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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1997, the registrant had 4,451,018 shares of common
stock outstanding.
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<PAGE>
GENTA INCORPORATED
INDEX TO FORM 10-Q/A
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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 2. Changes in Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
GENTA INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
------------- -------------
(UNAUDITED) (NOTE)
Current assets:
<S> <C> <C>
Cash and cash equivalents $9,969,724 $532,013
Subscription receivable 4,154,007 0
Trade accounts receivable 520,630 602,696
Notes receivable from officers and employees 0 62,000
Inventories 873,457 992,243
Other current assets 190,590 185,164
-------------- -------------
Total current assets 15,708,408 2,374,116
-------------- -------------
Property and equipment, net 2,917,910 3,634,281
Intangibles, net 4,074,665 4,022,242
Other assets, net 1,087,149 1,138,745
-------------- -------------
$23,788,132 $11,169,384
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,614,878 $1,481,521
Other accrued expenses 2,210,374 2,012,125
Deferred revenue 132,110 193,121
Short term notes payable 2,350,000 350,000
Current portion of notes payable and
capital lease obligations 221,602 291,842
-------------- -------------
Total current liabilities 7,528,964 4,328,609
-------------- -------------
Capital lease obligations, less current portion 0 30,652
Notes payable, less current portion 917,431 1,129,388
Deficit in Joint Venture 2,003,013 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
June 30, 1997 and December 31, 1996,
liquidation value is $29,045,500 at June 30, 1997 528 528
Series C convertible preferred stock, $.001 par value; 1,144 shares
and 1,424 shares issued and outstanding at June 30, 1997 and
December 31, 1996, respectively, liquidation value is
$1,202,422 at June 30, 1997. 1 1
Series D convertible preferred stock, $.001 par value; 174,580
shares and no shares issued and outstanding at June 30, 1997
and December 31, 1996, respectively, liquidation value is
$24,441,200 at June 30, 1997 175 0
Common stock, $.001 par value; 70,000,000 shares authorized;
4,378,852 and 3,999,163 shares issued and outstanding at
June 30, 1997 and December 31, 1996, respectively* 4,379 3,999
Additional paid-in capital 122,732,087 108,823,555
Accumulated deficit (114,156,246) (108,375,407)
Accrued dividends payable 4,807,776 3,671,532
Notes receivable from stockholders (49,976) (49,976)
-------------- -------------
Total stockholders' equity 13,338,724 4,074,232
-------------- -------------
============== =============
$23,788,132 $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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- ---------------------------------
1997 1996 1997 1996
---------------- ---------------- ------------- --------------
Revenues:
<S> <C> <C> <C> <C>
Product sales ........... $ 1,093,214 $ 1,365,636 $ 2,252,053 $ 2,611,195
Collaborative research
and development ....... 0 0 50,000 0
----------- ----------- ------------ -----------
1,093,214 1,365,636 2,302,053 2,611,195
----------- ----------- ------------ -----------
Cost and expenses:
Cost of products sold ... 792,860 708,443 1,505,086 1,263,835
Research and development 1,141,584 1,453,806 2,248,623 3,030,242
Selling, general and
administrative ....... 2,115,131 1,226,296 3,574,589 2,335,373
----------- ----------- ------------ -----------
4,049,575 3,388,545 7,328,298 6,629,450
----------- ----------- ------------ -----------
Loss from operations ....... (2,956,361) (2,022,909) (5,026,245) (4,018,255)
Equity in net loss of
joint venture ............ (477,393) (941,776) (780,522) (2,149,623)
Other income (expense):
Interest and other income 85,740 97,816 203,844 174,803
Interest expense ........ (111,966) (48,092) (177,916) (142,815)
----------- ----------- ------------ -----------
(26,226) 49,724 25,928 31,988
----------- ----------- ------------ -----------
Net loss ................... $(3,459,980) $(2,914,961) $ (5,780,839) $(6,135,890)
Dividends on preferred stock (8,206,363) (676,584) (8,781,518) (1,354,084)
----------- ----------- ------------ -----------
Net loss applicable to
common shares ............ $(11,666,343) $(3,591,545) $(14,562,357) ($7,489,974)
============ =========== ============ ===========
Net loss per common share* . $ (2.72) $ (1.35) $ (3.51) $ (2.92)
============ =========== ============ ===========
Shares used in computing net
loss per common share* ... 4,293,722 2,654,225 4,147,358 2,566,944
============ =========== ============ ===========
</TABLE>
* Per share data have 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>
SIX MONTHS ENDED JUNE 30,
----------------------------------
1997 1996
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net loss ($5,780,839) ($6,135,890)
Items reflected in net loss not requiring cash:
Depreciation and amortization 466,889 781,378
Equity in net loss of joint venture 780,522 2,149,623
Changes in operating assets and liabilities 1,474,580 (1,341,175)
------------- -------------
Net cash used in operating activities (3,058,848) (4,546,064)
INVESTING ACTIVITIES
Purchase of property and equipment (11,556) (64,419)
Sale of property and equipment 338,161 0
Investment in and advances to joint venture (384,012) (1,205,517)
Deposits and other (77,950) (206,708)
------------- -------------
Net cash used in investing activities (135,357) (1,476,644)
FINANCING ACTIVITIES
Issuance of common stock 0 5,539,287
Issuance of preferred stock, net 9,882,765 0
Proceeds from notes payable 3,000,000 240,000
Proceeds from notes receivable 62,000 2,910,722
Repayments of notes payable and capital lease obligations (312,849) (618,325)
------------- -------------
Net cash provided by financing activities 12,631,916 8,071,684
------------- -------------
Increase (decrease) in cash and cash equivalents 9,437,711 2,048,976
Cash and cash equivalents at beginning of period 532,013 271,755
------------- -------------
Cash and cash equivalents at end of period $9,969,724 $2,320,731
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $26,584 $105,523
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock dividends accrued 1,148,318 1,354,084
Common stock issued in payment of dividends on preferred stock 12,074 0
Common stock issued upon conversion of convertible debentures
and accrued interest 358,559 0
Preferred stock issued upon conversion of short term notes payable 650,000 0
Preferred stock issued for receivable 4,154,007 0
</TABLE>
See accompanying notes
5
<PAGE>
GENTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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.
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:
June 30, December 31,
1997 1996
----------- -----------
Raw materials and supplies $ 303,046 $ 342,875
Work-in-process 170,684 272,259
Finished goods 399,727 377,109
------------ -----------
$ 873,457 $ 992,243
============ ===========
(3) STOCKHOLDERS' EQUITY
In June 1997, the Company raised gross proceeds of $16 million
(approximately $14 million net of placement agent fees and other expenses)
through the private placement of Premium Preferred Units(TM). Each unit sold in
the private placement consists of 1,000 shares of Premium Preferred Stock(TM),
par value $.001 per share, stated value $100 per share (the "Series D Preferred
Stock") and Warrants to purchase 5,000 shares of Genta common stock, par value
$.001 (the "Class D Warrants"), at any time prior to the fifth anniversary of
the final closing. The Series D Preferred Stock is immediately convertible at
the option of the holder into shares of common stock at a conversion price equal
to the lesser of (i) $3.00 and (ii) 50% of the average closing bid price of the
common stock for the five consecutive trading days immediately prior to the
final closing date of the Private Placement (i.e. June 30, 1997). In addition,
the holders of the Series D Preferred Stock are entitled to a liquidation
preference aggregating $24,441,200, which represents an immediate increase in
value to the Series D Preferred Stock. Due to the increase in value asssociated
with the discounted conversion terms and liquidation preference of the Series D
Preferred Stock, the Company has accounted for such increase by charging
$7,633,200 to dividends on preferred stock.
6
<PAGE>
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. During May 1997, $100,000 of the
Convertible Debentures and the related accrued interest were converted into
50,895 shares of Genta's common stock. The conversion prices were based upon 75%
of the average Nasdaq closing bid prices of Genta's common stock for specified
periods. Terms of the 4% Convertible Debentures also provide for interest
payable in shares of the Company's common stock.
Also during May 1997, $650,000 of the Senior Secured Convertible Bridge
Notes (the "Convertible Notes") were converted into 13,000 shares of Series D
Preferred Stock. The conversion price was based upon the initial conversion
price of $5 per share of Series D Preferred Stock adjusted for the one-for-ten
reverse stock split to a $50 per share of Series D Preferred Stock conversion
price.
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. During July 1997, 100 shares of the Series C
Preferred Stock and accrued dividends were converted at the option of the
holders into 72,166 shares of Genta's common stock. The conversion prices were
based upon 75% of the average Nasdaq closing bid prices of Genta's common stock
for specified periods. Terms of the Series C Preferred Stock also provide for
dividends payable in shares of the Company's common stock.
In July 1997, Nasdaq informed Genta that it has met the terms for
continued listing set forth in the April 11, 1997 revised exception of the
Nasdaq Listings Qualifications Panel (the "Panel") and that Genta's common stock
will therefore continue to be listed on the Nasdaq SmallCap Market. In
conjunction with this decision, Genta resumed trading under the symbol "GNTA" as
of July 24, 1997.
(4) 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 June 30, 1997 and 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception in February 1988, Genta Incorporated ("Genta" or
the "Company") 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,
7
<PAGE>
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 June 30, 1997,
the Company has incurred a cumulative net loss of $114.2 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/A that
are not historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), 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/A. The Company does not
undertake to update any forward-looking statements.
RESULTS OF OPERATIONS
Operating revenues decreased to $1.1 million in the second quarter of
1997 compared to $1.4 million in the second quarter of 1996, and $2.3 million
for the six months ended June 30, 1997 compared to $2.6 million in the
comparable period of 1996 due to decreased sales of specialty chemical and
pharmaceutical intermediate products. All of the Company's product sales are
attributable to its manufacturing subsidiary, JBL Scientific, Inc. 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. For example, while product sales have decreased in
1997 compared to 1996, the Company experienced its greatest sales for any single
month in the month of July, 1997 recording $600,000 of sales. Collaborative
research and development revenues recorded during the six months ended June 30,
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 $4.0 million in the second quarter of
1997 from $3.4 million in the second quarter of 1996, and to $7.3 million for
the six months ended June 30, 1997 compared to $6.6 million in the comparable
period of 1996. The cost of products sold increased from $700,000 in the second
quarter of 1996 to $800,000 in the second quarter of 1997 and to $1.5 million
for the six months ended June 30, 1997 compared to $1.3 million for the six
months ended June 30, 1996. Research and development expenses decreased from
$1.4 million in the second quarter of 1996 to $1.1 million in the second quarter
of 1997 and to $2.2 million for the six months ended June 30, 1997 compared to
$3.0 million in the comparable period of 1996. Selling and general and
administrative expenses increased from $1.2 million in the second quarter of
8
<PAGE>
1996 to $2.1 million in the second quarter of 1997, and to $3.6 million for the
six months ended June 30, 1997 compared to $2.3 million in the comparable period
of 1996. The increase in the cost of products sold is primarily due to an
unfavorable product mix variance and the redeployment of certain employees in
connection with a reduction in the research and development staff. 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 and the
redeployment mentioned in the prior sentence. However the decrease in research
and development expenses was partially offset by a $300,000 non-recurring charge
recorded during the second quarter of 1997 related to the Company's
restructuring and workforce reductions. The increase in selling and general and
administrative expenses is primarily attributable to $300,000 in non-recurring
charges recorded during the second quarter of 1997 related to the Company's
restructuring and workforce reductions, increased legal expenses associated with
successfully defending the litigation brought by certain of the Company's
preferred stockholders challenging a $3 million investment made in February 1997
and increased accounting and legal expenses due to the Company's successful
efforts to avoid the potential Nasdaq delisting and associated with the equity
offerings consummated in 1997.
The Company's equity in net loss of joint venture (Genta Jago)
decreased to $477,000 in the second quarter of 1997 from $900,000 in the second
quarter of 1996, and to $781,000 for the six months ended June 30, 1997 compared
to $2.1 million in the comparable period of 1996. Such decrease is attributable
to the fact that a greater portion of development activities were funded
pursuant to Genta Jago's collaborative agreements with third parties.
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 $112.4 million through June 30, 1997, including
net proceeds of approximately $17.0 million (net of expenses) raised during the
first six months of 1997. At June 30, 1997, the Company had cash and cash
equivalents totaling $10.0 million compared to a total of $532,000 at December
31, 1996. The $10.0 million does not reflect the $4.2 million subscription
receivable related to the private placement of equity securities that closed on
June 30, 1997, which amount was received in cash on July 1, 1997. The increase
in cash and cash equivalents during the first six months of 1997 is largely
attributable to proceeds from the issuance of the Senior Secured Convertible
Bridge Notes (the "Convertible Notes") in February 1997 and the issuance of
Premium Preferred Units(TM) in June 1997 (the "Private Placement") less cash
used in the Company's operations. As a result of the closing of the Private
Placement the conversion prices and exercise prices of certain outstanding
securities were adjusted pursuant to their terms. See "Risk Factors
Subordination of Common Stock to Senior Secured Convertible Bridge Notes and
Series A, Series C and Series D Preferred Stock; Risk of Dilution; Anti-dilution
Adjustments" and "Part II, Item 2, Changes in Securities."
The Convertible Notes are due on the earlier of (a) December 31, 1997
and (b) the date of any decision, order or other determination adverse to the
Company or any of its directors by any court or other tribunal in any lawsuit or
other proceeding against the Company and/or any of its directors by any of the
Company's preferred stockholders.
The Company 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.
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.
9
<PAGE>
RISK FACTORS
In addition to the other information contained in this Quarterly Report
on Form 10-Q/A, the following factors should be considered carefully.
Need for Additional Funds. Genta's operations to date have consumed
substantial amounts of cash. Substantial additional sources of financing will be
required in order for the Company to continue its planned 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 products to market and to establish production and
marketing capabilities. 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 ("FDA") and foreign regulatory process, potential
litigation by companies seeking to prevent or delay marketing approval of Genta
Jago's products and other factors.
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 Rule 15g-9, 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 Company's securities in the
secondary market.
The Securities and Exchange Commission (the "SEC") 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 SEC 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 SEC the authority to restrict any person from participating in a
distribution of penny stock, if the SEC 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 could be materially adversely
affected.
10
<PAGE>
Jago Notice of Default. On May 7, 1997 Jago and Jagotec gave Genta Jago
formal notices of its assertion that Genta Jago is in breach of the Restated
GEOMATRIX(R) Services Agreement, the Restated GEOMATRIX(R) Research and
Development Agreement and the Restated GEOMATRIX(R) 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, Jagotec and Jago Holding AG 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.
The Company recently met with Jago and is attempting to resolve the situation
without resort to litigation. While a termination of these agreements may have a
material adverse effect on the Company, the Company intends vigorously to oppose
Jago's position. Without prejudice to Genta's position, Genta provided
approximately $129,000 to Genta Jago for the payment by Genta Jago of all
amounts claimed by Jago under the Restated GEOMATRIX(R) License Agreement and
certain other amounts owed by Genta Jago to third parties (both included in
Jago's notice of default).
Subordination of Common Stock to Senior Secured Convertible Bridge
Notes and Series A, Series C and Series D Preferred Stock; Risk of Dilution;
Anti-dilution Adjustments. In the event of the liquidation, dissolution or
winding up of the Company, the common stock is expressly subordinate to $2.35
million principal amount of Convertible Notes payable in December 1997 or
earlier under certain circumstances, the approximately $29 million preference of
the 528,100 outstanding shares of Series A Preferred Stock, the approximately
$1.2 million preference of the 1,144 shares of Series C Preferred Stock and the
approximately $37 million preference of 261,975 shares of Series D Preferred
Stock (assuming full conversion of the Convertible Notes but excluding any
Series D Preferred Stock that may be issued pursuant to conversion of any
interest on the Convertible Notes and including 40,395 shares of Series D
Preferred Stock issuable upon exercise of certain warrants exercisable after
December 31, 1997). Further, the payment of dividends on the common stock is
prohibited by the terms of the Convertible Notes unless approved by the
Convertible Note holders, nor may any dividends be paid on the common stock
unless full cumulative dividends on the Series A, Series C and Series D
Preferred Stock have been paid or funds have been set aside for such preferred
dividends by the Company.
The Convertible Notes are initially convertible into 60,000 shares (and
such additional shares issuable upon conversion of the interest on the
Convertible Notes) of Series D Preferred Stock, which are in turn convertible
into common stock as described below. The conversion rate 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 6.65 shares of common stock and
the exercise price of the Series A Warrants is $9.32 per share. There are
outstanding Series A Warrants to purchase an aggregate of 60,000 shares of
common stock. Shares of Series C Preferred Stock are convertible into common
stock at a conversion price equal to 75% of a moving average of market-based
prices. The conversion rate of the Series D Preferred Stock and the exercise
prices of the Class D Warrants are subject to adjustment, among other things,
upon certain issuances of common stock or securities convertible into common
stock at prices per share below certain levels. Each share of Series D Preferred
Stock is presently convertible into 106 shares of common stock and the exercise
price of the Class D Warrants is presently $0.94375 per share. There are 807,900
Class D Warrants outstanding and another 201,975 Class D Warrants issuable upon
the exercise of certain warrants. Finally, the Company has outstanding warrants
to purchase an aggregate of 6,357,616 shares of common stock at an exercise
price of $0.471875 per share, warrants to purchase an aggregate of 50,000 shares
of common stock at an exercise price of $2.50 per share, warrants to purchase an
aggregate of 95,769 shares of common stock at various exercise prices between
approximately $13 and $21 per share and outstanding employee stock options.
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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. 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 clinical testing of the
Company's products currently in preclinical development, or, if permitted, that
such products will be demonstrated to be safe and efficacious. 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(R) 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. 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 June 30, 1997, the Company has
incurred a cumulative net loss of $114.2 million. 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. 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. However, in 1997, the Company
has raised net proceeds of approximately $17 million (net of expenses) in
various private placements.
Limited Availability of Net Operating Loss Carry Forwards. For Federal
income tax purposes, net operating loss and tax credit carryforwards as of
December 31, 1996 are approximately $61,731,000 and $9,585,000, respectively.
These carryforwards will expire beginning in 2003. The Tax Reform Act of 1986
provided for a limitation on the use of net operating loss and tax credit
carryforwards following certain ownership changes. The Company believes that the
Private Placement, together with certain prior issuances of securities may
restrict the Company's ability to utilize its net operating losses and tax
credits. Additionally, because U.S. tax laws limit the time during which net
operating loss and tax credit carryforwards may be applied against future
taxable income and tax liabilities, respectively, the Company may not be fully
able to use its net operating loss and tax credits for federal income tax
purposes.
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
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dividends on its common stock until such time as all cumulative dividends have
been paid on outstanding shares of its Series A, Series C and Series D Preferred
Stock. The Company currently intends to retain its earnings, if any, after
payment of dividends on outstanding shares of Series A, Series C and Series D
Preferred Stock, for the development of its business.
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 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") by small
quantities of certain chemicals. 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
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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 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
and Trademark 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. In addition, Genta Jago is seeking additional collaborative
arrangements to develop and commercialize certain of their respective products.
No assurance can be given that they will obtain such collaborative arrangements
on acceptable terms, if at all, nor can any assurance be given that any current
collaborative arrangements will be maintained.
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
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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 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 Process. 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 it will need to obtain an agreement with a third party supplier
(including, potentially, agreements with competitors of Genta) or make
improvements in its manufacturing technology 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
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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; No Full Time Chief Executive
Officer. The Company does not currently have a Chief Executive Officer. The
Company's success is highly dependent on the hiring and retention of key
personnel and scientific staff. The loss of 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 the search for a new Chief Executive Officer.
Product Liability Exposure; Limited Insurance Coverage. The Company's,
JBL's and Genta Jago's 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.
Fundamental Change. The Company's Restated 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 could result in the Company being required to
pay to the holders of Series A Preferred Stock cash in the aggregate amount of
approximately $29 million. "Fundamental Change" is defined as: (i) a "person" or
"Group" (as defined), together with any affiliates thereof, becoming the
beneficial owner (as defined) of Voting Shares (as defined) of the Company
entitled to exercise more than 60% of the total voting power of all outstanding
Voting Shares of the Company (including any Voting Shares that are not then
outstanding of which such person or Group is deemed the beneficial
owner)(subject to certain exceptions); (ii) any consolidation of the Company
with, or merger of the Company into, any other person, any merger of another
person into the Company, or any sale, lease or transfer of all or substantially
all of the assets of the Company to another person (subject to certain
exceptions); (iii) the sale, transfer or other disposition (or the entry into a
commitment to sell, transfer or otherwise dispose) of all of any portion of the
shares of Genta Jago held at any time by the Company (or the imposition of any
material lien on such shares which lien is not removed within 30 days of
imposition) and the sale (or functional equivalent of a sale) of all or
substantially all of the assets of Genta Jago or (iv) the substantial reduction
or elimination of a public market for the common stock as the result of
repurchases, delisting or deregistration of the common stock or corporate
reorganization or recapitalization undertaken by 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
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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 and may be so in the future. Factors such as, among
other things, 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 July 31, 1997, the Company had
4,451,018 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.
No predictions can be made of the effect that future market sales of
the shares of common stock underlying the convertible securities and warrants
referred to under the caption "Risk Factors - Subordination of Common Stock to
Senior Secured Convertible Bridge Notes and Series A, Series C and Series D
Preferred Stock; Risk of Dilution; Anti-dilution Adjustments," or the
availability of such securities for sale, will have on the market price of the
common stock prevailing from time to time. Sales of substantial amounts of
common stock, or the perception that such sales might occur, could adversely
affect prevailing market prices.
Certain Interlocking Relationships; Potential Conflicts of Interest.
The Aries Trust and the Aries Domestic Fund L.P. (collectively the "Aries
Funds") have the contractual right to appoint a majority of the members of the
Board of Directors of the Company, subject to certain conditions. The Aries
Funds have appointed Michael S. Weiss to the Board of Directors. David R.
Walner, the Secretary of the Company, is an Associate Director and Secretary of
Paramount Capital Asset Management, Inc. ("PCAM"). PCAM is the investment
manager and general partner of The Aries Trust and the Aries Domestic Fund,
L.P., respectively. The Aries Funds currently do not hold a controlling block of
voting stock, although the Aries Funds have the present right to appoint a
majority of the Board of Directors, and to convert and exercise their securities
into a significant portion of the outstanding common stock. See "Risk Factors -
Concentration of Ownership and Control" below. Dr. Lindsay A. Rosenwald, the
President and sole stockholder of PCAM, is also the President and sole
stockholder of Paramount Capital Investments LLC, a New York-based merchant
banking and venture capital firm specializing in biotechnology companies
("PCI"). In the regular course of its business, PCI identifies, evaluates and
pursues investment opportunities in biomedical and pharmaceutical products,
technologies and companies. Generally, Delaware corporate law requires that any
transactions between the Company and any of its affiliates be on terms that,
when taken as a whole, are substantially as favorable to the Company as those
then reasonably obtainable from a person who is not an affiliate in an
arms-length transaction. Nevertheless, neither such affiliates nor PCI is
obligated pursuant to any agreement or understanding with the Company to make
any additional products or technologies available to the Company, nor can there
be any assurance, and the Company does not expect and purchasers of the
securities offered hereby should not expect, that any biomedical or
pharmaceutical product or technology identified by such affiliates or PCI in the
future will be made available to the Company. In addition, certain of the
current officers and directors of the Company or certain of any officers or
directors of the Company hereafter appointed may from time to time serve as
officers or directors of other biopharmaceutical or biotechnology companies.
There can be no assurance that such other companies will not have interests in
conflict with those of the Company.
Concentration of Ownership and Control. 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
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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, and
have to date appointed only one member, Michael S. Weiss. 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. These arrangements may discourage or prevent any
proposed takeover of the Company, including transactions in which stockholders
might otherwise receive a premium for their shares over the then current market
prices. Such stockholders may influence corporate actions, including influencing
elections of directors and significant corporate events. See also, "Risk Factors
- -- Effect of Certain Anti-Takeover Provisions."
Effect of Certain Anti-Takeover Provisions. The Company's Restated
Certificate of Incorporation and By-laws 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. 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 $3 million private placement in February 1997 and
the Private Placement in June 1997 described in this Report on Form 10-Q/A.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(c) Sales of Unregistered Securities.
On June 30, 1997, a total of 161.58 Premium Preferred UnitsTM were sold
to accredited investors in the Private Placement. Such sale was made in reliance
on the exemption from registration pursuant to Rule 506 of Regulation D of the
Securities Act. Each Unit sold in the Private Placement consists of 1,000 shares
of Premium Preferred StockTM, par value $0.001 per share, stated value $100.00
per share and warrants to purchase 5,000 shares of the Company's common stock,
par value $0.001 per share, at any time prior to the fifth anniversary of the
final closing date. A total of $16.158 million was raised. The net proceeds to
the Company were $14,036,772. The respective conversion and exercise prices of
the Series D Preferred Stock and the Class D Warrants is $0.94375 per share of
common stock, subject to adjustment upon the occurrence of certain events.
In connection with the Private Placement, the placement agent received
cash commissions equal to 9% of the gross sales price and a non-accountable
expense allowance equal to 4% of the gross sales price, and the placement agent
is entitled to receive warrants (the "Placement Warrants") to purchase up to 10%
of the Units sold in the Private Placement for 110% of the offering price per
Unit. Furthermore, the Company has agreed to enter a financial advisory
agreement pursuant to which the financial advisor shall receive certain cash
fees and warrants (the "Advisory Warrants") to purchase up to 15% of the Units
sold in the Private Placement for 110% of the offering price per Unit. The
Placement Warrants and the Advisory Warrants are not exercisable for six months
following the closing of the Private Placement.
The Company is required to file a Registration Statement on Form S-3
with the Securities and Exchange Commission under the Securities Act with
respect to the common stock issuable upon conversion and upon exercise of the
securities issued in the private placement consummated in February 1997 and the
Private Placement.
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 was 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.
19
<PAGE>
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.
(b) Reports on Form 8-K
(i) 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.
(ii) 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."
(iii) 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.
(iv) On July 3, 1997, the Company filed a Report on Form 8-K dated as
of July 3, 1997 reporting under Item 5 that the Company issued a press release
entitled "Genta Incorporated Raises in Excess of $12 million through Private
Placement of Equity Securities."
(v) On July 7, 1997, the Company filed a Report on Form 8-K dated as of
June 30, 1997 reporting under Item 5 that the Company was making a filing in
accordance with the Revised Exception Showing capital and surplus of
$13,338,724.
(vi) On July 23, 1997, the Company filed a Report on Form 8-K dated as
of July 23, 1997 reporting under Item 5 that the Company issued a press release
entitled "Nasdaq to Maintain Genta's Listing on SmallCap Market Resumes Trading
as "GNTA" Effective July 24."
20
<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: August 29, 1997
21
<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/A
(AMENDMENT NO. 1) FOR THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,969,724
<SECURITIES> 0
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<INTEREST-EXPENSE> 177,916
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