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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
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 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 [ ]
As of April 30, 1997, the registrant had 4,328,062 shares of common
stock outstanding.
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<PAGE>
GENTA INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the
Quarters Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 1997 and 1996 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 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 22
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Genta Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
---- ----
(Unaudited) (Note)
Current assets:
<S> <C> <C>
Cash and cash equivalents ...................................... $1,288,688 $532,013
Trade accounts receivable ...................................... 683,070 602,696
Notes receivable from officers and employees ................... 62,000 62,000
Inventories .................................................... 957,552 992,243
Other current assets ........................................... 709,450 185,164
---------- ---------
Total current assets .............................................. 3,700,760 2,374,116
---------- ---------
Property and equipment, net ....................................... 3,173,289 3,634,281
Intangibles, net .................................................. 4,016,771 4,022,242
Other assets, net ................................................. 1,213,674 1,138,745
$12,104,494 $11,169,384
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,436,852 $1,481,521
Other accrued expenses 1,446,108 2,012,125
Deferred revenue 135,684 193,121
Short term notes payable 3,350,000 350,000
Current portion of notes payable and capital lease obligations 262,400 291,842
--------- ---------
Total current liabilities 7,631,044 4,328,609
--------- ---------
Capital lease obligations, less current portion -- 30,652
Notes payable, less current portion 979,535 1,129,388
Deficit in Joint Venture 1,740,542 1,606,503
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized:
Series A convertible preferred stock, $.001 par value; 528,100 shares
issued and outstanding at March 31, 1997 and December 31, 1996,
liquidation value is $30,446,432 at March 31, 1997. 528 528
Series C convertible preferred stock, $.001 par value; 1,424 shares
issued and outstanding at March 31, 1997 and December 31, 1996,
liquidation value is $1,482,870 at March 31, 1997 1 1
Common stock, $.001 par value; 70,000,000 shares authorized;
3,999,163 shares issued and outstanding at March 31, 1997 and
December 31, 1996* 3,999 3,999
Additional paid-in capital 108,248,400 108,823,555
Accumulated deficit (110,696,266) (108,375,407)
Accrued dividends payable 4,246,687 3,671,532
Notes receivable from stockholders (49,976) (49,976)
----------- -----------
Total stockholders' equity 1,753,373 4,074,232
----------- -----------
$12,104,494 $11,169,384
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1996 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.
* Adjusted to reflect the one for ten reverse stock split of the Company's
outstanding common stock which was effected on April 4, 1997.
See accompanying notes.
3
<PAGE>
Genta Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarters Ended March 31,
------------------------
1997 1996
---- ----
Revenues:
Product sales ..................... $ 1,158,839 $ 1,245,559
Collaborative research
and development ................. 50,000 --
-----------
1,208,839 1,245,559
----------- -----------
Cost and expenses:
Cost of products sold ............. 712,226 555,392
Research and development .......... 1,107,039 1,576,436
Selling, general and administrative 1,459,458 1,109,077
----------- -----------
3,278,723 3,240,905
----------- -----------
Loss from operations ................. (2,069,884) (1,995,346)
Equity in net loss of joint venture .. (303,129) (1,207,847)
Other income (expense):
Interest and other income ......... 118,104 76,987
Interest expense .................. (65,950) (94,723)
----------- -----------
52,154 (17,736)
----------- -----------
Net loss ............................. (2,320,859) (3,220,929)
Dividends on preferred stock ......... (575,155) (677,500)
----------- -----------
Net loss applicable to
common shares ...................... $(2,896,014) $(3,898,429)
=========== ===========
Net loss per common share* ......... $ (0.70) $ (1.60)
=========== ===========
Shares used in computing net
loss per common share* ............. 3,999,163 2,479,663
=========== ===========
* Per share data has been adjusted to reflect the one for ten reverse stock
split of the Company's outstanding common stock which was effected on April 4,
1997.
See accompanying notes.
4
<PAGE>
Genta Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarters ended March 31,
------------------------
1997 1996
---- ----
Operating activities
<S> <C> <C>
Net loss ........................................... $(2,320,859) $(3,220,929)
Items reflected in net loss not requiring cash:
Depreciation and amortization ................... 250,666 402,537
Equity in net loss of joint venture ............. 303,129 1,207,847
Changes in operating assets and liabilities ..... (238,092) (743,466)
----------- -----------
Net cash used in operating activities .............. (2,005,156) (2,354,011)
Investing activities
Purchase of property and equipment ................. (4,449) --
Sale of property and equipment ..................... 253,337 --
Investment in and advances to joint venture ........ (169,090) (654,007)
Deposits and other ................................. (108,020) (101,210)
----------- -----------
Net cash used in investing activities .............. (28,222) (755,217)
Financing activities
Proceeds from notes payable ........................ 3,000,000 240,000
Repayments of notes payable and capital leases ..... (209,947) (318,882)
Proceeds from issuance of preferred stock, net ..... -- 8,354,458
Other .............................................. -- 7,497
----------- -----------
Net cash provided by financing activities .......... 2,790,053 8,283,073
----------- -----------
Increase in cash and cash equivalents .............. 756,675 5,173,845
Cash and cash equivalents at beginning of period ... 532,013 271,755
----------- -----------
Cash and cash equivalents at end of period ......... $ 1,288,688 $ 5,445,600
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid ...................................... $ 14,670 $ 57,434
Supplemental schedule of noncash investing and
financing activities:
Preferred stock dividends accrued .................. $ 575,155 $ 677,500
Preferred stock issued upon conversion of short-term
notes payable and accrued interest .............. $ -- $ 1,044,000
</TABLE>
See accompanying notes.
5
<PAGE>
GENTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited condensed 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 1996 have been reclassified to
conform with the presentation in 1997.
The condensed 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, 1996.
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:
March 31, December 31,
1997 1996
------------ ------------
Raw materials and supplies $ 300,765 $ 342,875
Work-in-process 189,614 272,259
Finished goods 467,173 377,109
------------ -----------
$ 957,552 $ 992,243
============ ===========
(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.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute net earnings (loss) per share and to restate
all prior periods. Under the new requirements for calculating basic, or primary,
earnings per share, the dilutive effect of stock options will be excluded. The
impact of the new standard will have no effect on the Company's net loss per
share for the quarters ended March 31, 1997 and 1996.
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<PAGE>
(4) STOCKHOLDERS' EQUITY
In February 1997, the Company raised gross proceeds of $3 million in a
private placement to the Aries Fund and the Aries Domestic Fund, L.P.
(collectively the "Aries Funds"), of Senior Secured Convertible Bridge Notes
(the "Convertible Notes") and warrants to purchase 2 million shares of common
stock ("Bridge Warrants"). The Convertible Notes are initially convertible into
600,000 shares of Series D preferred stock, which in turn are convertible into 2
million shares of common stock. Bridge Warrants on 780,000 shares of common
stock have an exercise price of $.01 per share. Bridge Warrants on 1,220,000
shares of common stock have an exercise price of $5.50 per share. Further, upon
the occurrence of certain events of default, if elected by the holders, up to
$300,000 principal amount of the Convertible Notes is convertible into common
stock at a conversion price of $.01 per share. Each Bridge Warrant is
convertible, at the option of the holder, into a new Warrant entitling such
holder to purchase one share of common stock at an exercise price of $1.50 per
share or, under certain circumstances, if lower than $1.50 per share, 50% of the
market price of the common stock. Pursuant to the Note and Warrant Purchase
Agreement dated as of January 28, 1997 between the Company and the Aries Funds
(the "Note and Warrant Purchase Agreement"), the Aries Funds have the right to
appoint a majority of the members of the Board of Directors of the Company;
provided, however, that in the event the Company does not obtain Future
Financings (as defined in the Note and Warrant Purchase Agreement) in excess of
$3.5 million on or before June 30, 1977, then the Aries Funds shall have the
contractual right to appoint only two directors or observers and, if at such
time, more than two directors have been appointed by the Aries Funds, the
additional directors shall be required to resign.
During April 1997, 280.336 shares of the Series C Preferred Stock and
accrued dividends were converted at the option of the holders into 175,221
shares of Genta's common stock. The Conversion price was based upon 75% of the
average Nasdaq closing bid prices of Genta's common stock for a specified
period. Terms of the Series C Preferred Stock also provide for dividends payable
in shares of the Company's common stock.
Also during April 1997, $250,000 of the 4% Convertible Debentures (the
"Convertible Debentures") and the related accrued interest were converted into
153,368 shares of Genta's common stock. The conversion price was based upon 75%
of the average Nasdaq closing bid prices of Genta's common stock for a specified
period. Terms of the Convertible Debentures also provide for interest payable in
shares of the Company's common stock.
At the Company's Annual Meeting of Stockholders held on April 4, 1997,
the stockholders approved an amendment to the Company's Restated Certificate of
Incorporation effecting a one for ten reverse stock split of its common stock.
The stockholders also approved a reduction of the Company's authorized shares of
common stock from 150,000,000 to 70,000,000. The Company commenced trading on a
post reverse split basis at the commencement of trading on April 7, 1997. All
common stock and per share amounts in the accompanying Consolidated Financial
Statements have been retroactively restated to reflect the reverse stock split.
In April 1997, the Nasdaq Listing Qualifications Panel (the "Panel")
reached a determination to modify the terms of the conditional exception to the
bid price and capital and surplus requirements of The Nasdaq SmallCap Market
that was granted to the Company on February 7, 1997, as follows (the "Revised
Exception"). First, on or before April 15, 1997, the Company must make a public
filing with the Securities and Exchange Commission (the "SEC") and The Nasdaq
Stock Market, Inc. ("Nasdaq") evidencing minimum capital and surplus of
$2,700,000. The filing must contain a February 28, 1997 balance sheet with pro
forma adjustments for any significant transactions occurring on or before the
filing date. Second, on or before May 7, 1997, the Company must provide Nasdaq
with an April 30, 1997 balance sheet evidencing compliance with the $1,000,000
maintenance requirement for capital and surplus. Third, on or before June 9,
1997, the Company must provide Nasdaq with a May 31, 1997 balance sheet
evidencing compliance with the $1,000,000 maintenance requirement for capital
and surplus. Finally, on or before July 7, 1997, the Company must make a public
filing with the SEC and Nasdaq containing a June 30, 1997 balance sheet with pro
forma adjustments for any significant transactions occurring on or before the
filing date. The filing must evidence a minimum of $6,000,000 in capital and
surplus and compliance with all requirements for continued listing. The Panel
has further informed the Company that in the event the Company fails to meet any
7
<PAGE>
of the terms of this Revised Exception, its securities will be immediately
deleted from The Nasdaq Stock Market. On April 15, 1997, the Company made a
filing with the SEC and Nasdaq evidencing capital and surplus of $2,722,091 as
of February 28, 1997, and on May 6, 1997, the Company provided Nasdaq with an
April 30, 1997 balance sheet evidencing $1,383,984 in capital and surplus. The
Company believes that it will be able to meet the terms of the Revised
Exception. However, there can be no assurance that Nasdaq's capital and surplus
requirements will be satisfied or that the Company will not fail to meet some
other listing maintenance standard during the intervening period.
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, even 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 if so
decided, and development activities undertaken by Genta Jago Technologies B.V.
("Genta Jago"), the Company's joint venture with Jagotec AG ("Jagotec"). From
the period since its inception to March 31, 1997, the Company has incurred a
cumulative net loss of $110.7 million. The Company has experienced significant
quarterly fluctuations in operating results and it expects that these
fluctuations in revenues, expenses and losses will continue. See "Risk Factors".
The statements contained in this Quarterly Report on Form 10-Q that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), including statements
regarding the expectations, beliefs, intentions or strategies regarding the
future. The Company intends that all forward-looking statements be subject to
the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements reflect the Company's views as of the
date they are made with respect to future events and financial performance, but
are subject to many risks and uncertainties, which could cause the actual
results of the Company to differ materially from any future results expressed or
implied by such forward-looking statements. Examples of such risks and
uncertainties include, but are not limited to, 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 to produce new products, the obtaining
of proprietary protection for any such technology and products, the impact of
competitive products and pricing and reimbursement policies, changing market
conditions and the other risks detailed in the Risk Factors section of this
Quarterly Report on Form 10-Q. The Company does not undertake to update any
forward-looking statements.
RESULTS OF OPERATIONS
Operating revenues decreased to $1.2 million in the first quarter of
1997 compared to $1.3 million in the first quarter of 1996 due to decreased
sales of specialty chemical and pharmaceutical intermediate products. The
Company has historically experienced significant quarterly fluctuations in its
level of product sales, generally reflecting the timing and degree of customer
demand for certain products, and the Company anticipates that these sales
fluctuations will continue in future periods. Collaborative research and
development revenues recorded during the first quarter of 1997 represented
revenues earned pursuant to the Company's agreement with Johnson & Johnson
Consumer Products, Inc. which provided limited funding for preliminary
feasibility studies using Genta's Anticode compounds.
Costs and expenses increased to $3.3 million in the first quarter of
1997 compared to $3.2 million in the first quarter of 1996. Although research
and development expenses have decreased from $1.6 million in the first quarter
of 1996 to $1.1 million in the first quarter of 1997, selling and general and
administrative expenses have increased from $1.1 million in the first quarter of
1996 to $1.5 million in the first quarter of 1997 and cost of
8
<PAGE>
products sold have increased from $600,000 in 1996 to $700,000 in 1997. The
decrease in research and development expenses is primarily attributable to the
Company's restructuring and related workforce reductions implemented in 1995 and
1996 together with the discontinuation or non-initiation of several programs.
The increase in selling and general and administrative expenses is primarily
attributable to the increased expenses associated with the litigation described
under the heading "Legal Proceedings" in Item 1 of Part II of this Report on
Form 10-Q. The increase in the cost of products sold is primarily due to an
unfavorable product mix variance, cost of materials variance, volume variance
and restructuring modifications related to manufacturing capabilities.
The Company's equity in net loss of joint venture (Genta Jago)
decreased to $300,000 in the first quarter of 1997 from $1.2 million in the
comparable quarter of 1996. Such decrease is largely attributable to the fact
that a greater portion of development activities were funded pursuant to Genta
Jago's collaborative agreements with third parties and that the joint venture's
development efforts are now focused exclusively on GEOMATRIX(R) 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 approximately $98.3 million through March 31, 1997, including
net proceeds of $2.9 million (net of expenses) raised during the first quarter
of 1997. At March 31, 1997, the Company had cash and cash equivalents totaling
$1.3 million compared to a total of $500,000 at December 31, 1996. The increase
in cash and cash equivalents during the first quarter of 1997 is largely
attributable to proceeds from the issuance of Convertible Notes in February 1997
as described under note 4 to the Consolidated Financial Statements, less cash
used in the Company's operations.
The Company anticipates that its existing capital resources, including
$3 million in financing obtained from the issuance of the Convertible Notes in
February 1997, will enable the Company to maintain its presently planned
operations into June 1997. Management believes that a minimum of approximately
$6.4 million of additional financing will be required to sustain the Company's
presently-planned operations through the end of 1997 and to satisfy the
Company's obligations under the Convertible Notes and the Convertible
Debentures. The Company has been informed, however, that its common stock will
be delisted from the Nasdaq SmallCap Market unless the Company complies with the
terms of the Revised Exception (see note 4 to the Consolidated Financial
Statements). While the Company believes that it can meet the Nasdaq's
requirements, there can be no assurance that the Company will be able to do so.
Such delisting is likely to have a material adverse effect on the Company. The
Company is actively seeking additional sources of financing and is negotiating
with biotechnology and pharmaceutical companies regarding collaborative
agreements and other financial arrangements. There can be no assurance, however,
that any such sources of funding or collaborative agreements will be available
on favorable terms, if at all. The Company has entered into a letter of intent
with an investment banking firm pursuant to which such firm confirmed its
interest in acting as placement agent, on a "best efforts" basis, of a private
placement of preferred stock, convertible notes and warrants for proceeds of up
to $7.5 million (plus an over-allotment option), subject to certain conditions.
In the letter of intent, this firm agreed that, to the extent alternative
financings were available at better timing, pricing and terms, the firm would
waive its right to conduct the offering. If the Company is unsuccessful in
raising the required funds, the Company may be required to license or sell
additional assets and technology, further scale back or eliminate some or all of
its development programs, further reduce its work force and spending, and take
other measures in order to continue its operations. If such measures are not
successfully completed, the Company may be required to discontinue its
operations.
As described under note 4 to the Consolidated Financial Statements, the
Aries Funds, who provided $3 million in financing to the Company in February
1997, have the right to appoint a majority of the members of the Board of
Directors of the Company. Should they determine to do so, their designees may
decide to alter the business strategy, operations and/or management of the
Company in a manner not contemplated in this Quarterly Report on Form 10-Q.
Effective May 6, 1997, Thomas H. Adams, Ph.D., who co-founded the Company in
1989, resigned from the Board of Directors and as Chairman and Chief Executive
Officer of the Company. Dr. Adams
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will remain as a consultant and technical advisor to the Company as Chairman
Emeritus. Mr. Michael S. Weiss, Senior Managing Director of Paramount Capital,
Inc., was elected to the Board of Directors of Genta as an appointee of the
Aries Funds and as Interim Chairman of the Board. Mr. Weiss is also a director
of AVAX Technologies, Inc., Xytronyx, Inc. and Palatin Technologies, Inc., each
a publicly traded biotechnology company. In addition, the Company announced that
Mr. John F. Dee and Mr. John V. Oyler will assist the Company as an interim
management team during this transitional period while the Company seeks a
full-time Chief Executive Officer. Both Mr. Dee and Mr. Oyler were most recently
management consultants at McKinsey & Company, Inc., a multinational consulting
firm and both have consulting and operational experience in healthcare and
biotechnology.
In connection with the Genta Jago joint venture formed in late 1992 and
expanded in May 1995, the Company entered into a working capital agreement with
Genta Jago that 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. The Company anticipates its working capital contribution to Genta Jago
for 1997 will be $300,000, as compared to $846,784 in 1996 and $7.7 million in
1995. The reduction in the Company's working capital contributions to Genta Jago
is largely a result of Genta Jago's having entered into collaborative agreements
with third parties. As of March 31, 1997, the Company had advanced working
capital loans of approximately $15.8 million to Genta Jago, net of principal
repayments. 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. Genta Jago repaid
Genta $1 million of its working capital loans in November 1996 from license fee
revenues. 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.
On May 7, 1997 Jago Pharma AG ("Jago") gave Genta Jago formal notices
of its assertion that Genta Jago is in breach of the Restated Geomatrix Services
Agreement, the Restated Geomatrix Research and Development Agreement and the
Restated Geomatrix License Agreement, stating that should the breach not be
cured within the applicable cure period, Genta Jago would reserve the right to
terminate the agreements in accordance with their terms. Jago also gave formal
notice of default under the Restated Joint Venture and Shareholders Agreement,
contending that due to Genta's failure to meet its funding obligations to Genta
Jago, Genta Jago was unable to fulfill its obligations to Jago. The amount
claimed by Jago to be in default is approximately $1.2 million, of which
$200,000 relates to 1997 and $1.0 million relates to development costs and
license fees for 1996. While a termination of certain of these agreements may
have a material adverse effect on the Company, the Company believes there is no
basis for Jago's assertions and intends to vigorously oppose Jago's position.
Unless the Company and/or Genta Jago 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.
10
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RISK FACTORS
In addition to the other information contained in this Quarterly Report
on Form 10-Q, the following factors should be considered carefully.
Need for Additional Funds; Risk of Insolvency. Genta's operations to
date have consumed substantial amounts of cash. The Company anticipates that its
existing cash funds, including $3,000,000 in additional financing obtained in
February 1997, will enable the Company to maintain its presently planned
operations into June 1997. The Company's auditors included in the Annual Report
on Form 10-K an emphasis paragraph in their opinion with respect to the
Company's ability to continue as a going concern. Management believes that a
minimum of approximately $6.4 million of additional financing will be necessary
to sustain operations through the end of 1997 and to satisfy the Company's
obligations under the Convertible Notes and the Convertible Debentures. The
Convertible Notes are due on the earlier of June 30, 1997 or five business days
following the completion of any equity offering or series of equity offerings
with gross proceeds in excess of $2,500,000. However, the Company is currently
in discussions with the holders of the Convertible Notes to extend the maturity
date of such Convertible Notes. There can be no assurance that the Company will
be successful in extending the maturity date of the Convertible Notes.
Substantial additional sources of financing will be required in order for the
Company to continue its planned operations. Furthermore, Nasdaq has informed the
Company that its common stock will be delisted from the Nasdaq SmallCap Market
unless the Company provides Nasdaq with a May 31, 1997 balance sheet evidencing
compliance with the $1,000,000 capital and surplus maintenance requirement on or
before June 9, 1997 and makes a public filing with the SEC and Nasdaq by July 7,
1997 evidencing minimum capital and surplus of at least $6,000,000. See "Risk
Factors -- Threat of Nasdaq Delisting" below. The Company is negotiating with
biotechnology and pharmaceutical companies regarding collaborative agreements
and other financing arrangements and is actively seeking additional equity or
debt financing. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." 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
unavailable, the Company may be required to license or sell certain of its
assets and technology, further scale back or eliminate some or all of its
development programs, further reduce its work force and spending, and take other
measures in order to continue its operations. If such measures are not
successfully completed, the Company may be required to discontinue its
operations. The Company will need to raise substantial additional funds to
conduct the costly and time-consuming research, pre-clinical development and
clinical trials necessary to bring its and Genta Jago's products to market and
to establish production and marketing capabilities. The Company may also need
substantial additional funds to provide working capital loans to Genta Jago. The
Company intends to seek additional funding through public or private financings,
including equity financings, and through collaborative arrangements. Adequate
funds for these purposes, whether obtained through financial markets or
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop itself. The Company's future cash requirements will be
affected by results of research and development, results of preclinical studies
and bioequivalence and clinical trials, relationships with corporate
collaborators, changes in the focus and direction of the Company's research and
development programs, competitive and technological advances, resources devoted
to Genta Jago, the United States Food and Drug Administration (the "FDA") and
foreign regulatory process, potential litigation by companies seeking to prevent
or delay marketing approval of Genta Jago's products and other factors.
Threat of Nasdaq Delisting. In April 1997, the Nasdaq Listing
Qualifications Panel (the "Panel") reached a determination to modify the terms
of the conditional exception to the bid price and capital and surplus
requirements of The Nasdaq SmallCap Market that was granted to the Company on
February 7, 1997, as follows (the "Revised Exception"). First, on or before
April 15, 1997, the Company must make a public filing with the SEC and Nasdaq
evidencing minimum capital and surplus of $2,700,000. The filing must contain a
February 28, 1997 balance sheet with pro forma adjustments for any significant
transactions occurring on or before the filing date. Second, on or before May 7,
1997, the Company must provide Nasdaq with an April 30, 1997 balance sheet
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evidencing compliance with the $1,000,000 maintenance requirement for capital
and surplus. Third, on or before June 9, 1997, the Company must provide Nasdaq
with a May 31, 1997 balance sheet evidencing compliance with the $1,000,000
maintenance requirement for capital and surplus. Finally, on or before July 7,
1997, the Company must make a public filing with the SEC and Nasdaq containing a
June 30, 1997 balance sheet with pro forma adjustments for any significant
transactions occurring on or before the filing date. The filing must evidence a
minimum of $6,000,000 in capital and surplus and compliance with all
requirements for continued listing. The Panel has further informed the Company
that in the event the Company fails to meet any of the terms of this Revised
Exception, its securities will be immediately deleted from The Nasdaq Stock
Market. On April 15, 1997, the Company made a filing with the SEC and Nasdaq
evidencing capital and surplus of $2,722,091 as of February 28, 1997, and on May
6, 1997, the Company provided Nasdaq with an April 30, 1997 balance sheet
evidencing $1,383,984 in capital and surplus. The Company believes that it will
be able to meet the terms of the Revised Exception. However, there can be no
assurance that Nasdaq's capital and surplus requirements will be satisfied or
that the Company will not fail to meet some other listing maintenance standard
during the intervening period. A delisting of the Company's common stock could
adversely affect the ability of the Company to attract new investors. See "Risk
Factors - Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on
Liquidity for the Company's Securities."
Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on
Liquidity for the Company's Securities. If the Company's securities were not
listed on a national securities exchange nor listed on a qualified automated
quotation system, they may become subject to Rule 15g-9 under the Exchange Act,
which imposes additional sales practice requirements on broker-dealers that sell
such securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000 or $300,000 together with their spouses). For
transactions covered by this Rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such Rule may
affect the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers to sell any of the securities acquired hereby,
after subsequent registration, in the secondary market.
The Commission has adopted regulations that define a "penny stock" to
be any equity security that has a market price (as therein defined) of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about sales commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stock.
The foregoing required penny stock restrictions will not apply to the
Company's securities if the Company meets certain minimum net tangible assets or
average revenue criteria. There can be no assurance that the Company's
securities will qualify for exemption from the penny stock restrictions. In any
event, even if the Company's securities were exempt from such restrictions, the
Company would remain subject to Section 15(b)(6) of the Exchange Act, which
gives the Commission the authority to restrict any person from participating in
a distribution of penny stock, if the Commission finds that such a restriction
would be in the public interest.
If the Company's securities were subject to the rules on penny stocks,
the market liquidity for the Company's securities would be materially adversely
affected.
Risk of Appeal of the Suit. In relation to the Suit described under the
heading "Legal Proceedings" in Item 1 of Part II of this Report on Form 10-Q,
the Court issued an opinion on April 25, 1997 stating that it will enter
judgment in favor of Genta and its directors in the lawsuit challenging the
Aries investment. The Company believes that the lawsuit is without
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merit. However, there can be no assurance that the Plaintiffs will not appeal
the Court's decision, in which case the Company could incur substantial costs in
litigating such appeal, and, if an appeal is taken, there can be no assurance
that the Court's decision will be upheld.
Subordination of Common Stock to Series A and Series C Preferred Stocks
and Redemption of Series A Preferred Stock; Risk of Dilution. The common stock
is expressly subordinate to the approximately $30 million preference of the
528,100 outstanding shares of Series A Preferred Stock and the approximately
$1.2 million preference of the 1,144 shares of Series C 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 and Series C Preferred Stocks 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 $67.50 per share or less.
Each share of Series A preferred stock is presently convertible into 2.87 shares
of common stock and the exercise price of the Series A Warrants is $21.57 per
share.
Subordination of Common Stock to Senior Secured Convertible Bridge
Notes and 4% Convertible Debentures; Risk of Dilution. In the event of a
liquidation, dissolution or winding up of the Company, the common stock is also
expressly subordinate to $3 million principal amount of Convertible Notes and to
$100,000 principal amount of Convertible Debentures; such issues are payable in
June 1997 or earlier under certain conditions and August 1997, respectively.
However, the Company is currently in negotiations with the holders of the
Convertible Notes to extend the maturity date thereof. During April 1997,
$250,000 of the Convertible Debentures and the related accrued interest were
converted into 153,368 shares of Genta's common stock. The conversion price was
based upon 75% of the average Nasdaq closing bid prices of Genta's common stock
for a specified period. Terms of the Convertible Debentures also provide for
interest payable in shares of the Company's common stock. Further, no dividends
may be paid on the common stock unless cumulative dividends on such convertible
notes and debentures have been paid or funds have been set aside for such
payment. The Convertible Notes are initially convertible into 600,000 shares of
Series D preferred stock, which are in turn convertible into 2 million shares of
common stock, subject to antidilution adjustments.
Early Stage of Development; Technological Uncertainty. Genta is at an
early stage of development. All of the Company's potential therapeutic products
are in research or development, and no revenues have been generated from
therapeutic product sales. The Company is pursuing research and development,
through Genta Jago, of a range of oral controlled-release formulations of
currently available pharmaceuticals. Many of the products to be developed
through Genta Jago have not yet been successfully formulated using GEOMATRIX
technology. In addition, none of the products being developed through Genta Jago
has had its manufacturing process successfully scaled-up for commercial
production or has started pivotal bioequivalence trials. To date, a portion of
the Company's resources have been dedicated to applying molecular biology and
medicinal chemistry to the research and development of potential pharmaceutical
products based upon Anticode technology. While the Company has demonstrated the
activity of Anticode technology in model systems in vitro and the activity of
antisense technology in animals and has identified a number of compounds which
the Company believes are worthy of additional testing, only one of these
potential Anticode products has begun to be tested in humans, with such testing
in its early stages. There can be no assurance that the novel approach of
Anticode technology to develop therapeutic products will result in products
which receive necessary regulatory approvals or that will be successful
commercially. Further, results obtained in preclinical studies or pilot
bioequivalence trials are not necessarily indicative of results that will be
obtained in human clinical testing or pivotal bioequivalence trials,
respectively. The Company is also developing products for certain diseases where
no animal models exist. There can be no assurance that any of the Company's or
Genta Jago's potential products can be successfully developed. Furthermore, the
Company's products in research or development may prove to have undesirable and
unintended side effects or other characteristics that may prevent or limit their
commercial use. There can be no assurance that the Company will be permitted to
undertake human
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clinical testing of its potential Anticode products or any other of the
Company's products currently in preclinical development, or, if permitted, that
such products will be demonstrated to be safe and efficacious. In addition,
there can be no assurance that any of the Company's or Genta Jago's products
will obtain FDA or foreign regulatory approval for any indication or that an
approved compound would be capable of being produced in commercial quantities at
reasonable costs and successfully marketed. Products, if any, resulting from
Genta's or Genta Jago's research and development programs are not expected to be
commercially available for a number of years.
Loss History; Uncertainty of Future Profitability. Genta has been
unprofitable to date, incurring substantial operating losses associated with
ongoing research and development activities, preclinical testing, clinical
trials, manufacturing activities and development activities undertaken by Genta
Jago. From the period since its inception to March 31, 1997, the Company has
incurred a cumulative net loss of $110.7 million. The Company's independent
auditors have included an explanatory paragraph in their report to the Company's
financial statements at December 31, 1996, which paragraph expresses substantial
doubt as to the Company's ability to continue as a going concern. The Company
has experienced significant quarterly fluctuations in operating results and
expects that these fluctuations in revenues, expenses and losses will continue.
The Company has historically experienced significant quarterly fluctuations in
its level of product sales, generally reflecting the timing and degree of
customer demand for various products.
Dividends. The Company has never paid cash dividends on its common
stock and does not anticipate paying any such dividends in the foreseeable
future. In addition, the Company is restricted from paying cash dividends on its
common stock until such time as all cumulative dividends have been paid on
outstanding shares of its Series A and Series C convertible preferred stock. The
Company currently intends to retain its earnings, if any, after payment of
dividends on outstanding shares of Series A and Series C convertible preferred
stock, for the development of its business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Operations After Restructuring. As a result of the Company's
restructuring to reduce operating expenses, the Company has focused its research
and development programs on its near-term drug delivery (GEOMATRIX) technology
and its Anticode cancer program. The Company's Anticode programs directed at
other areas including BCL2 in cancer have largely been curtailed and any future
progress with these programs is dependent upon the Company obtaining financing
or a collaborative partner to fund further research. There can be no assurance
that the Company will be successful in obtaining additional funding for these
programs. The Company no longer anticipates devoting any of its resources to
further development of its topical dermatology product candidates. The Company's
agreement with its collaborative partner, the Procter & Gamble Company ("Procter
& Gamble"), for its Anticode program in infectious diseases, ended in September
1995. The Company will have to obtain additional corporate partners in order to
continue its Anticode programs in different molecular targets. There can be no
assurance that the Company will be able to negotiate such collaborative
arrangements on favorable terms, if at all.
No Assurance of Regulatory Approval; Government Regulation. The FDA and
comparable agencies in foreign countries impose substantial premarket approval
requirements upon the introduction of pharmaceutical products through lengthy
and detailed preclinical and clinical testing procedures and other costly and
time-consuming procedures. Satisfaction of these requirements, which includes
demonstrating to the satisfaction of the FDA and foreign regulatory agencies
that the product is both safe and effective, typically takes several years or
more depending upon the type, complexity and novelty of the product. There can
be no assurance that such testing will show any product to be safe or
efficacious or, in the case of certain of Genta Jago's products, to be
bioequivalent to a currently marketed pharmaceutical. Government regulation also
affects the manufacture and marketing of pharmaceutical products. The effect of
government regulation may be to delay marketing of any new products for a
considerable or indefinite period of time, to impose costly procedures upon the
Company's or Genta Jago's activities and to diminish any competitive advantage
that the Company or Genta Jago may attain. It may take years before marketing
approvals are obtained for the Company's or Genta Jago's products, if at all.
There can be no assurance that FDA or other regulatory approval for any products
developed by the Company or Genta Jago will
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be granted on a timely basis, if at all, or, if granted, that such approval will
cover all the clinical indications for which the Company or Genta Jago is
seeking approval or will not sustain significant limitations in the form of
warnings, precautions or contraindications with respect to conditions of use.
Further, with respect to the reformulated versions of currently available
pharmaceuticals being developed through Genta Jago, there is a substantial risk
that the manufacturers or marketers of such currently available pharmaceuticals
will seek to delay or block regulatory approval of any reformulated versions of
such pharmaceuticals through litigation or other means. Any significant delay in
obtaining, or failure to obtain, such approvals would materially adversely
affect the Company and Genta Jago's revenue. Moreover, additional government
regulation from future legislation or administrative action may be established
which could prevent or delay regulatory approval of the Company's or Genta
Jago's products or further regulate the prices at which the Company's or Genta
Jago's proposed products may be sold.
The Company is also subject to various foreign, federal, state and
local laws, regulations and recommendations (collectively "Governmental
Regulations") relating to safe working conditions, laboratory and manufacturing
practices, the experimental use of animals and the use, manufacture, storage,
handling and disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease agents, used in
connection with the Company's research and development work and manufacturing
processes. In October 1996, JBL Scientific, Inc. ("JBL") retained a chemical
consulting firm to advise it with respect to environmental compliance regarding
an incident of soil and groundwater contamination (the "Spill"). The Company
believes, based upon information known to date, that the Spill is relatively
minor and will not have a material adverse effect on the business of the
Company, although there can be no assurance thereof. Although the Company
believes it is in compliance with Governmental Regulations in all material
respects (except with respect to the Spill), there can be no assurance that the
Company will not be required to incur significant costs to comply with
Governmental Regulations in the future.
Uncertainty Regarding Patents and Proprietary Technology. The Company's
and Genta Jago's success will depend, in part, on their respective abilities to
obtain patents, maintain trade secrets and operate without infringing the
proprietary rights of others. No assurance can be given that patents issued to
or licensed by the Company or Genta Jago will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company or Genta Jago. There can be no assurance that the
Company's or Genta Jago's patent applications will be approved, that the Company
or Genta Jago will develop additional products that are patentable, that any
issued patent will provide the Company or Genta Jago with any competitive
advantage or adequate protection for its inventions or will not be challenged by
others, or that the patents of others will not have an adverse effect on the
ability of the Company or Genta Jago to do business. Competitors may have filed
applications, may have been issued patents or may obtain additional patents and
proprietary rights relating to products or processes competitive with those of
the Company or Genta Jago. Furthermore, there can be no assurance that others
will not independently develop similar products, duplicate any of the Company's
or Genta Jago's products or design around any patented products developed by the
Company or Genta Jago. The Company and Genta Jago rely on secrecy to protect
technology in addition to patent protection, especially where patent protection
is not believed to be appropriate or obtainable. No assurance can be given that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's or Genta
Jago's trade secrets, or that the Company or Genta Jago can effectively protect
is rights to its unpatented trade secrets.
Genta and Genta Jago have obtained licenses or other rights to patents
and other proprietary rights of third parties, and may be required to obtain
licenses to additional patents or other proprietary rights of third parties. No
assurance can be given that any existing licenses and other rights will remain
in effect or that any licenses required under any such additional patents or
proprietary rights would be made available on terms acceptable to the Company or
Genta Jago, if at all. If Genta's or Genta Jago's licenses and other rights are
terminated or if Genta or Genta Jago cannot obtain such additional licenses,
Genta or Genta Jago could encounter delays in product market introductions while
it attempts to design around such patents or could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed. In
addition, the Company or Genta Jago could incur
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substantial costs, including costs caused by delays in obtaining regulatory
approval and bringing products to market, in defending itself in any suits
brought against the Company or Genta Jago claiming infringement of the patent
rights of third parties or in asserting the Company's or Genta Jago's patent
rights, including those granted by third parties, in a suit against another
party. The Company or Genta Jago may also become involved in interference
proceedings declared by the United States Patent Office in connection with one
or more of its patents or patent applications, which could result in substantial
cost to the Company or Genta Jago, as well as an adverse decision as to priority
of invention of the patent or patent application involved. There can be no
assurance that the Company or Genta Jago will have sufficient funds to obtain,
maintain or enforce patents on their respective products or technology, to
obtain or maintain licenses that may be required in order to develop and
commercialize their respective products, to contest patents obtained by third
parties, or to defend against suits brought by third parties.
Dependence on Others. The Company's strategy for the research,
development and commercialization of certain of its or Genta Jago's products
requires negotiating, entering into and maintaining various arrangements with
corporate collaborators, licensors, licensees and others, and is dependent upon
the subsequent success of these outside parties in performing their
responsibilities. Genta Jago is seeking additional collaborative arrangements to
develop and commercialize certain of their respective products. However, there
can be no assurance that Genta Jago will be able to negotiate collaborative
arrangements on acceptable terms, if at all.
Technology Licensed From Third Parties. The Company has entered into
certain agreements with, and licensed certain technology and compounds from,
third parties. The Company has relied on scientific, technical, clinical,
commercial and other data supplied and disclosed by others in entering into
these agreements, including the Genta Jago agreements, and will rely on such
data in support of development of certain products. Although the Company has no
reason to believe that this information contains errors of omission or fact,
there can be no assurance that there are no errors of omission or fact that
would materially affect the future approvability or commercial viability of
these products.
Potential Adverse Effect of Technological Change and Competition. The
biotechnology industry is subject to intense competition and rapid and
significant technological change. The Company and Genta Jago have numerous
competitors in the United States and other countries for their respective
technologies and products under development, including among others, major
pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions. There can be no assurance that the
Company's or Genta Jago's competitors will not succeed in developing products or
other novel technologies that are more effective than any which have been or are
being developed by the Company or Genta Jago or which would render the Company's
or Genta Jago's technology and products non-competitive. Many of the Company's
and Genta Jago's competitors have substantially greater financial, technical,
marketing and human resources than the Company or Genta Jago. In addition, many
of those competitors have significantly greater experience than the Company or
Genta Jago in undertaking preclinical testing and human clinical trials of new
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in healthcare. Accordingly, the Company's or Genta Jago's
competitors may succeed in obtaining regulatory approval for products more
rapidly than the Company or Genta Jago and such competitors may succeed in
delaying or blocking regulatory approvals of the Company's or Genta Jago's
products. Furthermore, if the Company or Genta Jago is permitted to commence
commercial sales of products, it will also be competing with respect to
marketing capabilities, an area in which it has limited or no experience, and
manufacturing efficiency. There are many public and private companies that are
conducting research and development activities based on drug delivery and
antisense technologies. The Company believes that the industry-wide interest in
such technologies will accelerate and competition will intensify as the
techniques which permit drug design and development based on such technologies
are more widely understood.
Uncertainty of Clinical Trials and Results. The results of clinical
trial and preclinical testing are subject to varying interpretations. Even if
the development of the Company's products advances to the clinical stage, there
can be no assurance that they will prove to be safe and effective. The products
that are successfully developed, if any, will be subject to requisite regulatory
approval prior to their commercial sale, and the approval, if obtainable, may
take several years. Generally, only a very small percentage of the number of new
pharmaceutical products
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initially developed is approved for sale. Even if products are approved for
sale, there can be no assurance that they will be commercially successful. The
Company may encounter unanticipated problems relating to development,
manufacturing, distribution and marketing, some of which may be beyond the
Company's financial and technical capacity to solve. The failure to address such
problems adequately could have a material adverse effect on the Company's
business, financial condition, prospects and results of operations. No assurance
can be given that the Company will succeed in the development and marketing of
any new drug products, or that they will not be rendered obsolete by products of
competitors.
Difficult Manufacturing Requirements. The manufacture of Anticode
oligonucleotides is a time-consuming and complex process. Management believes
that the Company has the ability to acquire or produce quantities of
oligonucleotides sufficient to support its present needs for research and its
projected needs for its initial clinical development programs. However, Genta
believes that improvements in its manufacturing technology will be required to
enable the Company to meet the volume and cost requirements needed for certain
commercial applications of Anticode products. Products based on chemically
modified oligonucleotides have never been manufactured on a commercial scale.
The manufacture of all of the Company's and Genta Jago's products will be
subject to current Good Manufacturing Practices ("GMP") requirements prescribed
by the FDA or other standards prescribed by the appropriate regulatory agency in
the country of use. There can be no assurance that the Company or Genta Jago
will be able to manufacture products, or have products manufactured for it, in a
timely fashion at acceptable quality and prices, that they or third party
manufacturers can comply with GMP or that they or third party manufacturers will
be able to manufacture an adequate supply of product.
Limited Sales, Marketing and Distribution Experience. The Company and
Genta Jago have very limited experience in pharmaceutical sales, marketing and
distribution. In order to market and sell certain products directly, the Company
or Genta Jago would have to develop or subcontract a sales force and a marketing
group with technical expertise. There can be no assurance that any direct sales
or marketing efforts would be successful.
Uncertainty of Product Pricing, Reimbursement and Related Matters. The
Company's and Genta Jago's business may be materially adversely affected by the
continuing efforts of governmental and third party payers to contain or reduce
the costs of healthcare through various means. For example, in certain foreign
markets the pricing or profitability of healthcare products is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar governmental control. While the Company cannot predict
whether any such legislative or regulatory proposals or reforms will be adopted,
the adoption of any such proposal or reform could adversely affect the
commercial viability of the Company's and Genta Jago's potential products. In
addition, in both the United States and elsewhere, sales of healthcare products
are dependent in part on the availability of reimbursement to the consumer from
third party payers, such as government and private insurance plans. Third party
payers are increasingly challenging the prices charged for medical products and
services and therefore, significant uncertainty exists as to the reimbursement
of existing and newly approved healthcare products. If the Company or Genta Jago
succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company or Genta Jago to sell its products on a competitive basis.
Dependence on Qualified Personnel. The Company's success is highly
dependent on the retention of key employees and scientific staff and the
recruitment of additional key personnel. As the Company has already fallen below
critical mass, the loss of additional key personnel or the failure to recruit
necessary additional personnel does and will further impede the achievement of
development objectives. There is intense competition for qualified personnel in
the areas of the Company's activities, and there can be no assurance that Genta
will be able to continue to attract and retain the qualified personnel necessary
for the development of its business. The Company is actively engaged in a search
for a new Chief Executive Officer.
Product Liability Exposure; Limited Insurance Coverage. The Company's,
JBL's and Genta Jago's
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businesses expose them to potential product liability risks which are inherent
in the testing, manufacturing, marketing and sale of human therapeutic products.
If available, product liability insurance for the pharmaceutical industry
generally is expensive. The Company has obtained a level of liability insurance
coverage which it deems appropriate for its current stage of development.
However, there can be no assurance that the Company's present insurance coverage
is adequate. Such existing coverage may not be adequate as the Company further
develops products, and no assurance can be given that in the future adequate
insurance coverage will be available in sufficient amounts or at a reasonable
cost, or that a product liability claim would not have a material adverse effect
on the business or financial condition of the Company.
Hazardous Materials; Environmental Matters. The Company's research and
development and manufacturing processes involve the controlled storage, use and
disposal of hazardous materials, biological hazardous materials and radioactive
compounds. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company may be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
There can be no assurance that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future, nor that the operations, business or assets of the Company will not be
materially adversely affected by current or future environmental laws of
regulations. See "Risk Factors - No Assurance of Regulatory Approval; Government
Regulation" for a discussion of the Spill.
Volatility of Stock Price. The market price of the Company's common
stock, like that of the common stock of many other biopharmaceutical companies,
has been highly volatile. Factors such as the results of preclinical studies and
clinical trials by Genta, Genta Jago or their competitors, other evidence of the
safety or efficacy of products of Genta, Genta Jago or their competitors,
announcements of technological innovations or new therapeutic products by the
Company, Genta Jago or their competitors, governmental regulation, developments
in patent or other proprietary rights of the Company or its competitors,
including litigation, fluctuations in the Company's operating results, and
market conditions for biopharmaceutical stocks in general could have a
significant impact on the future price of the common stock. At the Company's
Annual Meeting of Stockholders held on April 4, 1997, the stockholders approved
an amendment to the Company's Restated Certificate of Incorporation effecting a
one for ten reverse stock split of its common stock. The stockholders also
approved a reduction of the Company's authorized shares of common stock from
150,000,000 to 70,000,000. The Company commenced trading on a post reverse split
basis at the commencement of trading on April 7, 1997. As of April 30, 1997, the
Company had 4,328,062 shares of common stock outstanding. Future sales of shares
of common stock by existing stockholders and option holders also could adversely
affect the market price of the common stock.
Concentration of Ownership and Control; Certain Interlocking
Relationships. The Company's directors, executive officers and principal
stockholders and certain of their affiliates have the ability to influence the
election of the Company's directors and most other stockholder actions. In
particular, the Aries Funds may be deemed beneficially to own a majority of the
outstanding shares of the Common Stock and have the contractual right to appoint
a majority of the members of the Board of Directors of the Company subject to
certain conditions, although the Aries Funds have appointed only one director to
date, Mr. Weiss. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Accordingly, the Aries Funds have the ability to exert significant influence
over the election of the Company's Board of Directors and other matters
submitted to the Company's stockholders for approval. The Aries Funds currently
do not hold a controlling block of voting stock, although the Aries Funds have
the present right to convert and exercise their securities into a majority of
the outstanding common stock. These arrangements may discourage or prevent any
proposed takeover of the Company.
18
<PAGE>
Possible Nonpayment of Dividends on Series A and Series C Preferred
Stock; Deficiency in Fixed Charges and Preferred Stock Dividend Coverage.
Dividends will be payable on the Series A and Series C Preferred Stock only
when, as and if declared by the Company's Board of Directors, out of funds
legally available therefor. The Company has incurred losses and, thus, has had a
deficiency in fixed charges and preferred stock dividend coverage since
inception. For the fiscal years ended December 31, 1991, 1992, 1993, 1994, 1995
and 1996 the coverage deficiency was approximately $9,486,000, $16,703,000,
$16,189,000, $25,998,000, $27,917,000 and $13,950,000 respectively. While the
Company intends to pay dividends on the Series A and Series C Preferred Stock,
it is anticipated that the Company will continue to incur losses and thus will
continue to have a deficiency in fixed charges and preferred stock dividend
coverage. Dividends on the Series A and Series C Preferred Stock may be paid
only out of capital surplus (within the meaning of the Delaware General
Corporation Law) or net profits of the Company for the fiscal year in which the
dividend is declared and the preceding fiscal year.
Effect of Certain Anti-Takeover Provisions. The Company's Restated
Certificate of Incorporation and Bylaws include provisions that could discourage
potential takeover attempts and make attempts by stockholders to change
management more difficult. The approval of 66-2/3% of the Company's voting stock
is required to approve certain transactions and to take certain stockholder
actions, including the calling of a special meeting of stockholders and the
amendment of any of the anti-takeover provisions contained in the Company's
Restated Certificate of Incorporation. Additionally, the Company has contractual
obligations to certain of its security holders which may impair potential
takeovers. See "Concentration of Ownership and Control; Certain Interlocking
Relationships." Further, pursuant to the terms of its stockholder rights plan
adopted in December 1993, the Company has distributed a dividend of one right
for each outstanding share of common stock. These rights will cause a
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors and may have the effect of
deterring hostile takeover attempts. The stockholder rights plan was amended to
permit the consummation of the transactions with the Aries Funds described in
this Report on Form 10-Q.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 5, 1997, Equity-Linked Investors, L.P. and Equity-Linked
Investors-II (collectively, the "Plaintiffs") who, as a group, may be deemed to
beneficially own more than five percent of the outstanding shares of the Common
Stock of the Company as Series A preferred stockholders, filed suit (the "Suit")
in the Delaware Court of Chancery (the "Court") against the Company, each of the
Company's directors and the Aries Funds. Through the Suit, the Plaintiffs were
seeking to enjoin the transactions contemplated by The Note and Warrant Purchase
Agreement referred to in note 4 to the Consolidated Financial Statements (the
"Transactions"), rescission of the Transactions, damages, attorney fees, and
such other and further relief as the Court may deem just and proper. The Suit
alleged that the Board of Directors of the Company breached fiduciary duties by
failing to consider financing alternatives to the Transactions and further
alleged that the Transactions were not in the best interests of the
stockholders. Additionally, the Suit alleged that the Aries Funds aided and
abetted such breach of fiduciary duty through their participation in the
Transactions. On April 25, 1997, the Court rejected the Plaintiffs' challenge to
the Transactions and ruled in favor of Genta, Genta's directors and the Aries
Funds, who were the defendants. The Court issued an opinion stating that it will
enter judgment in favor of Genta and its directors in the lawsuit challenging
the Aries investment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its Annual Meeting of Stockholders on April 4, 1997.
(b) Proxies for the meeting were solicited pursuant to Regulation 14A of
the Exchange Act. There whas no solicitation in opposition to the
Board of Directors nominee for the Class III director as listed in the
definitive proxy statement of the Company dated as of March 14, 1997.
(c) Briefly described below is each matter voted upon at the Annual
Meeting of Stockholders.
(i) Approval of the amendment to the Company's Restated Certificate of
Incorporation to effectuate a one for ten reverse stock split of the
Company's outstanding Common Stock and decrease in the number of
authorized Shares of Common Stock from 150,000,000 to 70,000,000.
Total Common Stock voted was 31,711,962 in favor, 1,114,225 against,
78,900 abstained and 245,087 broker non-votes.
(ii) Election of one Class III director. Total Common Stock voted for
the election of Robert E. Klem was 31,977,180 in favor and 1,172,994
withheld.
(iii) Ratification of the appointment of Ernst & Young LLP as
independent auditors of the Company for the current year ending
December 31, 1997. Total Common Stock voted was 31,922,631 in favor,
561,983 against and 665,560 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description of Document
- ------ -----------------------
27.1(1) Financial Data Schedule
(1) Filed herewith.
20
<PAGE>
(b) Reports on Form 8-K
(i) On February 27, 1997, the Company filed a Report on Form 8-K dated
as of January 28, 1997 reporting under Item 5 that (A) David Hale resigned from
the Company's Board of Directors, (B) effective February 7, 1997, the Company's
Common Stock, formerly listed on The Nasdaq National Market would be listed on
The Nasdaq SmallCap Market via an exception from the bid price and capital and
surplus requirements of the Nasdaq SmallCap Market (the "Exception"), (C) the
Company raised gross proceeds of $3,000,000 in a private placement to the Aries
Funds of Senior Secured Convertible Bridge Notes (the "Transaction"), and (D)
two stockholders of the Company filed suit in the Delaware Court of Chancery
against the Company, its directors and the Aries Funds in relation to the
Transaction.
(ii) On April 15, 1997, the Company filed a Report on Form 8-K dated as
of March 19, 1997 reporting under Item 5 that (A) The Nasdaq Hearing and Review
Committee had called for review of The Nasdaq Listing Qualifications Panel's
decision (the "Panel"), (B) the Panel had determined to modify the terms of the
Exception, and (C) the Company was making a filing in accordance with the
Revised Exception showing capital and surplus of $2,722,091.
(iii) On April 25, 1997, the Company filed a Report on Form 8-K dated
as of April 25, 1997 reporting under Item 5 that the Company issued a press
release entitled "Aries Investment in Genta Upheld by Delaware Court: Genta Wins
Lawsuit Brought by Certain Preferred Stockholders."
(iv) On May 6, 1997, the Company filed a Report on Form 8-K dated as of
May 1, 1997 reporting under Item 5 that (A) The Nasdaq Hearing and Review
Committee has withdrawn its call for review of the decision of the Panel, (B)
the Company issued a press release entitled "Genta Announces Resignation of
Thomas H. Adams, Ph.D., the appointment of Michael S. Weiss as Interim Chairman
and the appointment of a transitional management team" and (C) the Company's
Nasdaq symbol has changed back to GNTAC.
21
<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)
By: /s/ Michael S. Weiss
--------------------
Name: Michael S. Weiss
Title: Interim Chairman of the Board
By: /s/ Robert E. Klem, Ph.D.
-------------------------
Name: Robert E. Klem, Ph.D.
Title: Acting Chief Financial Officer and
Member of the Board of Directors
Date: May 15, 1997
22
<TABLE> <S> <C>
<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 MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,288,688
<SECURITIES> 0
<RECEIVABLES> 745,070
<ALLOWANCES> 0
<INVENTORY> 957,552
<CURRENT-ASSETS> 3,700,760
<PP&E> 5,610,364
<DEPRECIATION> 2,437,075
<TOTAL-ASSETS> 12,104,494
<CURRENT-LIABILITIES> 7,631,044
<BONDS> 979,535
0
529
<COMMON> 3,999
<OTHER-SE> 1,748,845
<TOTAL-LIABILITY-AND-EQUITY> 12,104,494
<SALES> 1,158,839
<TOTAL-REVENUES> 1,208,839
<CGS> 712,226
<TOTAL-COSTS> 3,278,723
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,950
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,896,014)
<EPS-PRIMARY> (.70)
<EPS-DILUTED> 0
</TABLE>
