") problem comes not only from its own internal computer
systems and microprocessors, but also from the systems and microprocessors of
its key suppliers, including utility companies and payroll services.
The Company currently believes that all of its internal systems will be Y2K
compliant by the end of the third quarter of 1999. The Company is currently
evaluating all of its internal computer systems and microprocessors in light of
the Y2K problem. As part of this process, the Company is conducting an inventory
of its automated instruments and other computerized equipment and will be
contacting applicable vendors for information regarding Y2K compliance. The
Company will then upgrade or otherwise modify its internal computer systems and
microprocessors, to the extent necessary. Testing of all its internal computer
systems and microprocessors should be completed by the end of the first quarter
of 1999. The Company does not expect the cost of bringing all the Company's
systems and microprocessors into Y2K compliance will be material.
The Company's Y2K compliance efforts are in addition to other planned
information technology ("IT") projects. While these efforts have caused and may
continue to cause delays in other IT projects, the Company does not expect that
any of these delays will have a significant effect on the Company's business or
that any of the Company's other IT projects will be canceled or postponed to pay
for the Y2K upgrades.
13
With regard to potential supplier Y2K problems, the Company has compiled a list
of its critical suppliers, and has sent a Y2K questionnaire to each of them in
order to permit the Company to ascertain the Y2K compliance status of each. The
Company is awaiting the return of these questionnaires. The Company does not
know of any key supplier Y2K problems that could have a material effect on the
Company's business. If through a Y2K questionnaire or otherwise the Company
becomes aware of any such problems and is not satisfied that those problems are
being adequately addressed, it will take appropriate steps to find alternative
suppliers.
It has been acknowledged by governmental authorities that Y2K problems have the
potential to disrupt global economies, that no business is immune from the
potentially far-reaching effects of Y2K problems, and that it is difficult to
predict with certainty what will happen after December 31, 1999. Consequently,
it is possible that Y2K problems will have a material effect on the Company's
business even if the Company takes all appropriate measures to ensure that it
and its key suppliers are Y2K compliant.
It is possible that the conclusions reached by the Company from its analysis to
date will change, which could cause the Company's Y2K cost estimates and target
completion dates to change.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Form 1O-Q filing contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Such
forward-looking statements are based on management's current expectations and
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends,"
"may," and other similar expressions are intended to identify forward-looking
statements.
Factors which may cause actual future results to differ from forward-looking
statements include, among others, the matters set forth under the heading "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors that May Affect Future Results" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997
10-K") which information is incorporated herein by reference.
14
HYBRIDON, INC.
PART II
OTHER INFORMATION
-------
Items 1-4 None
Item 5 OTHER INFORMATION
Stockholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders, stockholder proposals submitted pursuant to Rule 14a-8
under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
for inclusion in the Company's proxy material for its 1999 Annual Meeting of
Stockholders (the "1999 Annual Meeting") must be received by the Secretary of
the Company at the principal offices of the Company no later than January 18,
1999.
In addition, the Company's by-laws require that the Company be given
advance notice of stockholder nominations for election to the Company's Board of
Directors and of other matters (other than matters included in the Company's
proxy statement in accordance with Rule 14a-8). The required notice must be made
in writing and delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the Company at the principal offices of the
Company, and received not less than 60 days nor more than 90 days prior to the
1999 Annual Meeting; provided however, that if less than 70 days' notice or
prior public disclosure of the date of the meeting is given to stockholders,
such nomination or other proposal shall have been mailed or delivered to the
Secretary no later than the close of business on the 10th day following the date
on which the notice of the meeting was mailed or such public disclosure made,
whichever occurs first. The 1999 Annual Meeting is currently expected to be held
on May 10, 1999. Assuming that this date does not change, in order to comply
with the time periods set forth in the Company's by-laws, appropriate notice
would need to be provided no earlier than February 9, 1999 and no later than
March 11, 1999. The advance notice provisions of the Company's by-laws supersede
the notice requirements contained in recent amendments to Rule 14a-4 under the
Exchange Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR)
15
99.1 Third Amendment to Loan and Security Agreement between Hybridon,
Inc. and Silicon Valley Bank.
99.2 Fourth Amendment to Loan and Security Agreement between Hybridon,
Inc. and Silicon Valley Bank.
(b) No Reports on Form 8-K have been filed during the third quarter
ended September 30, 1998.
16
SIGNATURES
-------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYBRIDON, INC.
November 16, 1998 /s/ E. Andrews Grinstead III
- - ----------------- ----------------------------
Date E. Andrews Grinstead, III
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
November 16, 1998 /s/ Robert G Andersen
- - ----------------- ---------------------
Date Robert G. Andersen
Treasurer (Principal Accounting and
Financial Officer)
17
HYBRIDON, INC.
EXHIBIT INDEX
-------
27 Financial Data Schedule (EDGAR)
99.1 Third Amendment to Loan and Security Agreement between Hybridon, Inc. and
Silicon Valley Bank.
99.2 Fourth Amendment to Loan and Security Agreement between Hybridon, Inc. and
Silicon Valley Bank.
18
Exhibit 99.1
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
BETWEEN
HYBRIDON, INC.
AND
SILICON VALLEY BANK
This Third Amendment is made, effective as of the 18th day of
September, 1998 to that certain Loan and Security Agreement between Hybridon,
Inc., a Delaware corporation with a principal place of business at 155 Fortune
Boulevard, Milford, Massachusetts (the "Borrower") and Silicon Valley Bank (the
"Bank") dated as of December 31, 1996, as amended by consent letter agreement
(the "Consent Letter") dated January 15, 1998 and by First Amendment to Loan
Security Agreement dated March 30, 1998 (the "First Amendment") and Second
Amendment to Loan and Security Agreement dated April 16, 1998 (the "Second
Amendment"). The Loan and Security Agreement as so amended is hereinafter
referred to as the "Loan Agreement." Capitalized terms used, but not defined in
this Third Amendment shall have the meanings ascribed to them in the Loan
Agreement and ancillary documents, instruments and agreements, or if not so
defined, shall have the meanings ascribed to them in the Uniform Commercial
Code, or in the case of financial and accounting terms, in accordance with
generally accepted accounting principles.
RECITALS
Pursuant to the Loan Agreement and on the terms and conditions set
forth therein, on December 31, 1996, the Bank made a secured term loan to the
Borrower in the original face amount of $7,500,000 (the "Loan"). The Borrower
advised the Bank of its planned offering of Units of investment in the Borrower
in January, 1998 (the "Original Offering"), which was consented to by the Bank
pursuant to the Consent Letter and which was subsequently amended by the
Borrower and consented to by the Bank in March, 1998 pursuant to the First
Amendment and in April, 1998 pursuant to the Second Amendment. The term
"Offering" as used in this Third Amendment shall include the amended Offering or
any other equity offering or corporate collaboration not involving indebtedness
of the Borrower. In connection with the Borrower's continuing sales of equity
interests and on the terms and conditions set forth herein, the Borrower has
requested that the Bank temporarily waive compliance by the Borrower with the
application of the Minimum Liquidity and Tangible Net Worth covenants.
The Bank is willing to consent to a temporary waiver of the Minimum
Liquidity and Tangible Net Worth covenants, but only upon the terms and
conditions set forth in this Third Amendment.
AGREEMENT
In consideration of the foregoing, and of the undertakings and
obligations of the Borrower and the Bank set forth herein and for other good and
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the Borrower and Bank agree as follows:
1. The Borrower confirms that the outstanding balance of principal and
interest on the Loan as of September 18th, 1998 is as set forth in
Schedule 1 hereto, and that the Borrower has no defense, claim or
offset which would preclude full payment of such amount.
2. The Borrower ratifies and confirms: (i) its Obligations to the Bank
under the Loan Agreement, as amended hereby, (ii) all of the
representations and warranties made by it in the Loan Agreement,
except as expressly disclosed to the Bank, and (iii) that it is in
compliance with the covenants and agreements contained in the Loan
Agreement except for its failure to maintain compliance with the
covenants waived in the First Amendment, its failure to comply with
Section 6.10(c) of the Loan Agreement, to the extent that such failure
is nevertheless in compliance with the Intellectual Property Security
Agreement (the "IP Security Agreement") delivered by the Borrower in
connection with the Consent Letter (it being agreed that the
provisions of Section 6.10(c) shall be deemed superseded by the
analogous provisions of the IP Security Agreement), and except for
Borrower's failure to comply with the Minimum Liquidity and Tangible
Net Worth covenants as of June 30, 1998 and thereafter.
3. On August 7, 1998, the Borrower established with the Bank a
certificate of deposit in the amount of $1,592,386 (the "Deposit"). On
the date of this Amendment, the Borrower authorizes the Bank to apply
the Deposit against the outstanding principal of the Obligations as a
permanent reduction therein. Such payment is in addition to any other
regularly scheduled payments due under the Loan Agreement.
4. The Bank hereby waives any existing defaults of the Minimum Liquidity
and Tangible Net Worth covenants and also waives compliance by the
Borrower with the Minimum Liquidity and Tangible Net Worth covenants
through September 29, 1998; provided, however that if the Borrower
earlier receives the cash payment due to it for its sale of its
partnership interest (the "CRLP Interest") in Charles River Building
Limited Partnership (such date of receipt, the "CRLP Put Date"),
testing of such covenants shall begin on the following business day
after the CRLP Put Date rather than on September 30, 1998.
5. Section 6.8 of the Loan Agreement, as previously amended, is hereby
amended in its entirety to read as follows:
"Borrower shall maintain, as of the last day of each quarter of
Borrower's fiscal year, a Tangible Net Worth of not less than Six
Million Dollars ($6,000,000.00)."
6. Section 6.9 of the Loan Agreement, as previously amended, is hereby
amended in its entirety to read as follows:
"Borrower shall maintain Minimum Liquidity (as hereinafter
defined) of at least $4,000,000 as of the fifteenth (15th) and as
of the last day of the month (or the next business day if either
is not a business day). If the Borrower fails to maintain Minimum
Liquidity at any test date, the Borrower shall immediately repay
the then outstanding Obligations in full. "Minimum Liquidity" is
defined as consolidated cash on hand (other than cash in which an
entity other than the Bank or its assignee has a security
interest, and other than the CRLP Withhold), cash equivalents and
marketable securities, plus 50% of the Borrower's Trade Accounts
Receivable. "Trade Accounts Receivable" means accounts receivable
arising from the sale of goods and services and the licensing of
technology in the ordinary course of the Borrower's business, but
excluding the
2
extraordinary sale of assets or other transactions not in the ordinary
course of the Borrower's business."
7. Within two (2) business days after the CRLP Put Date, the Borrower
will pay to the Bank in good and collected funds, in addition to any
regularly scheduled payments on the Obligations, the sum of $750,000
as an additional payment against the principal of the Obligations.
Until payment of such sum to the Bank, all proceeds of the CRLP
interest received shall be held in trust by the Borrower for the Bank.
The Borrower and the Bank agree that this requirement supersedes any
requirement contained in the Loan Agreement, as previously amended,
relating to funds received by the Borrower from CRLP or its partners,
including, without limitation, any requirement as to the use of the
proceeds of such funds.
8. Conditioned upon satisfaction of the requirements set forth in this
paragraph, the Bank consents to the exclusive license by the Borrower
to OriGenix Therapeutics, Inc., a Quebec corporation ("OriGenix"), of
the specific patents and applications listed in Schedule 8 hereto (the
"Patents"), which license shall be limited to use of the Patents for
the development of treatments for Human Papilloma Virus ("HPV"),
Hepatitis B Virus ("HBV") and up to three (3) additional viral
indications to be agreed upon among OriGenix and the Borrower, subject
to the prior written consent of the Bank which will not be
unreasonably withheld (collectively, the "Indications"). The Borrower
will retain the rights to the Patents for other indication and
molecular targets. The Bank agrees to deliver to the Borrower
documents necessary to (i) release its security interest in the
patents and applications listed in Schedule 8 which are designated
with the 189 and 190 suffixes, and (ii) subordinate, pursuant to an
agreement acceptable to the Borrower and OriGenix, its security
interest to the exclusive licenses to be granted to OriGenix with
respect to all of the other patents and applications listed in
Schedule 8. The consents, release and subordinations referenced in
this paragraph are conditioned upon (a) the Borrower retaining a 40%
equity ownership in OriGenix, (b) the Borrower granting to the Bank a
perfected, first priority security interest in the Borrower's entire
ownership interest in OriGenix pursuant to a Pledge Agreement in the
form of Exhibit 8, (c) OriGenix being capitalized with a minimum cash
equity investment of CDN $4,000,000 from investors other than the
Borrower, and (d) the Borrower warranting and representing that no
investor in OriGenix owns more than five (5%) percent of the stock of
the Borrower on a fully converted basis. The Borrower shall, prior to
the Bank's delivery of the releases and subordinations referenced
above, make a best efforts attempt to provide the Bank in writing with
the names and addresses of the investors in the new entity and their
respective ownership interests, a complete copy of any prospectus or
offering memorandum provided to investors, a complete copy of the
business plan for the new entity and such other information as the
Bank may reasonably require, including evidence of the Borrower's 40%
interest in OriGenix.
9. The Borrower further acknowledges that all reasonable out-of-pocket
costs and expenses of the Bank in connection with negotiation,
documentation and administration of this Third Amendment, including
reasonable fees of attorneys engaged to represent the Bank, shall be
borne by the Borrower.
3
10. The Borrower acknowledges and confirms that to the extent that the
Borrower may have any claims, offsets, counterclaims, or defenses,
asserted or unasserted, the Borrower, for itself, and on behalf of its
successors, assigns, parents, subsidiaries, agents, affiliates,
predecessors, employees, officers, directors, executors and heirs, as
applicable (collectively, the "Borrower Affiliates") releases and
forever discharges the Bank, its subsidiaries, affiliates, employees,
officers, directors, agents, successors and assigns, both present and
former (collectively, the "Bank Affiliates") of and from any and all
manner of claims, offsets, counterclaims, defenses, action and
actions, cause and causes of action, suits, debts, controversies,
damages, judgments, executions, and demands whatsoever, asserted or
unasserted, in law or in equity, which against the Bank and/or the
Bank Affiliates, they or the Borrower Affiliates ever had to and
including the date hereof, upon or by reason of any matter, cause,
causes or thing whatsoever, in connection with the Loan and/or any of
the transactions and matters related thereto, except for the
obligations of the Bank in such documents, instruments and agreements
to be performed after the date of this Third Amendment. The Borrower
shall indemnify, defend and hold the Bank harmless of and from any
claim brought or threatened against the Bank by the Borrower or any
other person (as well as from attorneys' fees and expenses in
connection therewith) on account of the Loan Agreement, the Note, the
Consent Letter, the Intellectual Property Security Agreement, Pledge
Agreement, Intercreditor Agreement, the First Amendment, the Second
Amendment, this Third Amendment and any other document, instrument or
agreement given in connection with the Loan and any of the
transactions and matters related thereto (each of which may be
defended, compromised, settled or pursued by the Bank with counsel of
the Bank's election reasonably acceptable to the Borrower, but at the
expense of the Borrower), except in the case of the Bank's failure to
comply with its obligations hereunder or thereunder, its gross
negligence or willful misconduct.
11. The Borrower acknowledges and agrees that the Bank's agreement herein
to temporarily waive compliance with the Minimum Liquidity and
Tangible Net Worth covenants shall not create a course of dealing or
conduct and that the Bank has not agreed to waive any other covenant
or agreement with the Borrower or to waive compliance with the Minimum
Liquidity and Tangible Net Worth covenants other than for the limited
time period set forth in this Third Amendment.
12. To the extent possible, this Third Amendment shall be construed to be
consistent with the provisions of the Loan Agreement; however, to the
extent that the provisions of this Third Amendment expressly conflict
with or contradict the provisions of the Loan Agreement, the
provisions of this Third Amendment shall be deemed to control.
13. This Third Amendment represents the entire agreement between the
parties with respect to the modifications contained herein, and shall
be construed in accordance with the laws of the Commonwealth of
Massachusetts as an agreement under seal. The Borrower has voluntarily
entered into this Third Amendment without coercion or duress of any
kind and has been or has had the opportunity to have been represented
by legal counsel of their choosing.
4
WITNESS OUR hands and seals on this 18th day of September, 1998.
HYBRIDON, INC. SILICON VALLEY BANK
By: /s/Robert G. Andersen By: /s/ Sean Lynden
--------------------- -------------------------
5
SCHEDULE 1 TO
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
BETWEEN
SILICON VALLEY BANK
AND HYBRIDON, INC.
Principal Balance as of September 15, 1998 $4,487,175.22
Interest outstanding at September 15, 1998 23,768.61
6
Exhibit 99.2
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
BETWEEN
HYBRIDON, INC.
AND
SILICON VALLEY BANK
This Fourth Amendment is made, effective as of the 29th day of
September, 1998, to that certain Loan and Security Agreement between Hybridon,
Inc., a Delaware corporation with a principal place of business at 155 Fortune
Boulevard, Milford, Massachusetts (the "Borrower") and Silicon Valley Bank (the
"Bank") dated as of December 31, 1996, as amended by consent letter agreement
(the "Consent Letter") dated January 15, 1998 and by First Amendment to Loan and
Security Agreement dated March 30, 1998 (the "First Amendment"), Second
Amendment to Loan and Security Agreement dated April 16, 1998 (the "Second
Amendment") and Third Amendment to Loan and Security Agreement dated September
18, 1998 (the "Third Amendment"). The Loan and Security Agreement as so amended
is hereinafter referred to as the "Loan Agreement". Capitalized terms used, but
not defined in this Fourth Amendment shall have the meanings ascribed to them in
the Loan Agreement and ancillary documents, instruments and agreements, or if
not so defined, shall have the meanings ascribed to them in the Uniform
Commercial Code, or in the case of financial and accounting terms, in accordance
with generally accepted accounting principles.
RECITALS
Pursuant to the Third Amendment, the Borrower and the Bank agreed to
temporarily waive compliance by the Borrower with the Tangible Net Worth and
Minimum Liquidity covenants (as amended) through September 29, 1998 to
accommodate the sale by the Borrower of the CRLP Interest. The closing of the
sale of the CRLP Interest has not occurred and the Borrower has requested that
the Bank agree to extend the waiver of covenant compliance until October 31,
1998.
The Bank is willing to consent to extend the temporary waiver of the
Minimum Liquidity and Tangible Net Worth covenants, but only upon the terms and
conditions set forth in this Fourth Amendment.
AGREEMENT
In consideration of the foregoing, and of the undertakings and
obligations of the Borrower and the Bank set forth herein and for other good and
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the Borrower and Bank agree as follows:
1. The Borrower confirms that the outstanding balance of principal and
interest on the Loan as of October 15, 1998 is as set forth in
Schedule 1 hereto, and that the Borrower has no defense, claim or
offset which would preclude full payment of such amount.
2. The Borrower ratifies and confirms: (i) its Obligations to the Bank
under the Loan Agreement, as amended hereby, (ii) all of the
representations and warranties made by it in the Loan Agreement,
except as expressly disclosed to the Bank, and (iii) that it is in
compliance with
the covenants and agreements contained in the Loan Agreement except
for its failure to maintain compliance with the covenants waived in
the First Amendment, its failure to comply with Section 6.10(c) of the
Loan Agreement, to the extent that such failure is nevertheless in
compliance with the Intellectual Property Security Agreement (the "IP
Security Agreement") delivered by the Borrower in connection with the
Consent Letter (it being agreed that the provisions of Section 6.10(c)
shall be deemed superseded by the analogous provisions of the IP
Security Agreement), and except for Borrower's failure to comply with
the Minimum Liquidity and Tangible Net Worth covenants as of June 30,
1998 and thereafter.
3. The Bank hereby waives any existing defaults in the Minimum Liquidity
and Tangible Net Worth covenants and also waives compliance by the
Borrower with the Minimum Liquidity and Tangible Net Worth covenants
through October 31, 1998; provided however, that if the CRLP Put Date
is earlier than October 31, 1998, testing of such covenants shall
begin on the following business day after the CRLP Put Date rather
than on October 31, 1998. Within two (2) business days after the CRLP
Put Date, the Borrower will pay to the Bank in good and collected
funds, in addition to any regularly scheduled payments on the
Obligations, the sum of $750,000 as an additional payment against the
principal of the Obligations.
4. In consideration of the Bank's agreement to extend its waiver of
compliance with the Tangible Net Worth and Liquidity covenants through
October 31, 1998, the Borrower shall pay to the Bank a forbearance fee
in the amount of $25,000 in addition to any other amounts due with
respect to the Obligations. If the CRLP Put Date is after October 15,
1998, the forbearance fee shall increase by $1,000 per day commencing
October 16, 1998, but in no event more than an additional $16,000. The
$25,000 installment of the forbearance fee is due and payable on the
date of this Fourth Amendment, and any and all incremental increases
thereto shall be due and payable no later than October 31, 1998.
5. The Borrower further acknowledges that all reasonable out-of-pocket
costs and expenses of he Bank in connection with negotiation,
documentation and administration of this Fourth Amendment, including
reasonable fees of attorneys engaged to represent the Bank, shall be
borne by the Borrower.
6. The Borrower acknowledges and confirms that to the extent that the
Borrower may have any claims, offsets, counterclaims, or defenses,
asserted or unasserted, the Borrower, for itself, and on behalf of its
successors, assigns, parents, subsidiaries, agents, affiliates,
predecessors, employees, officers, directors, executors and heirs, as
applicable (collectively, the "Borrower Affiliates") releases and
forever discharges the Bank, its subsidiaries, affiliates, employees,
officers, directors, agents, successors and assigns, both present and
former (collectively, the "Bank Affiliates") of and from any and all
manner of claims, offsets, counterclaims, defenses, action and
actions, cause and causes of action, suits, debts, controversies,
damages, judgments, executions, and demands whatsoever, asserted or
unasserted, in law or in equity, which against the Bank and/or the
Bank Affiliates, they or the Borrower Affiliates ever had to and
including the date hereof, upon or by reason of any matter, cause,
causes or thing whatsoever, in connection with the Loan and/or any of
the transactions and matters related thereto, except for the
obligations of the Bank in such documents, instruments and agreements
to be performed after the date of this Fourth Amendment. The Borrower
shall indemnify, defend
2
and hold the Bank harmless of and from any claim brought or threatened
against the Bank by the Borrower or any other person (as well as from
attorneys' fees and expenses in connection therewith) on account of
the Loan Agreement, the Note, the Consent Letter, the Intellectual
Property Security Agreement, Pledge Agreement, Intercreditor
Agreement, the First Amendment, the Second Amendment, the Third
Amendment, this Fourth Amendment and any other document, instrument or
agreement given in connection with the Loan and any of the
transactions and matters related thereto (each of which may be
defended, compromised, settled or pursued by the Bank with counsel of
the Bank's election reasonably acceptable to the Borrower, but at the
expense of the Borrower), except in the case of the Bank's failure to
comply with its obligations hereunder or thereunder, its gross
negligence or willful misconduct.
7. The Borrower acknowledges and agrees that the Bank's agreement herein
to temporarily waive compliance with the Minimum Liquidity and
Tangible Net Worth covenants shall not create a course of dealing or
conduct and that the Bank has not agreed to waive any other covenant
or agreement with the Borrower or to waive compliance with the Minimum
Liquidity and Tangible Net Worth covenants other than for the limited
time period set forth in this Fourth Amendment.
8. To the extent possible, this Fourth Amendment shall be construed to be
consistent with the provisions of the Loan Agreement; however, to the
extent that the provisions of this Fourth Amendment expressly conflict
with or contradict the provisions of the Loan Agreement, the
provisions of this Fourth Amendment shall be deemed to control.
9. This Fourth Amendment represents the entire agreement between the
parties with respect to the modifications contained herein, and shall
be construed in accordance with the laws of the Commonwealth of
Massachusetts as an agreement under seal. The Borrower has voluntarily
entered into this Fourth Amendment without coercion or duress of any
kind and has been or has had the opportunity to have been represented
by legal counsel of its choosing.
WITNESS OUR hands and seals on this 30th day of October, 1998,
effective as of September 29, 1998.
WITNESS: SILICON VALLEY BANK
/s/ C. Wade By: /s/ Sean Lynden
- - ----------------------------- ------------------------
HYBRIDON, INC.
/s/ Cheryl M. Northrup By: /s/ E. Andrews Grinstead
- - ----------------------------- ------------------------
3
SCHEDULE 1 TO
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
BETWEEN
SILICON VALLEY BANK
AND HYBRIDON, INC.
Principal Balance as of October 15, 1998 $2,832,289.22
Interest outstanding at October 15, 1998 14,613.83
4
5
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
882,825
0
825,668
0
0
7,606,865
22,925,187
13,972,070
18,398,562
10,422,268
1,879,017
0
6,248
15,255
6,075,774
18,398,562
2,353,435
3,409,807
0
22,398,791
0
0
2,880,307
(21,869,291)
0
(21,869,291)
0
8,876,685
0
(12,992,606)
(1.22)
(1.22)
