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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 September 30, 1998
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 November 10, 1998, the registrant had 9,274,964 shares of common stock
outstanding.
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<PAGE>
Genta Incorporated
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 5
Notes to Condensed 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 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
</TABLE>
<PAGE>
Genta Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
------------------ ------------------
1998 1997
ASSETS ------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 288,815 $ 1,202,668
Short term investments............................... 3,477,353 7,253,756
Trade accounts receivable............................ 895,662 431,046
Inventories.......................................... 958,806 826,008
Other current assets................................. 243,899 218,513
------------------ ------------------
Total current assets................................... 5,864,535 9,931,991
------------------ ------------------
Property and equipment, net............................ 1,408,663 1,718,150
Intangibles, net....................................... 2,920,774 3,390,032
Deposits and other assets.............................. 702,080 713,730
------------------ ------------------
$10,896,052 $15,753,903
================== ==================
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 547,025 $ 849,108
Payable to Research Institution...................... 635,661 635,661
Accrued payroll payable.............................. 88,105 548,295
Other accrued expenses............................... 686,782 992,660
Deferred revenue..................................... 50,000 198,570
Current portion of notes payable and
capital lease obligations.......................... 1,113,870 900,558
------------------ ------------------
Total current liabilities.............................. $ 3,121,443 $ 4,124,852
------------------ ------------------
Notes payable, less current portion.................... - -
Deficit in joint venture............................... 3,064,423 2,204,053
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized;
Series A Convertible Preferred Stock, $.001 par value:
451,100 and 456,600 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively,
liquidation value is $27,066,000 at September 30, 1998 451 457
Series D Convertible Preferred Stock, $.001 par value:
206,185 and 226,995 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively,
liquidation value is $27,865,900 at September 30, 1998... 203 227
Common stock, $.001 par value: 70,000,000 shares
authorized; 8,264,430 and 5,712,364 shares issued and
outstanding at September 30, 1998 and December 31,
1998 and December 31, 1997, respectively......... 8,265 5,712
Additional paid-in capital........................... 129,372,970 129,320,493
Accumulated deficit.................................. (129,182,703) (124,467,891)
Accrued dividends payable............................ 4,511,000 4,566,000
Total stockholders' equity............................. 4,710,186 9,424,998
------------------ ------------------
Total Liabilities and Stockholders' Equity............. $10,896,052 $15,753,903
================== ==================
</TABLE>
(See Accompanying Notes)
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<PAGE>
Genta Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended September 30, Nine Months Ended September 30,
---------------------------- ------------------------------
1998 1997 1998 1997
(restated) (restated)
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenues:
Product sales.................... $ 1,466,912 $ 1,206,883 $ 4,101,458 $ 3,458,936
Contract Revenue from Genta Jago. 17,396 87,524 52,188 262,573
Collaborative research and
development................... 15,860 - 40,292 50,000
------------ ------------ ------------ --------------
$ 1,500,168 $ 1,294,407 $ 4,193,938 $ 3,721,509
------------ ------------ ------------ --------------
Cost and expenses:
Cost of products sold............ $ 729,368 $ 834,759 $ 2,338,282 $ 2,339,845
Research and development......... 354,649 2,236,334 1,788,383 4,484,957
Selling, general and
administrative................ 1,393,274 1,964,330 4,203,481 5,538,919
------------ ------------ ------------ --------------
$ 2,477,291 $ 5,035,423 $ 8,330,146 $ 12,363,721
------------ ------------ ------------ --------------
Loss from operations............... $ (977,123) $ (3,741,016) $ (4,136,208) $ (8,642,212)
Equity in net loss of joint venture (286,790) (144,533) (860,370) (925,055)
Other income (expense):
Interest and other income........ 91,452 223,176 275,118 427,020
Interest expense................. (3,480) (889,940) (10,749) (2,431,189)
------------ ------------ ------------ --------------
Sub Total Other Income (Expense)... 87,972 (666,764) 264,369 (2,004,169)
------------ ------------ ------------ --------------
Net loss........................... $ (1,175,941) $ (4,552,313) $ (4,732,209) $ (11,571,436)
Dividends Accrued on Preferred Stock - (542,183) - (1,690,501)
Dividends Imputed on Preferred Stock - - - (16,158,000)
------------ ------------ ------------ --------------
Net loss applicable to common shares $ (1,175,941) $ (5,094,496) $ (4,732,209) $ (29,419,937)
============ ============ ============ ===============
Net loss per common share.......... $ (.15) $ (1.14) $ (.59) $ (6.92)
============ ============ ============ ===============
Shares used in computing net loss
per common share................. 8,021,411 4,451,289 7,974,363 4,249,782
============ ============ ============ ===============
</TABLE>
(See Accompanying Notes)
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<PAGE>
Genta Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
(Restated)
----------
<S> <C> <C>
Operating activities
Net Loss $ (4,732,209) $ (11,784,009)
Items reflected in net loss not requiring cash:
Depreciation and amortization.............................. 778,745 708,475
Write-off of intangibles................................... - 600,000
Equity in net loss of joint venture........................ 860,370 925,055
Interest Imputed on convertible debentures................. - 2,181,666
Changes in operating assets and liabilities.................. (1,822,124) 1,168,114
------------- --------------
Net cash used in operating activities........................ (4,915,218) (6,200,699)
Investing activities
Maturities of short-term investments......................... 3,776,403 (3,936,409)
Purchase of property and equipment........................... - (34,264)
Sale of property and equipment............................... - 338,161
Investment in and advances to joint venture.................. - (571,999)
Deposits and other........................................... 11,650 146,523
------------- --------------
Net cash used in investing activities........................ 3,788,053 (4,057,988)
Financing activities
Issuance of common stock..................................... - -
Issuance of preferred stock, net............................. - 13,972,261
Proceeds from notes payable.................................. - 3,000,000
Proceeds from notes receivable............................... - 62,000
Increase in current portion of capital leases/notes payables. 213,312 (526,134)
Other........................................................ - -
------------- --------------
Net cash provided by financing activities.................... 213,312 16,508,127
------------- --------------
Increase/(Decrease) in cash and cash equivalents............. (913,853) 6,249,440
Cash and cash equivalents at beginning of period............. 1,202,668 532,013
------------- --------------
Cash and cash equivalents at end of period................... $ 288,815 $ 6,781,453
============= ==============
Supplemental disclosures of cash flow information:
Interest paid................................................ $ $ 27,456
Supplemental schedule of noncash investing and
financing activities:
Preferred stock dividends accrued............................ - 1,690,501
Common stock issued in payment of dividends on preferred stock - 17,192
Common stock issued upon conversion of convertible debentures
and accrued interest....................................... - 358,559
Preferred stock issued upon conversion of short term notes payable - 650,000
Preferred stock issued for receivable........................ - 4,154,007
</TABLE>
(See Accompanying Notes)
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<PAGE>
Genta Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(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 1997 have been reclassified to
conform with the presentation in 1998.
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, 1997, as amended.
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:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1998
-------------------- --------------------
<S> <C> <C>
Raw materials and supplies $ 385,517 $ 329,681
Work-in-process 311,440 141,120
Finished goods 261,849 355,197
-------------------- --------------------
$ 958,806 $ 826,008
==================== ====================
</TABLE>
(3) Net Loss Per Common Share
As required, the Company adopted SFAS No. 128, "Earnings Per Share," for
the year ended December 31, 1997. SFAS No. 128 changes the method used to
calculate earnings per share and requires the restatement of all prior periods.
Under SFAS No. 128, the Company is required to present basic and diluted
earnings per share if applicable. Basic earnings per share is based on the
weighted average number of shares outstanding during the period. Diluted
earnings per share includes the weighted average number of shares outstanding
and gives effect to potentially dilutive common shares such as options, warrants
and convertible debt and preferred stock outstanding.
Net loss per common share for the nine months ended September 30, 1998
and 1997 is based on the weighted average number of shares of common stock
outstanding during the periods. Potentially dilutive securities include options,
warrants and convertible preferred stock; however, such securities have not been
included in the calculation of the net loss per common share as their effect is
antidilutive where, as here, there is loss rather than
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<PAGE>
earnings. Therefore, there is no difference between the basic and diluted net
loss per common share for any of the periods presented.
(4) Stockholders' Equity
During the third quarter of 1998, an aggregate of 23,710 shares of Series D
Preferred Stock were converted at the option of the respective holders thereof
into an aggregate of 2,512,312 shares of Genta's common stock at a conversion
price of $0.94375 per share. From the close of the third quarter through
November 10, 1998 an aggregate of 2,000 shares of Series A Preferred Stock were
converted at the option of the holders of the shares into an aggregate of 14,510
shares of Genta's common stock at a conversion price of $8.27 per share and an
aggregate of 9,400 shares of Series D Preferred Stock were converted at the
option of the holders of the shares into an aggregate of 996,024 shares of the
Company's common stock at a conversion price of $0.94375 per share.
(5) Legal Proceedings
LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based broker/dealer,
has asserted claims against the Company and others, including Paramount Capital
Inc., of which Dr. Rosenwald is the sole stockholder and Mr. Weiss is a Senior
Managing Director, and various related entities and persons. LBC's claims relate
to the alleged breach by the Company of certain letter agreements, allegedly
entered into by LBC and the Company in 1995 and 1996 with respect to brokerage
and/or investment banking services, particularly in connection with a $3 million
investment for which LBC is seeking a fee. In April 1998 a Complaint was filed
in the United States District Court for the Southern District of New York (98
Civ. 2491) by LBC against the Company and the same other parties.
The Company is engaged in settlement discussions with LBC.
On June 4, 1998, the Company's statutory process agent received a
Summons and Complaint in a lawsuit brought by Johns Hopkins against the Company
in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins
alleges in the Complaint that the Company has breached the Johns Hopkins
Agreement and owes it licensing royalty fees and related expenses in the amount
of $308,832.24. Johns Hopkins also alleges the existence of a separate March
1993 letter agreement wherein the Company agreed to support a fellowship program
at the Johns Hopkins School of Hygiene and Public Health and the Company's
breach thereof, with damages of $326,829.00. On August 10, 1998, the Company's
statutory process agent received a Summons and Complaint in a related lawsuit
brought by the Ts'o/Miller Partnership and others against the Company in the
same court (Case No. 98182113). The Ts'o/Miller Partnership claims that it is
owed licensing royalty fees in the amount of $287,671.23. The Company is
currently in settlement negotiations.
On June 30, 1998, the Director General of the Company's subsidiary, Genta
Pharmaceuticals Europe, SA ("Genta Europe"), was served notice of a suit in
Marseilles, France by Marseilles Amenagement, the manager of the Company's
facilities in Marseilles. On July 30, 1998, the Company's office in San Diego,
California was also served with notice of the suit. The suit seeks the payment
of unpaid past rents in the amount of 473,464.50 FF (as of November 12, 1998,
approximately $83,000), the removal of the Company from the facility and an
indemnity payment of 1,852,429 FF (as of November 12, 1998, approximately
$326,000), which is allegedly equal to the balance of the first nine years'
rent. A hearing is scheduled for December 11, 1998. On July 1, 1998, the ANVAR
notified Genta Europe by letter of its claim that the Company remains liable for
4,187,423 FF (as of November 12, 1998, approximately $737,000) and is required
to pay this amount immediately. In view of these events, the Board of Directors
of Genta Europe directed the Director General to declare "Cessation of Payment"
in the commercial court in France, which declaration was made in July 1998. On
August 27, 1998, the commercial court appointed a trustee to replace the
Director General and to represent Genta Europe in its liquidation process.
- 7 -
<PAGE>
In October 1996, JBL retained a chemical consulting firm to advise it
with respect to an incident of soil and groundwater contamination (the "Spill").
Sampling conducted at the JBL facility revealed the presence of chloroform and
perchloroethylenes ("PCEs") in the soil and groundwater at this site. Six soil
borings were drilled and groundwater wells were installed at several locations
around the site. Chloroform was detected at levels of up to 190 ug/liter
on-site, exceeding the California Drinking Water Maximum Contamination Level for
trihalomethanes of 100 ug/liter. PCEs were also detected at levels of up to 22
ug/liter on-site, exceeding the California Drinking Water Maximum Contamination
Level of 5 ug/liter. In addition, toluene was detected at levels of up to 2
ug/liter at several points on-site, which is significantly below the California
Toxicity Action Level of 100 ug/liter. These toxicity levels are not binding, as
the final regulatory maximum levels may be higher or lower. JBL has notified the
appropriate regulatory agency, the California Regional Water Quality Control
Board, of conditions at the site, and with the agency's approval, JBL is
monitoring groundwater conditions at the site on a quarterly basis. JBL is
currently in the pre-regulatory action stage with ongoing site monitoring and
site assessment. In addition, current sampling results indicate that
contaminants may be migrating off-site. An off-site well, used as a domestic and
irrigation water source, has shown evidence of being impacted by chloroform at
1.0 ug/liter, significantly below the California Drinking Water Maximum
Contamination Level for trihalomethanes of 100 ug/liter, and toluene at 0.9
ug/liter, also significantly below (less than one percent of) the California
Toxicity Action Level of 100 ug/liter. While another off-site well has been
found to contain chloroform, the engineering consultant concluded that the
contaminants do not appear to relate to impact from the JBL site. The Company
believes that any costs associated with further investigating or remediating
this contamination will not have a material adverse effect on the business of
the Company, although there can be no assurance thereof.
JBL received notice on October 16, 1998 from Region IX of the
Environmental Protection Agency (the "EPA") that it had been identified as a
potentially responsible party ("PRP") at the Casmalia Disposal Site, which is
located in Santa Barbara, California. JBL has been designated as a de minimis
PRP by the EPA. The EPA currently estimates that de minimis PRPs will be
required to pay as little as $75,000 and as much as $750,000 to settle their
potential liability, depending upon the volume of wastes attributed to them. The
EPA plans on sending by the beginning of January 1999 individual volume
calculations to each de minimis PRP that received the aforementioned notice
letter. While the terms of a settlement have not been discussed, any settlement
with de minimis PRPs should contain standard contribution protection language.
JBL is investigating all factual and legal defenses that are available to it and
plans on responding to this matter accordingly.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Since its inception in February 1988, the Company has devoted its
principal efforts toward drug discovery, research and development. The Company
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 and clinical testing, manufacturing activities,
regulatory activities, establishment of a sales and marketing organization, and
development activities undertaken by Genta Jago, the Company's joint venture
with Jagotec. From the period since its inception to September 30, 1998, the
Company has incurred a cumulative net loss of $129.2 million. The Company has
experienced significant quarterly fluctuations in operating results and it
expects that these fluctuations in revenues, expenses and losses will continue.
The Company's independent auditors have included an explanatory
statement in their report to the Company's financial statements at December 31,
1997, that expresses substantial doubt as to the Company's ability to continue
as a going concern. There are several factors that must be considered risks in
that regard and those that are known to management are discussed under the
caption "Certain Trends and Uncertainties--Need for Additional Funds; Risk of
Insolvency" in this Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A").
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<PAGE>
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, 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 Certain Trends and Uncertainties
section of this MD&A and elsewhere in this Quarterly Report on Form 10-Q. The
Company does not undertake to update any forward-looking statements.
Results of Operations
Operating revenues totaled $1.5 million in the third quarter of 1998
compared to $1.3 million in the third quarter of 1997 and $4.2 million for the
nine months ended September 30, 1998 compared to $3.7 million in the comparable
period of 1997. The increase in revenue is the result of an increase in sales by
the Company's subsidiary, JBL Scientific, Inc. All of the Company's product
sales are attributable to JBL. Sales of specialty chemical and pharmaceutical
intermediate products used in the clinical diagnostics, pharmaceutical research
and development and pharmaceutical manufacturing were $1.5 million in the third
quarter of 1998 compared to $1.2 million in the same period in 1997 and $4.1
million for the nine months ended September 30, 1998 compared to $3.5 million in
the comparable period of 1997. While the annual demand for many of JBL's
products is relatively stable, there are significant quarter-to-quarter
variations in sales due to the timing of customers' production schedules and
demands. Overall, demand for the Company's products has been increasing, while
competition has caused prices to decrease. Sales of products used in
pharmaceutical manufacturing have trended downward in 1998 while sales of
products used in pharmaceutical research and development and clinical
diagnostics increased due to increased market penetration.
Europa Bioproducts ("Europa"), JBL's European distributor, accounted for
approximately 18% of product sales in the third quarter of 1998, compared to
14.5% in the comparable period in 1998. Two other customers each accounted for
more than 10% of product sales in the third quarter of 1998, representing 19%
and 13%. Individual customers' demands for JBL products generally fluctuates
with the outcomes of clinical trials, the availability of funding and
manufacturing schedules. The Company believes that the loss of any material
customer, if not replaced, could have an adverse effect on the Company.
Costs and expenses were $2.5 million in the third quarter of 1998, down
from $5.0 million for the same quarter in 1997, and $8.3 million for the nine
months ended September 30, 1998 compared to $12.4 million in the comparable
period in 1997. The costs of products sold by JBL decreased to $0.73 million in
the third quarter of 1998 from $0.83 million in the third quarter of 1997 and
were $2.34 million for both the nine months ended September 30, 1998 and the
comparable period of 1997. Gross margins for JBL in the third quarter of 1998
were $0.74 million compared to $0.37 million in the third quarter of 1997 and
$1.76 million for the nine months ended September 30, 1998 compared to $1.12
million in the comparable period of 1997. The improvement in gross margins
largely reflects the increased level of sales and relatively stable fixed
overhead costs.
Research and Development expenses decreased in the third quarter from
$2.24 million in 1997 to $0.35 million in 1998, and in the nine months ended
September 30 from $4.48 million in 1997 to $1.79 million in 1998. Included in
these expenses is $0.63 million in the third quarter of 1997 and $0.79 million
in the first half of 1998 for the purchase of bulk G3139 to support the
Company's expanded clinical research program. The decreases also were the result
of a non-recurring charge of $0.60 million recorded in the third quarter of 1997
related to management's decision to abandon certain patents that management
determined were no longer germane to the Company's mainstream business. The
remaining decrease in on-going research and development expenses is primarily
attributable to the Company's research and development workforce reductions
implemented in 1997 together with the discontinuation of several programs.
Selling, General and Administrative Expenses were $1.4 million in the
third quarter of 1998 compared to $1.96 million in the third quarter of 1997 and
$4.2 million for the nine months ended September 30, 1998 compared to $5.54
million in the comparable period of 1997. The reduction is attributable to the
Company's restructuring, workforce reductions and the decrease of leased
facilities.
- 9 -
<PAGE>
The Company's net loss totaled $1.18 million, or $0.15 per common
share, for the third quarter of 1998 compared to a net loss of $5.09 million, or
$1.14 per common share, for the third quarter of 1997. For the first nine months
of 1998, the Company's net loss was $4.73 million, or 0.59 per share, compared
to a net loss of $29.42 million for the first nine months of 1997, or $6.92 per
share. The Company's net losses for the third quarter and first nine months of
1998 were lower than those reported for the comparable periods of 1997 primarily
as a result of the following which occurred in 1997: a one-time charge of $16.2
million of imputed dividends due to the value associated with the discounted
conversion terms and liquidation preference of the Series D Preferred Stock,
$0.54 million in accrued dividends on the Series A Preferred Stock, $0.87
million of accrued severance costs, which were partially offset by $0.75 million
Research and Development cost-savings related to workforce and program
reductions implemented in 1995 through 1997, a $0.60 million non-recurring
charge for certain abandoned patents, the cessation of the obligation to accrue
dividends on the Series A Preferred Stock as of October 1, 1997 ($1.7 million in
Series A preferred dividends were accrued in 1997) and $2.2 million in interest
expense in the first nine months of 1997 from the amortization of debt issuance
costs of Bridge Warrants issued in the first quarter of 1997.
The Company's equity in net loss of joint venture (Genta Jago) increased
to $0.29 million in the third quarter of 1998 from $0.14 million in the
comparable period of 1997, and decreased to $0.86 million for the nine months
ended September 30, 1998 compared to $0.93 million in the comparable period of
1997. The decrease in the Company's equity in net loss of joint venture 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. The equity in net loss of joint venture is determined by reducing
the loss per Genta Jago's financials by Genta's 20% markup on internal costs for
which the joint venture is billed plus the interest accrued on the working
capital loans. Interim financial information regarding Genta Jago will be filed
by amendment when available.
Since the formation of Genta Jago, no products have been successfully
developed and marketed. Since the initial plans called for earlier introductions
and since there have been significant changes in the market environment since
the Company entered into the joint venture, there is reason to believe that any
products that may be marketed in the future could represent significantly poorer
financial opportunities than those that were anticipated in the earlier plans.
This reduction in opportunity derives from factors such as the presence of
direct competitors to Genta Jago's products being in the marketplace before
Genta Jago, and increasing pricing pressures on pharmaceuticals, particularly
multisource or generic products, from payors such as reimbursers and government
buyers. On May 20, 1998, Genta Jago received notice from Apothecon that they
have terminated the agreement for the development of ketoprofen. Apothecon
stated that their decision to terminate was based on the facts that a competing
generic is already being successfully marketed, other competitors already have
ANDAs pending for their own generic formulations of such drug and they consider
the GEOMATRIX(R) capsule size competitively disadvantageous. Both of these
factors may adversely affect Genta Jago even if it is successful in developing
products to obtain regulatory approval. As a result and in consideration of the
Company's need to reduce expenses and focus its efforts, the Company is seeking
to direct its resources away from the joint venture to its Anticode(TM) drug
development, specifically G3139, for the immediate future. On July 27, 1998,
SkyePharma PLC, the parent company to SkyPharma ("Jago" was changed to
"SkyePharma" on May 1, 1998) announced that an ANDA for naproxen sodium filed by
Brightstone Pharma, its U.S. sales and marketing subsidiary, had been accepted
for filing by the FDA. See "Certain Trends and Uncertainties--Uncertainty of
Technological Change and Competition" and "Certain Trends and
Uncertainties--Potential Adverse Effect of Product Pricing, Reimbursement and
Related Matters."
Interest income has fluctuated significantly each year and is
anticipated to continue to fluctuate primarily due to changes in the levels of
cash, investments and interest rates each period.
In consideration of EITF D-60, which was issued by the SEC in March
1997, the Company recorded debt issuance costs totaling $3.0 million related to
value associated with 6.4 million Bridge Warrants issued in connection with a
$3.0 million debt issue in February 1997 that matured in December 1997. The
Company has amortized such costs to interest expense over the life of the debt.
In the three months ended September 30, 1997, the Company recorded a charge to
interest expense totaling $818,333 ($.10 per share) related to amortization of
such debt issuance costs.
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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 $124.2 million through September 30, 1998. At
September 30, 1998, the Company had cash, cash equivalents and short-term
investments totaling $3.8 million compared to $8.5 million at December 31, 1997.
The Company will need substantial additional funds and may consider the
divestiture of non-strategic assets. The Company projects that, at its current
rate of spending and for its current activities, its existing cash funds will
enable the Company to maintain its present operations into the first quarter of
1999. To the extent that the Company is successful in accelerating its
development of G3139, in expanding its development portfolio or acquiring or
adding new development candidates, the current cash resources will be consumed
at a greater rate. Similarly, the Company has been seeking to identify and hire
additional senior managers to direct the business of the Company. To the extent
it is successful in these endeavors, the rate of cash utilization will also
increase. Certain parties with whom the Company has agreements have claimed
default and, should the Company be obligated to pay these claims or should the
Company be obligated to incur significant legal fees to defend or negotiate its
positions or both, its ability to continue operations could be significantly
reduced or shortened. See "MD&A--Certain Trends and Uncertainties--Claims of
Genta's Default Under Various Agreements." 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 also anticipates seeking additional product development
opportunities from external sources. Such acquisitions may consume cash reserves
or require additional cash or equity. The Company's working capital and
additional funding requirements will depend upon numerous factors, including:
(i) the progress of the Company's research and development programs; (ii) the
timing and results of preclinical testing and clinical trials; (iii) the level
of resources devoted to Genta Jago; (iv) the level of resources that the Company
devotes to sales and marketing capabilities; (v) technological advances; (vi)
the activities of competitors; and (vii) the ability of the Company to establish
and maintain collaborative arrangements with others to fund certain research and
development efforts, to conduct clinical trials, to obtain regulatory approvals
and, if such approvals are obtained, to manufacture and market products. See
"MD&A--Certain Trends and Uncertainties--Need for Additional Funds; Risk of
Insolvency."
If the Company successfully secures sufficient levels of collaborative
revenues and other sources of financing, it expects to use such financing to
continue and expand its ongoing research and development activities, preclinical
testing and clinical trials, manufacturing activities, costs associated with the
market introduction of potential products and expansion of its administrative
activities.
In the third quarter of 1998, the holders of an aggregate of 23,710
shares of Series D Preferred Stock converted those shares into 2,512,312 shares
of Common Stock. From the close of the third quarter through November 10, 1998,
an aggregate of 9,400 shares of Series D Preferred Stock were converted by their
respective holders into an aggregate of 996,024 shares of Common Stock
(approximately 10.7% of the outstanding Common Stock) and an aggregate 2,000
shares of Series A Preferred Stock were converted by their respective holders
into an aggregate of 14,510 shares of common stock.
Impact of Year 2000
Some older computer programs were written using two digits rather than
four to define the applicable year. As a result, those computer programs have
sensitive software that recognizes a date using 00 as the year 1900 rather than
the year 2000 (the "Year 2000 Issue"). This could cause a system failure or
miscalculations causing disruption of operations, including a temporary
inability to process transactions or engage in similar normal business
activities.
The Company has completed its assessment of whether it will have to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company is currently implementing a plan to acquire and install new computer
hardware and upgraded software in its facilities that will accommodate dating
beyond 1999. The total year 2000 project cost is not expected to be material and
is expected to be completed not later than October 31, 1999, which is prior to
any anticipated impact on its operating systems. The Company believes that with
the modifications to existing software and conversions to new software the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material adverse effect on
the operations of the Company.
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The Company has initiated formal communications with all of its
significant suppliers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 Issues. If through such communication or otherwise the Company becomes
aware of any such failures and is not satisfied that those failures are being
adequately addressed, it will take appropriate steps to find alternative
suppliers. There is no assurance that the systems of other companies on which
the Company's systems rely will be timely converted and will not have a material
adverse effect on the Company's systems. The costs of the project and the date
on which the Company believes it will complete the Year 2000 modifications are
based on management's best estimates, which were derived using numerous
assumptions of future events, including the continued availability of certain
resources and factors. However, there can be no assurance that these estimates
will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
It has been acknowledged by governmental authorities that year 2000
problems have the potential to disrupt global economies, that no business is
immune from the potentially far-reaching effects of year 2000 problems, and that
it is difficult to predict with certainty what will happen after December 31,
1999. Consequently, it is possible that year 2000 problems will have a material
effect on the Company's business even if the Company takes all appropriate
measures to ensure that it and its key suppliers are year 2000 compliant.
Certain Trends and Uncertainties
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 will need to raise substantial additional funds to continue its
operations and to conduct the costly and time-consuming research, preclinical
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, to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself, to sell itself to a third party, to cease operations, or to
declare bankruptcy. The Company's future cash requirements will be affected by
results of research and development, results of pre-clinical 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 FDA and foreign regulatory processes, potential litigation by
companies seeking to prevent or delay marketing approval of Genta Jago's
products and other factors.
Loss History; Uncertainty of Future Profitability.
Genta has been unprofitable to date, incurring substantial operating
losses associated with ongoing research and development activities, pre-clinical
testing, clinical trials, manufacturing activities and development activities
undertaken by Genta Jago. From the period since its inception to September 30,
1998, the Company has incurred a cumulative net loss of $129.2 million. The
Company has experienced significant quarterly fluctuations in operating results
and expects that these fluctuations in revenues, expenses and losses will
continue. Ernst & Young LLP ("E&Y") has included an explanatory paragraph in
their report to the Company's financial statements at December 31, 1997, which
paragraph expresses substantial doubt as to the Company's ability to continue as
a going concern. See "Report of Ernst & Young LLP, Independent Auditors" in the
1997 Annual Report and "MD&A--Certain Trends and Uncertainties--Need for
Additional Funds; Risk of Insolvency." As reported in the Company's Current
Report on Form 8-K dated as of October 28, 1998, E&Y has resigned as the
Company's independent accountants.
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Subordination of Common Stock to Series A 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 the approximately $26.9
million preference of the 449,100 outstanding shares of Series A Preferred Stock
and the approximately $32.8 million preference of 234,280 shares of Series D
Preferred Stock (including 40,395 shares of Series D Preferred Stock issuable
upon exercise of certain warrants). Dividends may not be paid on the Common
Stock unless full cumulative dividends on the Series A and Series D Preferred
Stocks have been paid or funds have been set aside for such preferred dividends
by the Company.
The conversion rate of the Series A Preferred Stock 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. As of
September 30, 1998, each share of Series A Preferred Stock is convertible into
approximately 7.255 shares of Common Stock at a conversion price of $8.27 per
share. The Series A Warrants to purchase an aggregate of 675,966 shares of
Common Stock expired on September 24, 1998. 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. In addition, the Conversion Price of the Series D Preferred Stock in
effect on January 29, 1999 (the "Reset Date") will be adjusted and reset
effective as of the Reset Date if the average closing bid price of the Common
Stock for the 20 consecutive trading days immediately preceding the Reset Date
(the "19-Month Trading Price") is less than 140% of the then-applicable
Conversion Price (a "Reset Event"). Upon the occurrence of a Reset Event, the
then-applicable Conversion Price will be reduced to be equal to the greater of
(i) the 19-Month Trading Price divided by 1.40 and (ii) 25% of the
then-applicable Conversion Price. Each share of Series D Preferred Stock is
presently convertible into approximately 106 shares of Common Stock, at a
conversion price of $0.94375 per share 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 Bridge
Warrants to purchase an aggregate of 6,357,616 shares of Common Stock at an
exercise price of $0.471875 per share, Line of Credit 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 95,768 shares of Common Stock at
various exercise prices between approximately $13 and $21 per share and
outstanding employee stock options. The Note and Warrant Purchase Agreement
provides that a number of additional Bridge Warrants ("Penalty Warrants") equal
to 1.5% of the number of Bridge Warrants then held by the Aries Funds shall be
issued to the Aries Funds for each day beyond 30 days after the final closing of
the Private Placement that a shelf registration statement covering the Common
Stock underlying the securities purchased pursuant to the Note and Warrant
Purchase Agreement is not filed with the SEC and for each day beyond 210 days
after the closing date of the investment contemplated by the Note and Warrant
Purchase Agreement that such shelf registration statement is not declared
effective by the SEC. The Company filed such shelf registration statement with
the SEC on September 9, 1997; however, the Company has to date been unable to
have such shelf registration statement declared effective by the SEC. As a
result, the Company could be obligated to issue Penalty Warrants to the Aries
Funds. The Aries Funds have not, to date, requested that the Company issue such
Penalty Warrants. The Company and the Aries Funds are currently conducting
negotiations to determine whether, and to what extent, Penalty Warrants will be
issued. See "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities" in the 1997 Annual Report.
Claims of Genta's Default Under Various Agreements.
On May 7, 1997 SkyePharma 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
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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. Each of these Agreements provides for a cure period of 30 days,
except that if the default is not capable of being cured within this period and
the defaulting party is diligently undertaking to cure such default as soon as
commercially feasible thereafter under the circumstances, then the non-breaching
party shall have no right to terminate the agreement. In addition, each of these
agreements contains a provision providing for the final resolution of any
disputes, claims or controversies, whether before or after termination of the
agreement, by arbitration in Paris, France. After the 30-day cure period
expired, SkyePharma did not take action purporting to terminate these agreements
but did not rescind the notices of default. SkyePharma, 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 SkyePharma. The amount claimed by SkyePharma 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. There is no specific
cure period contained in the Restated Joint Venture and Shareholders Agreement
but rather a provision providing for resolution of disputes, claims or
controversies by arbitration in Paris, France. The Company met with SkyePharma
and is attempting to resolve the situation without resort to arbitration. While
a termination of these agreements may have a material adverse effect on the
Company, the Company intends to oppose vigorously SkyePharma's position. Stating
that it was 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
SkyePharma under the Restated GEOMATRIX(R) License Agreement and certain other
amounts owed by Genta Jago to third parties (both included in SkyePharma's
notice of default). On May 15, 1997, Johns Hopkins University ("Johns Hopkins")
sent Genta a letter stating that the license agreement entered into between the
Company and Johns Hopkins in May 1990 (the "Johns Hopkins Agreement") was
terminated. On November 26, 1997 Drs. Paul O.P. Ts'o and Paul Miller (the
"Ts'o/Miller Partnership") sent Genta a letter claiming that Genta was in
material breach of the February 1989 license agreement between the Company and
the Ts'o/Miller Partnership (the "Ts'o/Miller Agreement") for failing to pay
royalties from 1995 through 1997. By letter dated April 28, 1998, the
Ts'o/Miller Partnership advised the Company that it was terminating the license
granted pursuant to the Ts'o/Miller Agreement. On June 4, 1998, the Company's
statutory process agent received a Summons and Complaint in a lawsuit brought by
Johns Hopkins against the Company in Maryland Circuit Court for Baltimore City
(Case No. 98120110). Johns Hopkins alleges in the Complaint that the Company has
breached the Johns Hopkins Agreement and owes it licensing royalty fees and
related expenses in the amount of $308,832.24. Johns Hopkins also alleges the
existence of a separate March 1993 letter agreement wherein the Company agreed
to support a fellowship program at the Johns Hopkins School of Hygiene and
Public Health and the Company's breach thereof, with damages of $326,829.00. On
August 10, 1998, the Company's statutory process agent received a Summons and
Complaint in a related lawsuit brought by the Ts'o/Miller Partnership and others
against the Company in the same court (Case No. 98182113). The Ts'o/Miller
Partnership claims that it is owed licensing royalty fees in the amount of
$287,671.23. The Company is currently in settlement negotiations. See
"Business--Anticode(TM) Brand of Antisense Oligonucleotide
Programs--Oligonucleotide Collaborative and Licensing
Agreements--Ts'o/Miller/Hopkins" and "Legal Proceedings" in the 1997 Annual
Report. The French government agency L'Agence Nationale de Valorisation de la
Recherche ("ANVAR") asserted, in a letter dated February 13, 1998, that Genta
Europe was not in compliance with the ANVAR Agreement and that ANVAR might
request the immediate repayment of such loan. On July 1, 1998, the ANVAR
notified Genta Europe of its claim that the Company remains liable for 4,187,423
FF (as of August 11, 1998, approximately $701,000) and is required to pay this
amount immediately. In July 1998, Genta Europe declared "Cessation of Payment"
in the commercial court in France. See "Legal Proceedings" and "Business--Genta
Europe" in the 1997 Annual Report. LBC Capital Resources, Inc. ("LBC"), a
Philadelphia-based broker/dealer, has asserted claims against the Company and
others. See "Legal Proceedings."
There can be no assurance that the Company will not incur material costs
in relation to these terminations and/or assertions of default or liability. See
"MD&A--Liquidity and Capital Resources."
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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, most of the
Company's resources have been dedicated to applying molecular biology and
medicinal chemistry to the research and development of potential Anticode(TM)
pharmaceutical products based upon oligonucleotide technology. While the Company
has demonstrated the activity of Anticode(TM) oligonucleotide technology in
model systems in vitro and the activity of antisense technology in animals and
has identified compounds that the Company believes are worthy of additional
testing, only one of these potential Anticode(TM) oligonucleotide 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 oligonucleotide technology will
result in products that will receive necessary regulatory approvals or that will
be successful commercially. Further, results obtained in pre-clinical studies or
early clinical investigations or pilot bioequivalence trials are not necessarily
indicative of results that will be obtained in pivotal human clinical or
bioequivalence trials. 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
pre-clinical 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 formulated using GEOMATRIX(R)
technology. On July 27, 1998, SkyePharma PLC, the parent company to Jago,
announced that an ANDA for naproxen sodium filed by Brightstone Pharma, its U.S.
sales and marketing subsidiary, had been accepted for filing by the FDA.
Brightstone has a license from Genta Jago to market this product. 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. Certain competitive products have already been
filed with and/or approved by the FDA. See "MD&A--Certain Trends and
Uncertainties--Potential Adverse Effect of Technological Change and
Competition."
Limited Availability of Net Operating Loss Carryforwards.
At December 31, 1997, the Company has federal and California net
operating loss carryforwards of approximately $71,697,000 and $15,236,000
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the fifty percent
limitation on California loss carryforwards prior to 1997. The federal tax loss
carryforwards will begin expiring in 2003, unless previously utilized.
Approximately $2,767,000 of the California tax loss carryforward expired during
1997 and the related deferred tax asset and tax loss carryforward amounts have
been reduced accordingly. The remaining California tax loss will continue to
expire in 1998, unless utilized. The Company also has federal and California
research and development tax credit carryforwards of $2,921,000 and $1,203,000,
respectively, which will begin expiring in 2003 unless previously utilized.
Federal and California tax laws limit the utilization of income tax net
operating loss and credit carryforwards that arise prior to certain cumulative
changes in a corporation's ownership resulting in change of control of the
Company. The future annual use of net operating loss carryforwards and research
and development tax credits will be limited due to the ownership changes that
occurred during 1990, 1991, 1993, 1996 and 1997. Because of the decrease in
value of the Company's stock, the ownership changes which occurred in 1996 and
1997 will have a material limitation on the Company's ability to utilize these
carryforwards.
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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 D Preferred Stocks. The Company currently intends to
retain its earnings, if any, after payment of dividends on outstanding shares of
Series A and Series D Preferred Stocks, 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 on the introduction of pharmaceutical products
through lengthy and detailed pre-clinical 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 have attained. 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 could materially adversely affect the
Company's or 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
retained a chemical consulting firm to advise it with respect to an incident of
soil and groundwater contamination.
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In addition, JBL received notice on October 16, 1998 from Region IX of the
Environmental Protection Agency (the "EPA") that it had been identified as a
potentially responsible party ("PRP") at the Casmalia Disposal Site, which is
located in Santa Barbara, California. See "Legal Proceedings." The Company
believes that it is in material compliance with Governmental Regulations,
however, 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 its 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,
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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 (or any foreign counterpart) 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 and Genta Jago's strategy for the research, development
and commercialization of their 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. 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 addition, many
of those competitors have significantly greater experience than the Company or
Genta Jago in undertaking pre-clinical 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. As competitors of the Company or of Genta Jago receive approval for
products that share the same potential market as the Company's or Genta Jago's
potential products, the market share available to the Company or Genta Jago will
likely be reduced, thereby reducing the potential revenues and earnings
available to the Company or Genta Jago. In addition, increased pricing
competition would also likely result, further reducing the earnings potential of
the Company's or Genta Jago's products. The Company is aware that certain
competitors of Genta Jago have filed, and received approval of, ANDAs for
generic formulations of drugs of which Genta Jago was working to develop generic
formulations. Furthermore, if the Company or Genta
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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 or 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 trials and pre-clinical testing are subject to
varying interpretations. Even if the development of the Company's or Genta
Jago's respective products advances to the clinical stage, there can be no
assurance that such products 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 or Genta Jago may encounter unanticipated
problems relating to development, manufacturing, distribution and marketing,
some of which may be beyond the Company's or Genta Jago's respective financial
and technical capacity to solve. The failure to address such problems adequately
could have a material adverse effect on the Company's or Genta Jago's respective
businesses, financial conditions, prospects and results of operations. No
assurance can be given that the Company or Genta Jago will succeed in the
development and marketing of any new drug products, or that they will not be
rendered obsolete by products of competitors. See "MD&A--Certain Trends and
Uncertainties--Potential Adverse Effect of Technological Change and
Competition."
Difficult Manufacturing Process; Access to Certain Raw Materials.
The manufacture of Anticode(TM) 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, in order to obtain oligonucleotides sufficient to meet the
volume and cost requirements needed for certain commercial applications of
Anticode(TM) oligonucleotide products, Genta requires raw materials currently
provided by a single supplier which is itself a development stage biotechnology
company (and a competitor of the Company) and is subject to uncertainties
including the potential for a decision by such supplier to discontinue
production of such raw materials, the insolvency of such supplier, or the
failure of such supplier to follow applicable regulatory guidelines. 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 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. Failure to establish compliance with
GMP to the satisfaction of the FDA can result in delays in, or prohibition from,
initiating clinical trials or commercial marketing of a 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
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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 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. Finally, given the above
potential market constraints on pricing, the availability of competitive
products in these markets may further limit the Company's and Genta Jago's
flexibility in pricing and in obtaining adequate reimbursement for its potential
products. See "MD&A--Certain Trends and Uncertainties--Potential Adverse Effect
of Technological Change and Competition."
Need for and Dependence on Qualified Personnel.
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 or both is likely further to 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 attract and retain the qualified
personnel necessary for the development of its business. In October 1998, the
Company hired a Vice President of Corporate Development and a Vice President,
Clinical and Regulatory Affairs, who will join the Company in mid-November. The
Company is actively engaged in the search for a new Chief Financial Officer. In
March 1998, the Company's Controller resigned and a replacement is being sought.
Product Liability Exposure; Limited Insurance Coverage.
The Company's, JBL's and Genta Jago's businesses expose them to
potential product liability risks that 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 that
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 stock or (in certain circumstances) cash in the
aggregate amount of approximately $26.9 million. Furthermore, if the Company is
required to redeem the Series A Preferred Stock it would also be required
(subject to certain conditions) to offer to redeem the Series D Preferred Stock
on a pari passu basis with the Series A Preferred Stock and with the same type
of consideration paid in redemption of the Series A Preferred Stock; upon a
Fundamental Change, the Company could, under certain circumstances, be required
to pay the holders of Series D Preferred Stock cash in the aggregate amount of
approximately $27.1 million (not including an additional $5.7 million that could
be payable upon redemption of 40,395 shares of Series D Preferred Stock issuable
upon exercise of certain warrants). "Fundamental Change" is defined as: (i) a
"person" or "Group" (as defined), together with any affiliates, becoming
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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 or 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.
The SEC Staff is currently in the process of reviewing a registration
statement filed by the Company, and has raised certain questions regarding the
Company's classification of the Preferred Stock as permanent (rather than
"mezzanine") equity. Management of the Company believes, based upon its
Certificate of Incorporation and the agreement pursuant to which the Preferred
Stock was issued, and after discussion with Company counsel, that the conditions
for redemption of the Preferred Stock require volitional acts undertaken by the
Company and are therefore solely within the control of the Company. If the SEC
Staff does not accept the Company's position, the Company will file an amendment
to this Form 10-Q reclassifying the Preferred Stock as "mezzanine" rather than
permanent equity.
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 or regulations. See "Legal Proceedings."
Volatility of Stock Price; Market Overhang from Outstanding Convertible
Securities and Warrants.
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
pre-clinical 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, Genta Jago or their respective 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
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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 November 10, 1998,
the Company had 9,274,964 shares of Common Stock outstanding. The Company
obtained stockholder approval of two-for-three, one-for-two, two-for-five,
one-for-three, one-for-four, one-for-five, one-for-seven and one-for-ten reverse
stock splits at its annual stockholders' meeting held on July 14, 1998, and the
Board may, in its discretion, effect one of these reverse stock splits at any
time on or prior to the Company's next annual meeting of stockholders and would
abandon the remaining alternative reverse stock splits without further action by
the stockholders of the Company. On October 22, 1998, the NASDAQ advised that
the Company's shares of common stock had not maintained a minimum closing bid
price of $1.00. The NASDAQ stated that no delisting action with respect to the
bid price deficiency would be initiated at the time of the letter. Rather, the
Company was provided ninety calendar days in which to regain compliance with the
minimum bid price requirement. Compliance would be demonstrated with a minimum
bid price of $1.00 or greater for ten consecutive trading days anytime within
the next ninety calendar days. However, if the Company is unable to demonstrate
compliance with the minimum $1.00 bid price on or before the end of the ninety
day period, the Company's securities will be subject to delisting. The NASDAQ
stated that to stay the delisting, the Company may request a hearing by the
close of business on January 22, 1999. The Company intends to request such
hearing if not in compliance with the minimum bid price requirement on or before
the end of the ninety day period. Future sales of shares of Common Stock by
existing stockholders, holders of preferred stock who might convert such
preferred stock into Common Stock, and option and warrant 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 "MD&A--Certain Trends and
Uncertainties--Subordination of Common Stock to Series A 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 Funds have the contractual right to appoint a majority of the
members of the Board of Directors of the Company. The Aries Funds have
designated Michael S. Weiss, Glenn L. Cooper, M.D., Donald G. Drapkin, Bobby W.
Sandage, Jr., Ph.D., and Andrew J. Stein as nominees to the Board of Directors.
Such persons were elected as Directors of the Company. 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 "MD&A--Certain
Trends and Uncertainties--Concentration of Ownership and Control" below. In
addition to the Aries Funds' investments in the Company that are disclosed in
"Market for Registrant's Common Equity and Related Stockholder Matters--Recent
Sales of Unregistered Securities," in the 1997 Annual Report, the Aries Funds
also engaged in the following transactions: as of June 30, 1997, the Aries Funds
purchased an aggregate of 10,000 shares of Series D Preferred Stock and 50,000
Class D Warrants in a private placement (the "Private Placement"); on December
2, 1997, the Aries Funds purchased an aggregate of 54,000 shares of Series A
Preferred Stock; on December 29, 1997, warrants to purchase an aggregate of
1,000 shares of Series D Preferred Stock and 5,000 Class D Warrants were
allocated to the Aries Funds by Paramount Capital, Inc., which warrants were
received in connection with the Private Placement; on December 31, 1997, the
Aries Funds converted the outstanding principal of, and interest on, their
respective Senior Secured Convertible Bridge Notes of the Company into an
aggregate of 52,415 shares of Series D Preferred Stock; in July 1998, the Aries
Funds purchased 40,000 shares of Series A Preferred Stock; in August 1998, the
Aries Funds purchased 5,000 shares of Series A Preferred Stock; during the third
quarter 1998, the Aries Funds purchased 701,550 shares of common stock; and the
Aries Funds purchased 268,400 shares of common stock in October 1998.
Furthermore, the Company may be required to issue Penalty Warrants to the Aries
Funds. See "Risk Factors--Subordination of Common Stock to Series A and Series D
Preferred Stock; Risk of Dilution; Anti-Dilution Adjustments." Dr. Lindsay A.
Rosenwald, the President and sole stockholder of PCAM, is also the President of
Paramount Capital, Inc. and 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
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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 investors in the Company
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. See "MD&A--Certain
Trends and Uncertainties--Certain Interlocking Relationships; Potential
Conflicts of Interest." 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 "MD&A--Certain Trends and
Uncertainties--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 amendment of the By-laws.
Additionally, the Company has contractual obligations to certain of its security
holders that may impair potential takeovers. See "MD&A--Certain Trends and
Uncertainties--Certain Interlocking Relationships; Potential Conflicts of
Interest." 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. Additionally, pursuant to the Company's Restated
Certificate of Incorporation, if any "person" or "Group" (as defined), together
with any affiliates thereof, becomes 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), then a Fundamental
Change (as defined) would occur and the Company would be obligated to redeem the
Series A and Series D Preferred Stocks. See "MD&A--Certain Trends and
Uncertainties--Fundamental Change." This Fundamental Change provision is a
further disincentive for any person attempting to acquire 60% or more of the
total voting power of the Company's Voting Shares.
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
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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). Rule
15g-9 defines "penny stock" to be any equity security that has a market price
(as therein defined) of less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions including (i) the securities
being quoted on the Nasdaq National Market or SmallCap Market; (ii) the
securities' issuer having net tangible assets in excess of $2,000,000 and having
been in continuous operation for at least three years; and (iii) the securities'
issuer having average revenues of at least $6,000,000 for the last three years
(all three exceptions enumerated above are currently met by the Company). 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. 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. 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.
There can be no assurance that the Company's securities will continue to
qualify for exemption from the penny stock restrictions. In any event, even if
the Company's securities are 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
LBC Capital Resources, Inc. ("LBC"), a Philadelphia-based broker/dealer,
has asserted claims against the Company and others, including Paramount Capital
Inc., of which Dr. Rosenwald is the sole stockholder and Mr. Weiss is a Senior
Managing Director, and various related entities and persons. LBC's claims relate
to the alleged breach by the Company of certain letter agreements, allegedly
entered into by LBC and the Company in 1995 and 1996 with respect to brokerage
and/or investment banking services, particularly in connection with a $3 million
investment for which LBC is seeking a fee. In April 1998 a Complaint was filed
in the United States District Court for the Southern District of New York (98
Civ. 2491) by LBC against the Company and the same other parties.
The Company is engaged in settlement discussions with LBC.
On June 4, 1998, the Company's statutory process agent received a
Summons and Complaint in a lawsuit brought by Johns Hopkins against the Company
in Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins
alleges in the Complaint that the Company has breached the Johns Hopkins
Agreement and owes it licensing royalty fees and related expenses in the amount
of $308,832.24. Johns Hopkins also alleges the existence of a separate March
1993 letter agreement wherein the Company agreed to support a fellowship program
at the Johns Hopkins School of Hygiene and Public Health and the Company's
breach thereof, with damages of $326,829.00. On August 10, 1998, the Company's
statutory process agent received a Summons and Complaint in a related lawsuit
brought by the Ts'o/Miller Partnership and others against the Company in the
same court (Case No. 98182113). The Ts'o/Miller Partnership claims that it is
owed licensing royalty fees in the amount of $287,671.23. The Company is
currently in settlement negotiations.
On June 30, 1998, the Director General of the Company's subsidiary,
Genta Pharmaceuticals Europe, SA, ("Genta Europe") was served notice of a suit
in Marseilles, France by Marseilles Amenagement, the manager of the Company's
facilities in Marseilles. On July 30, 1998, the Company's office in San Diego,
California was also served with notice of the suit. The suit seeks the payment
of unpaid past rents in the amount of 473,464.50 FF (as of November 12, 1998,
approximately $83,000), the removal of the Company from the facility and an
indemnity payment of 1,852,429 FF (as of November 12, 1998, approximately
$326,000), which is allegedly equal to the balance of the first nine years'
rent. A hearing is scheduled for December 11, 1998. On July 1, 1998, the ANVAR
notified Genta Europe by letter of its claim that the Company remains liable for
4,187,423 FF (as of November 12, 1998, approximately $737,000) and is required
to pay this amount immediately. In view of these events, the Board of Directors
of Genta Europe directed the Director General to declare "Cessation of Payment"
in the commercial court in France, which declaration was made in July 1998. On
August 27, 1998, the commercial court appointed a trustee to replace the
Director General and to represent Genta Europe in its liquidation process.
JBL received notice on October 16, 1998 from Region IX of the
Environmental Protection Agency (the "EPA") that it had been identified as a
potentially responsible party ("PRP") at the Casmalia Disposal Site, which is
located in Santa Barbara, California. JBL has been designated as a de minimis
PRP by the EPA. The EPA currently estimates that de minimis PRPs will be
required to pay as little as $75,000 and as much as $750,000 to settle their
potential liability, depending upon the volume of wastes attributed to them. The
EPA plans on sending by the beginning of January 1999 individual volume
calculations to each de minimis PRP that received the aforementioned notice
letter. While the terms of a settlement have not been discussed, any settlement
with de minimis PRPs should contain standard contribution protection language.
JBL is investigating all factual and legal defenses that are available to it and
plans on responding to this matter accordingly.
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In October 1996, JBL retained a chemical consulting firm to advise it
with respect to an incident of soil and groundwater contamination (the "Spill").
Sampling conducted at the JBL facility revealed the presence of chloroform and
perchloroethylenes ("PCEs") in the soil and groundwater at this site. Six soil
borings were drilled and groundwater wells were installed at several locations
around the site. Chloroform was detected at levels of up to 190 ug/liter
on-site, exceeding the California Drinking Water Maximum Contamination Level for
trihalomethanes of 100 ug/liter. PCEs were also detected at levels of up to 22
ug/liter on-site, exceeding the California Drinking Water Maximum Contamination
Level of 5 ug/liter. In addition, toluene was detected at levels of up to 2
ug/liter at several points on-site, which is significantly below the California
Toxicity Action Level of 100 ug/liter. These toxicity levels are not binding, as
the final regulatory maximum levels may be higher or lower. JBL has notified the
appropriate regulatory agency, the California Regional Water Quality Control
Board, of conditions at the site, and with the agency's approval, JBL is
monitoring groundwater conditions at the site on a quarterly basis. JBL is
currently in the pre-regulatory action stage with ongoing site monitoring and
site assessment. In addition, current sampling results indicate that
contaminants may be migrating off-site. An off-site well, used as a domestic and
irrigation water source, has shown evidence of being impacted by chloroform at
1.0 ug/liter, significantly below the California Drinking Water Maximum
Contamination Level for trihalomethanes of 100 ug/liter, and toluene at 0.9
ug/liter, also significantly below (less than one percent of) the California
Toxicity Action Level of 100 ug/liter. While another off-site well has been
found to contain chloroform, the engineering consultant concluded that the
contaminants do not appear to relate to impact from the JBL site. The Company
believes that any costs associated with further investigating or remediating
this contamination will not have a material adverse effect on the business of
the Company, although there can be no assurance thereof.
No material legal proceedings were terminated in the quarter ended
September 30, 1998.
Item 5. Other Information
Stockholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders, stockholder proposals submitted pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for
inclusion in the Company's proxy materials for its 1999 Annual Meeting of
Stockholders (the "1999 Annual Meeting") must be received by the Secretary of
the Company at the principal offices of the Company no later than February 22,
1999.
In addition, the Company's by-laws require that the Company be given
advance notice of stockholder nominations for election to the Company's Board of
Directors. Such stockholder proposals shall be made by notice in writing
delivered or mailed by first-class United States mail or a nationally recognized
courier service, postage prepaid, or her to the secretary or assistant secretary
of the corporation, and received by him or her not less than one hundred twenty
days prior to the 1999 Annual Meeting; provided, however, that if less than one
hundred days' notice of the meeting is given to stockholders, such nomination
shall have been mailed or delivered to the secretary or the assistant secretary
of the corporation not later than the close of business on the seventh day
following the day on which the notice of meeting was mailed. The 1999 Annual
Meeting is currently expected to be held on July 13, 1999. Assuming that this
date does not change, in order to comply with the time periods set forth in the
Company's by-laws, appropriate notice would need to be provided no later than
March 15, 1999.
The Company's by-laws also require that the Company be given advance
notice of stockholder proposals regarding matters other than nominations for
election to the Company's Board of Directors and matters included in the
Company's proxy statement in accordance with Rule 14a-8. The required notice
must be made in writing and delivered or mailed to the Secretary of the Company
at the principal offices of the Company, and received not less than 50 days nor
more than 75 days prior to the 1999 Annual Meeting; provided, however, that if
less than 65 days' notice or prior public disclosure of the date of the meeting
is given to stockholders, such nomination or other proposal to be timely shall
have been mailed or delivered to the Secretary and received not later than the
close of business on the 15th day following the date on which the notice of the
meeting was mailed or such public disclosure made, whichever occurs first.
Assuming that the date of the 1999 Annual Meeting given above does not change,
in order to comply with the time periods set forth in the Company's by-laws,
appropriate notice would need to be provided no earlier than April 29, 1999 and
no later than May 24, 1999. The advance notice provisions of the Company's
by-laws supersede the notice requirements contained in recent amendments to Rule
14a-4 under the Exchange Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. (1)
Exhibit
Number Description of Document
- - ------ -----------------------
27.1(1) Financial Data Schedule
(b) Reports on Form 8-K
(i) On November 3, 1998, the Company filed a Report on Form 8-K dated
as of October 28, 1998 reporting under Item 4 that the Company's firm of
independent accountants had resigned.
(1) Filed herewith.
- 26 -
<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/ Kenneth G. Kasses, Ph.D.
--------------------------------------
Name: Kenneth G. Kasses, Ph.D.
Title: Chairman of the Board of Directors,
President, Principal Executive Officer
and Principal Financial Officer
Date: November 16, 1998
- 27 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated balance sheets and consolidated statements of operations
contained in the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 288,815
<SECURITIES> 3,477,353
<RECEIVABLES> 895,662
<ALLOWANCES> 0
<INVENTORY> 958,806
<CURRENT-ASSETS> 5,864,535
<PP&E> 4,644,026
<DEPRECIATION> 3,235,363
<TOTAL-ASSETS> 10,896,052
<CURRENT-LIABILITIES> 3,121,443
<BONDS> 3,064,423
0
654
<COMMON> 8,265
<OTHER-SE> 4,710,186
<TOTAL-LIABILITY-AND-EQUITY> 10,896,052
<SALES> 4,101,458
<TOTAL-REVENUES> 4,193,938
<CGS> 2,338,282
<TOTAL-COSTS> 8,330,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (264,369)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,732,209)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
