<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
June 30, 1996 0-19635
GENTA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF INCORPORATION)
Delaware 33-0326866
------------------------------- ----------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3550 General Atomics Court
San Diego, California 92121
- ---------------------------------------- ------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(619) 455-2700
- ----------------------------------------------------------------------------
(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.
Class Shares Outstanding at July 31, 1996
---------- -----------------------------------
common stock, $.001 par value 30,958,135
<PAGE>
GENTA INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1996
and December 31, 1995. . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Operations for the Quarters
and Six Months Ended June 30, 1996 and 1995. . . . . . . .4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995. . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . .6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . .8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
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GENTA INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
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(UNAUDITED) (NOTE)
Current assets:
Cash and cash equivalents . . . . . . $ 2,320,731 $ 271,755
Receivable from sale of preferred
stock . . . . . . . . . . . . . . . -- 2,785,800
Trade accounts receivable . . . . . . 733,352 471,296
Notes receivable from officers and
employees . . . . . . . . . . . . . 62,000 362,000
Inventories . . . . . . . . . . . . . 920,580 702,644
Other current assets. . . . . . . . . 384,101 151,923
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Total current assets . . . . . . . . . . 4,420,764 4,745,418
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Property and equipment, net. . . . . . . 4,026,830 4,656,955
Investment in and advances to joint venture -- 258,896
Intangibles, net . . . . . . . . . . . . 3,710,212 3,577,654
Deposits and other assets. . . . . . . . 2,423,537 2,392,220
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$ 14,581,343 $ 15,631,143
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . $ 1,783,273 $ 2,260,495
Accrued dividends payable . . . . . . 2,831,336 1,572,588
Other accrued expenses. . . . . . . . 1,539,445 2,036,498
Deficit in joint venture. . . . . . . 685,210 --
Deferred revenue. . . . . . . . . . . 193,799 148,532
Short term notes payable. . . . . . . -- 760,000
Current portion of notes payable and
capital lease obligations. . . . . 983,724 1,120,013
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Total current liabilities. . . . . . . . 8,016,787 7,898,126
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Notes payable, less current portion. . . 1,264,821 1,437,481
Capital lease obligations, less current
portion . . . . . . . . . . . . . . . . 587,089 896,465
Stockholders' equity:
Preferred stock; 5,000,000 shares
authorized:
Series A convertible preferred
stock, $.001 par value;
584,000 and 600,000 shares
issued and outstanding at
June 30, 1996 and December 31,
1995, respectively, liquidation
value is $31,447,000 at June 30,
1996 . . . . . . . . . . . . . 585 600
Series B convertible preferred
stock, $.001 par value; no
shares and 3,000 shares issued
and outstanding at June 30, 1996
and December 31, 1995,
respectively . . . . . . . . . . -- 3
Series C convertible preferred
stock, $.001 par value; 5,544
shares and no shares issued and
outstanding at June 30, 1996 and
December 31, 1995, respectively,
liquidation value is $5,605,000
at June 30, 1996 . . . . . . . . 5 --
Common stock, $.001 par value;
45,000,000 shares authorized;
27,526,677 and 23,963,534 shares
issued and outstanding at June 30,
1996 and December 31, 1995,
respectively . . . . . . . . . . . 27,526 23,964
Additional paid-in capital. . . . . . 107,820,021 102,374,105
Accumulated deficit . . . . . . . . . (103,085,515) (96,949,625)
Notes receivable from stockholders. . (49,976) (49,976)
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Total stockholders' equity . . . . . . . 4,712,646 5,399,071
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$ 14,581,343 $ 15,631,143
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Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
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GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales...................$ 1,365,636 $ 1,033,136 $ 2,611,195 $ 1,741,883
Collaborative research
and development............... -- 375,000 -- 750,000
----------- ----------- ----------- ------------
1,365,636 1,408,136 2,611,195 2,491,883
----------- ----------- ----------- ------------
Cost and expenses:
Cost of products sold........... 708,443 465,974 1,263,835 882,826
Research and development........ 1,453,806 3,291,685 3,030,242 6,837,639
Charge for acquired in-process
research and development..... -- 3,612,000 -- 4,762,000
Selling, general and
administrative............... 1,226,296 1,483,737 2,335,373 2,926,535
----------- ----------- ----------- ------------
3,388,545 8,853,396 6,629,450 15,409,000
----------- ----------- ----------- ------------
Loss from operations............... (2,022,909) (7,445,260) (4,018,255) (12,917,117)
Equity in net loss of
joint venture.................... (941,776) (1,450,763) (2,149,623) (3,434,205)
Other income (expense):
Interest and other income....... 97,816 123,895 174,803 215,525
Interest expense................ (48,092) (102,606) (142,815) (187,345)
----------- ----------- ----------- ------------
49,724 21,289 31,988 28,180
----------- ----------- ----------- ------------
Net loss...........................$(2,914,961) $(8,874,734) $(6,135,890) $(16,323,142)
Dividends on preferred stock....... (676,584) (637,500) (1,354,084) (1,275,000)
----------- ----------- ----------- ------------
Net loss applicable to
common shares....................$(3,591,545) $(9,512,234) $(7,489,974) $(17,598,142)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Net loss per common share..........$ (.14) $ (.52) $ (.29) $ (1.09)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Shares used in computing net
loss per common share............ 26,542,246 18,347,110 25,669,439 16,098,989
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
See accompanying notes.
4
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GENTA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1996 1995
---- ----
OPERATING ACTIVITIES
Net loss.............................. $(6,135,890) $(16,323,142)
Items reflected in net loss not
requiring cash:
Depreciation and amortization...... 781,378 872,318
Equity in net loss of joint
venture........................... 2,149,623 3,434,205
Charge for acquired in-process
research and development.......... -- 3,612,000
Changes in operating assets and
liabilities....................... (1,341,175) (538,453)
----------- -----------
Net cash used in operating
activities........................... (4,546,064) (8,943,072)
INVESTING ACTIVITIES
Purchase of property and
equipment............................ (64,419) --
Maturities of short-term
investments.......................... -- 3,843,685
Investment in and advances to joint
venture.............................. (1,205,517) (4,646,487)
Deposits and other.................... (206,708) (2,228,104)
----------- -----------
Net cash used in investing
activities........................... (1,476,644) (3,030,906)
FINANCING ACTIVITIES
Issuance of common stock.............. 5,539,287 9,216,681
Proceeds from notes payable........... 240,000 4,113,104
Proceeds from notes receivable........ 2,910,722 --
Repayments of notes payable and
capital lease obligations............ (618,325) (789,028)
Other................................. -- 47,188
----------- -----------
Net cash provided by financing
activities........................... 8,071,684 12,587,945
----------- -----------
Increase (decrease) in cash and cash
equivalents.......................... 2,048,976 613,967
Cash and cash equivalents at
beginning of period.................. 271,755 7,259,220
----------- -----------
Cash and cash equivalents at end
of period............................ $ 2,320,731 $ 7,873,187
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid......................... $ 105,523 $ 164,907
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock dividends
accrued.............................. 1,354,084 1,275,000
See accompanying notes.
5
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GENTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required to be presented for
complete financial statements. The accompanying financial statements reflect
all adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented. Certain balances in 1995 have been reclassified to
conform with the presentation in 1996.
The consolidated financial statements and related disclosures have been
prepared with the presumption that users of the interim financial information
have read or have access to the audited financial statements for the preceding
fiscal year. Accordingly, these financial statements should be read in
conjunction with the audited consolidated financial statements and the related
notes thereto included in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
The Company has experienced significant quarterly fluctuations in operating
results and it expects that these fluctuations in revenues, expenses and losses
will continue.
(2) INVENTORIES
Inventories are comprised of the following:
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
(UNAUDITED)
Raw materials and supplies. . . . . . $296,361 $280,621
Work-in-process . . . . . . . . . . . 300,392 162,097
Finished goods. . . . . . . . . . . . 313,827 259,926
-------- --------
$910,580 $702,644
-------- --------
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(3) NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted average number of
common shares outstanding during each of the interim periods. Shares issuable
upon the exercise of outstanding stock options and warrants and upon the
conversion of convertible preferred stock are not reflected as their effect is
anti-dilutive.
(4) INTANGIBLE ASSETS
Intangible assets, consisting primarily of capitalized patent costs and
purchased proprietary technology, are amortized using the straight line basis
over a term of 5-17 years for issued patents, 14 years for purchased proprietary
technology and 5-7 years for organizational and other amortizable costs.
The carrying value of the Company's intangible assets is reviewed
periodically based upon the projected cash flows to be received from the related
product revenues, collaborative revenues, license fees, royalties and other
revenues. If such projected cash flows are less than the carrying amount of the
associated intangible asset, the asset will be written down to the present value
of the estimated future cash flows.
6
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(5) STOCKHOLDERS' EQUITY
During the second quarter of 1996, holders of 16,000 shares of Series A
Convertible preferred stock (the "Series A preferred stock") and 1,500 shares of
Series C Convertible preferred stock (the "Series C preferred stock") converted
such shares and related accrued dividends into approximately 131,000 and
1,084,000 shares, respectively, of the Company's common stock pursuant to terms
of the Company's Restated Certificate of Incorporation, as amended.
In July 1996, holders of an additional 3,750 shares of Series C Preferred
Stock converted such shares into approximately 3,431,000 shares of the Company's
common stock. Following completion of the aforementioned conversions,
adjustments were made to the conversion price ratio of the Company's Series A
preferred stock issued in September 1993 and to the exercise price of the
warrants to purchase 600,000 shares of common stock issued in connection with
the Series A preferred stock pursuant to antidilutive provisions. As a result,
each share of Series A preferred stock is presently convertible into 8.65 shares
of the Company's common stock and the exercise price of the warrants for 600,000
shares was adjusted to $6.32 per share. Such conversion ratios are subject to
further adjustment pursuant to antidilution provisions contained in the
Company's Restated Certificate of Incorporation, as amended, and in the warrant
agreements, respectively.
(6) GENTA JAGO JOINT VENTURE
An analysis of the carrying value of the investment in and advances to joint
venture as of June 30, 1996 is set forth below:
Initial capital contribution . . . . . . . . . . . $ 4,000,000
Working capital loans to Genta Jago,
net of principal repayments and credits . . . . . 13,787,099
Adjustment of working capital loans to Genta Jago
associated with the return of product rights
to Genta . . . . . . . . . . . . . . . . . . . . 4,437,945
Equity in net loss of joint venture for period
from inception (December 15, 1992) through
June 30, 1996 . . . . . . . . . . . . . . . . . . (22,329,796)
Other, net . . . . . . . . . . . . . . . . . . . . (580,458)
-------------
$ (685,210)
-------------
-------------
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception in February 1988, Genta has devoted its principal
efforts toward drug discovery, research and development. Genta has been
unprofitable to date and, if it obtains financing to continue its operations,
expects to incur substantial operating losses for the next several years due to
continued requirements for ongoing research and development activities,
preclinical testing and clinical trials, manufacturing activities, regulatory
activities, establishment of a sales and marketing organization, and development
activities undertaken by Genta Jago Technologies B.V. ("Genta Jago"), the
Company's joint venture with Jagotec AG. From the period since its inception to
June 30, 1996, the Company has incurred a cumulative net loss of $103.1 million.
The Company has experienced significant quarterly fluctuations in operating
results and, if it obtains financing to continue its operations, the Company
expects that these fluctuations in revenues, expenses and losses will continue.
See "Risk Factors".
During 1995, the Company restructured its operations to focus on its
near-term drug delivery (GEOMATRIX) development pipeline and the ANTICODE
cancer area and reduce its operating expenses. In March 1996, Genta Jago
entered into a collaborative licensing and development agreement with
Apothecon, Inc. ("Apothecon"), the multisource subsidiary of Bristol-Myers
Squibb and is currently negotiating with other pharmaceutical companies
regarding additional collaborative agreements. The Company is also actively
seeking additional equity financing and other funding arrangements. However,
there can be no assurance that any such collaborative agreements or other
sources of funding will be available on favorable terms, if at all. If such
funding is not available, the Company will run out of funding in September of
1996. See "Risk Factors".
Except for the historical information contained herein, the matters discussed
in this Quarterly Report on Form 10-Q are forward-looking statements that
involve risks and uncertainties, including obtaining sufficient financing to
maintain the Company's planned operations, the timely development, receipt of
necessary regulatory approvals and acceptance of new products, the successful
application of the Company's technology and products, the impact of competitive
products and pricing and reimbursement policies, changing market conditions and
other risks detailed throughout this Form 10-Q. Actual results may differ
materially from those projected. These forward-looking statements represent the
Company's judgment as of the date of the filing of this Form 10-Q. The Company
disclaims, however, any intent or obligation to update these forward-looking
statements.
RESULTS OF OPERATIONS
Operating revenues totaled $1.4 million in both the second quarter of 1996
and the second quarter of 1995, and $2.6 million for the six months ended
June 30, 1996 compared to $2.5 million in the comparable period of 1995.
During the second quarter and six months ended June 30, 1996, increased sales
of specialty chemical and pharmaceutical intermediate products offset the
loss of collaborative research and development revenues relative to the
comparable periods of 1995. Increased sales of such products were primarily
attributable to increased market penetration of existing products and, to a
lesser degree, the introduction of new products. The Company has
historically experienced significant quarterly fluctuations in its level of
product sales, generally reflecting the timing of customer demand for certain
products, and the Company anticipates that these sales fluctuations may
continue in future periods. Collaborative research and development revenues
recorded during the second quarter and six months ended June 30, 1995
represented revenues earned pursuant to the Company's collaboration with The
Procter & Gamble Company which ended in late 1995. The Company is actively
seeking to establish new collaborative agreements with potential corporate
partners. However, there can be no assurance that any such collaborative
agreements will be successfully secured.
Costs and expenses decreased to $3.4 million in the second quarter of 1996
from $8.9 million in the second quarter of 1995, and to $6.6 million for the
six months ended June 30, 1996 compared to $15.4 million in the comparable
period of 1995. Costs and expenses during the second quarter and six months
ended June 30, 1995 included charges of $3.6 million and $4.8 million,
respectively, for acquired in-process research and development
8
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associated with the expansion of Genta Jago to obtain the rights to develop
additional GEOMATRIX-based products. Exclusive of these charges, the decrease
in costs and expenses was primarily attributable to the Company's
restructuring, related workforce reductions and other cost savings measures
implemented during 1995 and 1996. In addition to the Company's restructuring
and cost saving measures implemented thus far, the Company is seeking to
realize additional reductions in operating expenses. However, the Company
anticipates that, if sufficient collaborative revenues and other funding is
available, research and development and other operating expenses may increase
in future periods due to requirements for clinical trials and increased
regulatory costs.
The Company's equity in net loss of joint venture (Genta Jago) decreased to
$942,000 in the second quarter of 1996 from $1.5 million in the second quarter
of 1995, and to $2.1 million for the six months ended June 30, 1996 compared to
$3.4 million in the comparable period of 1995. Such decrease is largely
attributable to the fact that a greater portion of development activities were
funded pursuant to Genta Jago's collaborative agreements and that the joint
venture's development efforts are now focused exclusively on GEOMATRIX-based
drug delivery products.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from
private and public offerings of its equity securities. Cash provided from these
offerings totaled $96 million through June 30, 1996, including net proceeds of
$5.5 million raised during the six months ended June 30, 1996. At June 30,
1996, the Company had cash, cash equivalents and short-term investments totaling
$2.3 million compared to $272,000 at December 31, 1995. The increase in cash
and cash equivalents during the six months ended June 30, 1996 is largely
attributable to proceeds from the Company's private placements of preferred
stock, including the receipt of $2.8 million in net proceeds from the Company's
sale of Series B preferred stock completed in December 1995 and reflected as a
receivable at December 31, 1995, less cash used in the Company's operations.
In connection with the Genta Jago joint venture, the Company entered into a
working capital agreement with Genta Jago which expires in October 1998.
Pursuant to this agreement, the Company is required to make loans to Genta Jago
up to a mutually agreed upon maximum commitment amount, which amount is
established by the parties on a periodic basis. As of June 30, 1996, the
Company had advanced working capital loans of approximately $13.8 million to
Genta Jago, net of principal repayments, which amount fully satisfied the loan
commitment established by the parties through June 30, 1996. Such loans bear
interest and are payable in full in October 1998, or earlier in the event
certain revenues are received by Genta Jago from third parties. There can be no
assurance, however, that Genta Jago will obtain sufficient financial resources
to repay such loans to Genta. The amount of future loans by Genta to Genta Jago
will depend upon several factors including the amount of funding obtained by
Genta Jago through collaborative arrangements, Genta's ability to provide loans,
and the timing and cost of Genta Jago's preclinical studies, clinical trials and
regulatory activities. Genta Jago entered into collaborative development
agreements with Gensia, Inc. and Apothecon during January 1993 and March 1996,
respectively. Such agreements provide funding to Genta Jago for the development
and clinical testing of selected controlled-release pharmaceuticals in addition
to potential milestone payments and royalties on future product sales.
Terms of the Company's Series A and Series C preferred stock require the
payment of dividends. Dividends may be paid in cash or common stock or a
combination thereof, at the Company's option if permitted by Delaware law.
The Company may redeem the Series A preferred stock under certain
circumstances and is required to redeem the Series A preferred stock, subject
to certain conditions, in September 1996 at a redemption price of $50 per
share, plus accrued and unpaid dividends (the "Redemption Price"). The
Redemption Price may be paid in cash or, subject to certain conditions,
common stock or a combination thereof, at the Company's option. As the
Company currently plans to redeem the Series A preferred stock with shares of
its common stock, holders of common stock will experience substantial
dilution at the time of such redemption. The Company is currently in
discussions to renegotiate certain terms of its agreement with holders of
Series A preferred stock. However, there can be no assurance the holders of
Series A will agree to any such proposed changes. The Company is restricted
from paying cash dividends on common stock until such time as all cumulative
dividends on outstanding shares of Series A and Series C preferred stock have
been paid. The Company also has commitments associated with its notes
payable, capital leases and operating leases.
9
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The Company will run out of cash in September of 1996. Substantial
additional sources of financing will be required in order for the Company to
continue its planned operations thereafter. The Company is in discussions
with potential corporate partners and other sources regarding collaborative
agreements, restructurings and other financing arrangements and is actively
seeking additional equity financing. However, there can be no assurance that
any such collaborative agreements, restructurings, financing arrangements or
other sources of funding will be available on favorable terms, if at all. If
such funding is unavailable, the Company will be required to consider the
license or sale of certain of its assets and technology, delay or curtailment
of certain of its development programs, further reductions in workforce and
spending, other restructuring alternatives including, discontinuing its
operations, liquidation or seeking protection under the bankruptcy laws.
If the Company successfully secures sufficient levels of collaborative
revenues and other sources of financing, it expects to incur substantial
additional costs, including costs related to ongoing research and development
activities, preclinical testing and clinical trials, manufacturing activities,
costs associated with the market introduction of potential products, expansion
of its administrative activities, and development activities undertaken by Genta
Jago. The Company will need substantial additional funds before it can expect
to realize significant product revenue. The Company anticipates that
significant additional sources of financing, including equity financings, will
be required in order for the Company to continue its planned principal
operations. The Company's working capital and additional funding requirements
will depend upon numerous factors, including: (i) the availability of funding;
(ii) the progress of the Company's research and development programs; (iii) the
timing and results of preclinical testing and clinical trials; (iv) the timing
and costs of obtaining regulatory approvals; (v) the level of resources devoted
to Genta Jago; (vi) the level of resources that the Company devotes to sales and
marketing capabilities; (vii) technological advances; (viii) the activities of
competitors; and (ix) the ability of the Company to establish and maintain
collaborative arrangements with others to fund certain research and development,
to conduct clinical trials, to obtain regulatory approvals and, if such
approvals are obtained, to manufacture and market products.
RISK FACTORS
NEEDS FOR ADDITIONAL FUNDS: RISK OF INSOLVENCY. Genta's operations to date
have consumed substantial amounts of cash. The Company will run out of cash
in September of 1996. Substantial additional sources of financing
will be required in order for the Company to continue its planned operations
thereafter. The Company's independent auditors have included an emphasis
paragraph in their opinion concerning the Company's financial statements for the
year ended December 31, 1995 with respect to the Company's ability to continue
as a going concern. The Company is in discussions with potential corporate
partners and other sources regarding collaborative agreements, restructurings
and other financing arrangements and is actively seeking additional equity
financing. However, there can be no assurance that any such collaborative
agreements, restructurings, financing arrangements or other sources of funding
will be available on favorable terms, if at all. If such funding is
unavailable, the Company will be required to consider the license or sale of
certain of its assets and technology, delay or curtailment of certain of its
development programs, further reductions in workforce and spending, other
restructuring alternatives including, discontinuing its operations, liquidation
or seeking protection under the bankruptcy laws.
SUBORDINATION OF COMMON STOCK TO AND REDEMPTION OF SERIES A PREFERRED STOCK:
POTENTIAL DEFAULT UNDER CERTIFICATE OF INCORPORATION. The common stock is
expressly subordinate to the approximately $31,000,000 preference of the 584,000
outstanding shares of Series A preferred stock in the event of the liquidation,
dissolution or winding up of the Company. Further, no dividends may be paid on
the common stock unless full cumulative dividends on the Series A preferred
stock have been paid or funds set aside for such preferred dividends by the
Company. In addition, the conversion ratio of the Series A preferred stock and
the exercise price of warrants issued in connection with the Series A preferred
stock (the "Series A Warrants") is subject to adjustment, among other things,
upon certain issuances of common stock or securities convertible into common
stock at $6.75 per share or less. Each share of Series A preferred stock is
presently convertible into 8.65 shares of common stock and the exercise price of
the Series A Warrants is $6.32 per share. The Series A preferred stock is also
subject to a mandatory redemption (the "Mandatory Redemption") by the Company on
September 23, 1996 (the "Redemption Date"). Under the terms of the Mandatory
Redemption, as set forth in the Company's Certificate of Incorporation, the
redemption price of $50 per share plus accrued dividends (the "Redemption
Price") may be paid, subject to certain conditions, in common stock valued at an
average trading price for 10 trading days before August 20, 1996. If the
Company elects to effect the Mandatory Redemption through such use of common
stock, it
10
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must first use its best efforts to arrange with an investment bank acceptable
to the holders of Series A preferred stock for a firm commitment underwriting
relating to such shares. The Company will not be able to arrange for such a
firm commitment offering and will be required to (i) redeem for the
Redemption Price payable in shares of common stock all Series A Preferred
Stock held by holders which waive the firm commitment underwriting
requirement, and (ii) for any Series A preferred stock not so redeemed,
continue to use its reasonable efforts to arrange for a firm commitment
underwriting as promptly as practicable thereafter and to redeem any
remaining outstanding shares of Series A preferred stock upon arranging for
such firm commitment underwriting. The Company currently does not have
enough common stock authorized to effect the Mandatory Redemption through the
use of common stock. However, the Company has called a Special Meeting of
Stockholders, scheduled to take place on September 19, 1996, for the purpose
of approving an amendment to the Company's Certificate of Incorporation to
increase the number of its authorized shares of common stock by 105,000,000
to meet its Mandatory Redemption obligations. If such proposal is not
approved, on September 23, 1996, the Company will not have enough cash or
unreserved shares to effect the Mandatory Redemption, and thus on September
23, 1996 will no longer be in compliance with the terms of its Certificate of
Incorporation. In such an event, the Company will be in breach of its
obligations toward the holders of Series A preferred stock. Any such breach
would have a material adverse effect on the Company. In addition, the
Company's noncompliance with its Certificate of Incorporation may result in
the Company being in default under many of its other agreements, which would
also have a material adverse effect on the Company. Further, the Company
would be unable to issue additional shares of common stock as a method of
raising capital or as a way of facilitating a restructuring or financing a
transaction, if any with a third party. Even if the Company is successful in
satisfying its Mandatory Redemption obligations with its shares of common
stock, holders of common stock will experience substantial dilution at the
time of such redemption. Terms of the Company's Series A preferred stock
provide for the payment of dividends annually of $5 per share per annum.
Dividends may be paid in cash or common stock or a combination thereof, at
the Company's option, if permitted under Delaware law. Dividends on the
preferred stock accrue on a daily basis (whether or not declared) and all
accumulate to the extent not paid on the annual dividend payment date
following the dividend period for which they accrue. The Company has
previously paid dividends in shares of the Company's common stock, however,
the Company may not be able to do so in the future because of Delaware law
constraints. The Company is currently in discussions to renegotiate certain
terms of its agreement with holders of Series A preferred stock. However,
there can be no asurance that holders of the Series A will agree to any such
proposed changes.
POTENTIAL DELISTING FROM THE NASDAQ NATIONAL MARKET AND CONSEQUENT
REQUIREMENT TO REPURCHASE SERIES A PREFERRED STOCK FOR CASH. As of June 30,
1996, the Company did not meet the net tangible asset criteria required for
listing on the Nasdaq National Market, therefore, the Nasdaq National Market
may delist the Company's common stock. As noted above, the Company is seeking
additional funding that may help it to meet this criteria. However, there can
be no assurance that the Company will be able to obtain additional funding on
favorable terms, if at all. Such a delisting of the common stock may constitute
a "Fundamental Change" under the Company's Certificate of Incorporation. The
Certificate of Incorporation currently provides that upon
the occurrence of a "Fundamental Change" the holders of Series A Preferred
Stock have the option of requiring the Company to repurchase all of each such
holder's shares of Series A preferred stock at the Redemption Price, an event
that would result in the Company being required to pay to the holders of
Series A preferred stock cash in the aggregate amount of approximately
$31,000,000. The Certificate of Incorporation allows the Company to satisfy
its redemption obligations arising as a result of a Fundamental Change
through the issuance of shares of common stock, but only if the common stock
is listed on a United States national securities exchange or quoted on the
Nasdaq National Market at the time of payment. Upon the occurence of a
Fundamental Change, the holders of Series A preferred stock would in effect
become unsecured creditors of the Company, which would materially and
adversely affect the Company. Given the Company's current financial
condition and market conditions, it is unlikely that the Company would be
able to make such payment to the holder of the Series A preferred stock and
it is therefore likely that the Company would be forced to discontinue
operations or liquidate part or all of its assets and may seek protection
from creditors under the bankruptcy laws. Further, a delisting could
adversely affect the liquidity of the common stock. The Company is currently
in discussions to renegotiate certain terms of its agreement with holders of
Series A preferred stock. However, there can be no asurance that holders of
the Series A will agree to any such proposed changes.
OBLIGATIONS UNDER EQUIPMENT FINANCING AGREEMENTS. The Company's equipment
financing agreements contain certain financial covenants, the most significant
of which require the Company to provide certain deposits in the event that the
Company's cash and investment balances fell below specified levels. During
1995, the Company was required to deposit $1.2 million in additional security
pursuant to terms of certain of these agreements. The Company also issued
warrants during 1995, exercisable for 247,312 shares of the Company's common
stock, to two equipment financing companies in lieu of posting certain
additional security deposits to one company and in connection with another
company waiving a default under the terms of its equipment financing agreement.
In the event the Company does not comply with the financial covenants contained
in its equipment financing agreements, it will be in default under the terms of
such agreements. Such a default would have a material and adverse effect on the
Company.
11
<PAGE>
SUBORDINATION OF COMMON STOCK TO SERIES C PREFERRED STOCK. The common
stock is also expressly subordinate to the approximately $5.6 million
preference of the 5,544 outstanding shares of Series C preferred stock in the
event of a liquidation, dissolution or winding up of the Company. Further,
no dividends may be paid on the common stock unless full cumulative dividends
on the Series C preferred stock have been paid or declared and set aside for
payment. Each share of Series C preferred stock is subject to certain
conditions, at the option of the holder, into that number of shares of common
stock determined by dividing the sum of $1,000, plus all accrued dividends on
each share of Series C preferred stock, by the conversion price of the Series
C preferred stock. The Conversion Price of the Series C preferred stock is
equal to 75% of the average of the closing bid prices of the Company's common
stock on the Nasdaq National Market for a specified period.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Document
- ------ -----------------------
10.1 Amendments to the Series C preferred stock Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
13
<PAGE>
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.
GENTA INCORPORATED
(Registrant)
Date: August 13, 1996 THOMAS H. ADAMS
--------------------------------------
Thomas H. Adams, Ph.D.
Chairman and Chief Executive Officer
Date: August 13, 1996 HOWARD SAMPSON
--------------------------------------
Howard Sampson,
Vice President and Chief Financial Officer
14
<PAGE>
Exhibit 10.1
AMENDMENT NO. 1 TO
SECURITIES SUBSCRIPTION AGREEMENT
This Amendment No. 1 to Securities Subscription Agreement dated April 23,
1996 by and between the undersigned hereby amends that certain Securities
Subscription Agreement made March 22, 1996 by and between Genta Incorporated, a
Delaware corporation (the "Company") and Newsun Limited (the "Subscriber")
relating to the purchase of 3,000 shares of the Company's Series C Convertible
Preferred Stock, par value $.001 per share by Subscriber to provide for the
following:
The Subscriber or any subsequent holder of the Shares (the "Holder") shall
be prohibited from converting any portion of the Shares which would result in
the Subscriber or the Holder being deemed the beneficial owner, in accordance
with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended, of five percent (5%) or more of the then issued and outstanding Common
Stock of the Company.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 to
Securities Subscription Agreement as of the date first written above.
GENTA INCORPORATED
By /s/ HOWARD SAMPSON
-------------------------------------
Its V.P., CFO
---------------------------------
NEWSUN LIMITED
By /s/ RAZ STEINMETZ
-------------------------------------
Its Proxy, Ray Steinmetz
---------------------------------
<PAGE>
AMENDMENT NO. 1 TO
SECURITIES SUBSCRIPTION AGREEMENT
This Amendment No. 1 to Securities Subscription Agreement dated April 23,
1996 by and between the undersigned hereby amends that certain Securities
Subscription Agreement made March 22, 1996 by and between Genta Incorporated, a
Delaware corporation (the "Company") and Kempton Investments Ltd. (the
"Subscriber") relating to the purchase of 3,000 shares of the Company's Series C
Convertible Preferred Stock, par value $.001 per share by Subscriber to provide
for the following:
The Subscriber or any subsequent holder of the Shares (the "Holder") shall
be prohibited from converting any portion of the Shares which would result in
the Subscriber or the Holder being deemed the beneficial owner, in accordance
with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended, of five percent (5%) or more of the then issued and outstanding Common
Stock of the Company.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 to
Securities Subscription Agreement as of the date first written above.
GENTA INCORPORATED
By /s/ HOWARD SAMPSON
-------------------------------------
Its V.P., CFO
---------------------------------
KEMPTON INVESTMENTS LTD.
By /s/ CLEVE REEVES
-------------------------------------
Its Secretary
---------------------------------
<PAGE>
Agreement Among Holders of Series C
Preferred Stock of Genta Incorporated
The undersigned being the holders of 7,044 shares of
Series C Convertible Preferred Stock (the "Series C Stock") of Genta
Incorporated (the "Company"), representing all outstanding shares of Series C
Preferred Stock, do hereby agree as of May 30, 1996 that the maximum aggregate
number of shares of Common Stock of the Company into which the outstanding
shares of Series C Preferred Stock may be converted is 5,247,491, which
represents less than 20% of the outstanding shares of Common Stock of the
Company at March 22, 1996. The undersigned further agree that Domain Partners,
L.P., Domain Partners II, L.P., Institutional Venture Partners IV and
Institutional Venture Management IV (or any assignees of such entities) shall
not convert any of the shares of Series C Preferred Stock held by them into
shares of Common Stock of the Company until Kempton Investments, Ltd. and Newsun
Limited have converted all of the shares of Series C Preferred Stock held by
them into shares of Common Stock of the Company. Further, the Company by the
signature of its Chief Financial Officer below hereby agrees that if any shares
of Series C Preferred Stock held by Kempton Investments Ltd. or Newsun Limited
cannot be converted into shares of Common Stock of the Company because of the
limitation contained herein, then the Company shall use its best efforts to
<PAGE>
remove such limitation in compliance with the rules of the National Association
of Securities Dealers, Inc.
Kempton Investments Ltd. Domain Partners, L.P.
By: /s/ CLEVE REEVES By: /s/ JAMES C. BLAIR
------------------------------- -------------------------------
Domain Partners II, L.P.
By: /s/ JAMES C. BLAIR
-------------------------------
Newsun Limited
By: /s/ RAZ STEINMETZ
-------------------------------
Institutional Venture Partners IV
Genta Incorporated By: /s/ S.D. COLELLA
-------------------------------
By: /s/ THOMAS H. ADAMS Institutional Venture Management IV
-------------------------------
By: /s/ S.D. COLELLA
-------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,320,731
<SECURITIES> 0
<RECEIVABLES> 795,352
<ALLOWANCES> 0
<INVENTORY> 920,580
<CURRENT-ASSETS> 4,420,764
<PP&E> 9,644,757
<DEPRECIATION> 5,617,927
<TOTAL-ASSETS> 14,581,343
<CURRENT-LIABILITIES> 8,016,787
<BONDS> 1,851,910
0
590
<COMMON> 27,526
<OTHER-SE> 4,684,530
<TOTAL-LIABILITY-AND-EQUITY> 14,581,343
<SALES> 1,365,636
<TOTAL-REVENUES> 1,365,636
<CGS> 708,443
<TOTAL-COSTS> 3,388,545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,092
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,914,961)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> 0
</TABLE>
