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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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)
Two Oak Way 07922
Berkeley Heights (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(908) 286-9800
(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 May 7, 2001, the registrant had 52,710,330 shares of common stock
outstanding.
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GENTA INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
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GENTA INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
---------------------------------
ASSETS 2001 2000
---------------------------------
Current assets:
Cash and cash equivalents...................................................$ 8,380,066 $ 19,025,179
Short term investments....................................................... 35,276,668 31,174,041
Notes receivable............................................................. 200,000 1,337,739
Prepaid expenses............................................................. 1,555,419 424,686
-------------- -------------
Total current assets............................................................ 45,412,153 51,961,645
-------------- -------------
Property and equipment, net..................................................... 893,615 758,220
Intangibles, net ............................................................... 2,723,456 2,922,989
Restricted cash relating to office lease........................................ 246,626 246,626
Deposits and other assets....................................................... 1,340 49,840
Prepaid royalties............................................................... 1,268,347 1,268,347
-------------- -------------
Total assets $ 50,545,537 $ 57,207,667
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...........................................................$ 2,201,033 $ 613,330
Accrued compensation........................................................ 105,075 225,006
Other accrued expenses...................................................... 887,225 2,227,457
Net liabilities of liquidated foreign subsidiary............................ 574,812 574,812
-------------- -------------
Total current liabilities...................................................... 3,768,145 3,640,605
-------------- -------------
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized, convertible
preferred shares outstanding:
Series A convertible preferred stock, $.001 par value;
261,200 shares issued and outstanding at March 31, 2001 and
December 31, 2000, liquidation value is $13,060,000 at March 31, 2001... 261 261
Common stock; $.001 par value; 95,000,000 shares authorized,
51,508,800 and 51,085,375 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively....................... 51,509 51,085
Additional paid-in capital.................................................. 207,089,595 206,451,331
Accumulated deficit......................................................... (159,407,580) (151,948,771)
Deferred compensation....................................................... (1,177,170) (1,081,920)
Accumulated other comprehensive income...................................... 220,777 95,076
-------------- -------------
Total stockholders' equity..................................................... 46,777,392 53,567,062
-------------- -------------
Total liabilities and stockholders' equity.....................................$ 50,545,537 $ 57,207,667
============== ==============
See accompanying notes.
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GENTA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2001 2000
-------------------------------------
Revenues:
License revenues................................................. $ 70,000 $ --
Costs and expenses:
Research and development (1)..................................... 5,655,772 505,791
General and administrative (1)................................... 1,372,576 853,724
Promega settlement............................................... 1,000,000 --
Non-cash equity related compensation............................. 151,750 7,990,679
------------ -------------
8,180,098 9,350,194
------------ -------------
Loss from operations................................................ (8,110,098) (9,350,194)
Equity in net income of joint venture............................... -- 501,945
Other income (expense):
Interest income.................................................. 651,289 110,654
------------ -------------
Net loss............................................................ (7,458,809) (8,737,595)
Dividends accrued on preferred stock................................ -- (3,442,561)
------------ -------------
Net loss applicable to common shares................................ $ (7,458,809) $ (12,180,156)
============ =============
Net loss per common share........................................... ($0.15) ($0.44)
============ =============
Shares used in computing net loss per common share.................. 51,131,633 27,767,794
============ =============
(1) Excludes non-cash equity related compensation
Research and development......................................... $ 15,867 $ 1,207,280
General and administrative....................................... 135,883 6,783,399
------------ -------------
$ 151,750 $ 7,990,679
============ =============
See accompanying notes.
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GENTA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2001 2000
--------------------------------
OPERATING ACTIVITIES
Net loss................................................................ $ (7,458,809) $ (8,737,595)
Items reflected in net loss not requiring cash:
Depreciation and amortization........................................ 250,899 57,114
Loss on disposal of fixed assets..................................... 1,736 --
Loss on Promega settlement........................................... 1,000,000 --
Compensation expense related to stock options........................ 151,750 7,990,679
Changes in operating assets and liabilities............................. (471,960) (197,373)
------------- -------------
Net cash used in operating activities................................... (6,526,384) (887,175)
INVESTING ACTIVITIES
Purchase of available-for-sale short-term investments................... (11,304,230) (2,295,624)
Maturities and sales of available-for-sale short-term investments....... 6,982,310 --
Purchase of property and equipment...................................... (188,497) (12,217)
Principal payments received on notes receivable......................... -- 60,000
------------- -------------
Net cash used in investing activities................................... (4,510,417) (2,247,841)
FINANCING ACTIVITIES
Issuance of common stock upon exercise of warrants and options.......... 391,688 993,878
------------- -------------
Net cash provided by financing activities............................... 391,688 993,878
------------- -------------
Decrease in cash and cash equivalents................................... (10,645,113) (2,141,138)
Less cash at liquidated foreign subsidiary.............................. -- (8,947)
Cash and cash equivalents at beginning of period........................ 19,025,179 10,100,603
------------- -------------
Cash and cash equivalents at end of period.............................. $ 8,380,066 $ 7,950,518
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................................... $ -- $ 4,706
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock dividends accrued....................................... -- 3,442,561
Market value change of available-for-sale equity securities............. (3,453) --
Market value change of available-for-sale short-term investments........ 129,154 30,804
See accompanying notes.
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GENTA INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Genta
Incorporated, a Delaware corporation ("Genta" or the "Company"), presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and note disclosures required to be presented for complete financial
statements. The accompanying financial statements reflect all adjustments
(consisting only of normal recurring accruals), which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented.
The unaudited 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 Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000 (the "2000 Form 10-K").
The Company has experienced significant quarterly fluctuations in
operating results and it expects that these fluctuations will continue.
(2) DISCONTINUED OPERATIONS
On March 19, 1999, the Company entered into an Asset Purchase Agreement
(the "JBL Agreement") with Promega Corporation ("Promega"), whereby a wholly
owned subsidiary of Promega acquired substantially all of the assets and assumed
certain liabilities of the Company's manufacturing subsidiary, JBL Scientific,
Inc. ("JBL"), for approximately $4.8 million in cash, a promissory note for $1.2
million, and certain pharmaceutical development services in support of the
Company's development activities. The closing of the sale of JBL was completed
on May 10, 1999 with a gain on the sale of approximately $1.6 million being
recognized.
In connection with the sale of JBL's business, 246,000 options were
granted to the former employees of JBL upon the closing of the sale of JBL's
business, pursuant to an ongoing service arrangement between Promega and the
Company. Those options have been accounted for pursuant to guidelines in
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," and EITF 96-18 using the Black-Scholes option pricing
model. These options were granted at $2.03 per share with a one-year vesting
period and will expire two years after the date of grant. The estimated value of
these options totaled $1.9 million as of March 31, 2000 of which approximately
$970,400 is included in continuing operations for the three months ended March
31, 2000 and is based on services provided and have been charged to non-cash
equity related compensation. These options were fully vested on May 9, 2000, and
therefore, no expense has been charged to non-cash equity related compensation
for the three months ended March 31, 2001.
(3) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consisted entirely of money market funds.
Marketable short-term investments consisted primarily of corporate notes, all of
which are classified as available-for-sale marketable securities. The
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estimated fair value of each investment security has been compared to its cost
and, therefore, an unrealized gain of $125,701 has been recognized in
comprehensive loss for the three months ended March 31, 2001.
MARCH 31, 2001 Gross Gross
Amortized unrealized unrealized Estimated
costs gains losses fair value
------------ --------- -------- ------------
Corporate debt securities $ 35,116,710 $ 190,346 $ 30,388 $ 35,276,668
============ ========= ======== ============
The fair value of corporate debt securities at March 31, 2001, by
contractual maturity, is as follows:
Due in one year or less.......................................$ 32,388,537
Due after one year............................................ 2,888,131
------------
$ 35,276,668
============
(4) NET LOSS PER COMMON SHARE
Basic earnings per share are based upon 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 preferred stock
outstanding.
Net loss per common share for the three months ended March 31, 2000 and
2001 is based on the weighted average number of shares of common stock
outstanding during the periods. Basic and diluted loss per share are the same
for all periods presented as potentially dilutive securities, including options,
warrants and convertible preferred stock have not been included in the
calculation of the net loss per common share as their effect is antidilutive.
Net loss per common share for the three months ended March 31, 2000 is also
based on net loss adjusted for imputed and accrued dividends on preferred stock.
(5) COMPREHENSIVE LOSS
Comprehensive loss includes the change in the unrealized gain on
available-for-sale equity and debt securities, net of tax. The following tables
set forth the calculation of comprehensive loss on an interim basis:
Three Months Ended March 31,
---------------------------------
2001 2000
---- ----
Net loss....................................................................... $ (7,458,809) $ (12,180,156)
Unrealized gain on market value change on available-for-sale short-term
investments.................................................................. 125,701 --
-------------- --------------
Total comprehensive loss....................................................... $ (7,333,108) $ (12,180,156)
============== ==============
(6) LICENSE REVENUE
The Company has entered into various licensing agreements. In January
2001, the Company entered into a worldwide non-exclusive license agreement with
Atugen AG ("Atugen") for a broad portfolio of patents and technologies that
relate to antisense for therapeutic and diagnostic applications. This agreement
has an initial term which expires in July 2010 and includes an upfront payment
in cash and future royalties on product sales.
The Company has recognized $70,000 of revenues for the three months
ended March 31, 2001 in relation to the Atugen license agreement.
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(7) STOCKHOLDERS' EQUITY
In February 2001, the Company issued 162,338 shares of common stock to
a major university as consideration for an amendment to a license agreement
initially executed on August 1, 1991, concerning antisense technology licensed
by such university. The amendment provided for a reduction in the royalty
percentage rate to be paid to the university based on the volume of sales of the
Company's products containing the antisense technology licensed from such
university.
In March 2001, the Company issued 1,687 shares upon the cashless
exercise of 4,291 warrants that were part of the warrants issued to the December
1999 private placement investors.
(8) NOTES RECEIVABLE
The Company accepted a $1.2 million promissory note (accruing 7% annual
interest rate) from Promega as part of the sale price of JBL.
During May 2000, Promega notified Genta by letter of two claims against
Genta and Genta's subsidiary, Genko Scientific, Inc. (f/k/a JBL Scientific,
Inc.) ("Genko"), for indemnifiable damages in the aggregate amount of $2,820,000
under the JBL Agreement. Promega's letter stated that it intends to reduce to
zero the principal amount of the $1.2 million promissory note it issued as
partial payment for the assets of Genko (which note provided for a payment of
$700,000 on June 30, 2000) and that therefore Genta owes Promega approximately
$1.6 million. Genta believed that Promega's claims were without merit and,
accordingly, on October 16, 2000 Genta filed suit in the US District Court of
California against Promega for the non- payment of the $1.2 million note plus
interest. On November 6, 2000, Promega filed a counter suit against the Company
with the US District Court of California.
In April 2001, Promega and the Company verbally agreed to settle this
matter. The Company has agreed to reduce the $1.2 million promissory note to
$200,000 and forgive all the accrued interest at March 31, 2001 of approximately
$158,700. Accordingly, the Company has recorded a one time cost for the Promega
settlement of $1.0 million for the three months ended March 31, 2001. The
accrued interest has been recorded in full against a provision established by
the Company at the time of the sale of JBL, and therefore, will not be reflected
in the Company's consolidated statement of operations in fiscal 2001. The
remaining balance of $200,000 is to be repaid by Promega upon the settlement of
both the Spill and Casmalia Disposal Site (See Note 10).
(9) GENTA JAGO
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into an interim agreement (the "Interim JV Agreement")
pursuant to which the parties to the Joint Venture released each other from all
liability relating to unpaid development costs and funding obligations of Genta
Jago Technologies B.V. ("Genta Jago"), the joint venture formed by Genta and
Skyepharma. SkyePharma agreed to be responsible for substantially all the
obligations of the joint venture to third parties and for the further
development of the joint venture's products, with any net income resulting
therefrom to be allocated in agreed-upon percentages between Genta and
SkyePharma as set forth in the Interim JV Agreement. In accordance with revised
revenue sharing agreements, Genta reported $502,000 in income for the three
months ended March 31, 2000 for its share of net income of Genta Jago in
relation to Skyepharma's royalty agreement with Elan Corporation for Genta
Jago's product, Naproxen.
(10) COMMITMENTS AND CONTINGENCIES
LITIGATION
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
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and perchloroethylenes ("PCEs") in the soil and groundwater at this site. A
semi-annual groundwater-monitoring program is being conducted, under the
supervision of the California Regional Water Quality Control Board for the
purpose of determining whether the levels of chloroform and PCEs have decreased
over time. The results of the latest sampling conducted by JBL shows that PCEs
and chloroform have decreased in all but one of the monitoring sites. The
Company has agreed to indemnify Promega in respect of this matter. At March 31,
2001 and December 31, 2000, the Company has $34,700 and $49,700, respectively,
accrued to cover remedial costs. Prior to 1999, such costs were not estimable
and, therefore, no loss provision had been recorded. The Company believes that
any costs stemming from 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. In April 2001, the Company has requested
closure of this matter from the California Regional Water Quality Control Board
as the current sampling results shows that PCEs and chloroform have decreased in
all of the monitoring sites.
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. Based on volume amounts from the EPA, the Company concluded that
it was probable that a liability had been incurred and accrued $75,000 during
1998. In 1999, the EPA estimated that the Company would be required to pay
approximately $63,200 to settle their potential liability. The Company expects
to receive a revised settlement proposal from the EPA during the second quarter
of 2001. While the terms of the settlement with the EPA have not been finalized,
they should contain standard contribution protection and release language. The
Company has agreed to indemnify Promega in respect of this matter. The Company
believes that any costs stemming from further investigation or remediating this
contamination will not have a material adverse effect on the business of the
Company, although there can be no assurance thereof.
During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe"), a
wholly-owned subsidiary of the Company, received approximately 5.4 million
French Francs (as of March 31, 2001, approximately $726,900) of funding in the
form of a loan from the French government agency L'Agence Nationale de
Valorisation de la Recherche ("ANVAR") towards research and development
activities pursuant to an agreement (the "ANVAR Agreement") between ANVAR, Genta
Europe and Genta. In October 1996, as part of the Company's restructuring
program, Genta Europe terminated all scientific personnel. 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, ANVAR notified Genta Europe by letter of its claim that
the Company remains liable for FF4,187,423 (as of March 31, 2001, approximately
$563,700) and is required to pay this amount immediately. The Company does not
believe that under the terms of the ANVAR Agreement ANVAR is entitled to request
early repayment. ANVAR notified the Company that it was responsible as a
guarantor of the note for the repayment. The Company's legal counsel in Europe
has again notified ANVAR that the Company does not agree that the note is
payable. The Company is working with ANVAR to achieve a mutually satisfactory
resolution. However, there can be no assurance that such a resolution will be
obtained. 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.
On June 30, 1998, Marseille Amenagement, a company affiliated with the
city of Marseilles, France, filed suit in France to evict Genta Europe from its
facilities in Marseilles and to demand payment of alleged back rent due and of a
lease guarantee for nine years' rent. Following the filing of this claim and in
consideration of the request for repayment of the loan from ANVAR, Genta
Europe's Board of Directors directed the management to declare a "Cessation of
Payment." Under this procedure, Genta Europe ceased any operations and
terminated its only employee. A liquidator was appointed by the Court to take
control of any assets of Genta Europe and to make payment to creditors. In
December 1998, the Court in Marseilles dismissed the case against Genta Europe
and indicated that it had no jurisdiction against Genta Incorporated. In August
1999, Marseille Amenagement instituted legal proceedings against the Company at
the Commercial Court in France, claiming alleged back rent payment of FF663,413
(as of March 31, 2001, approximately $89,300) and early termination payment of
FF1,852,429 (as of March 31, 2001, approximately $249,400). A court hearing has
been scheduled for June 11, 2001. The Company is working with its counsel in
France to achieve a mutually satisfactory resolution. However, there can be no
assurance that such a resolution will be obtained. On March 31, 2001, the
Company had $574,800 of net liabilities of liquidated subsidiary recorded and,
therefore, management believes no additional accrual is necessary. There can be
no assurance that the Company will not incur
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material costs in relation to this claim.
PURCHASE COMMITMENTS
In the quarter ended March 31, 2001, the Company entered into
commitments relating to the Company's Gallium products franchise with various
firms to develop and manufacture certain gallium-containing compounds. The
Company believes that successful development of this program may yield
substantial clinical and competitive advantages. The cost of these commitments
is expected to be approximately $800,000, all of which will be expensed in
research and development as incurred for registration and anticipated clinical
trials.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
The Company implemented SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended, on January 1, 2001 and did not
have any derivative instruments that resulted in a transition adjustment.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception in February 1988, the Company has devoted its
principal efforts toward drug discovery and research and development. The
Company has been unprofitable to date and 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
activities, regulatory activities, possible establishment of manufacturing
activities and a sales and marketing organization. From the period since its
inception to March 31, 2001, the Company has incurred a cumulative net loss of
approximately $159.4 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 unaudited condensed consolidated financial 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. Without limiting the foregoing, the words
"anticipates," "believes," "expects," "intends," "may" and "plans" and similar
expressions are intended to identify forward-looking statements. 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, 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. For example, the results obtained in pre-clinical or clinical
studies may not be indicative of results that will be obtained in future
clinical trials, and delays in the initiation or completion of clinical trials
may occur as a result of many factors. Further examples of such risks and
uncertainties also include, but are not limited to: the obtaining of sufficient
financing to maintain the Company's planned operations; 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; and
changing market conditions. The Company does not undertake to update forward-
looking statements. Although the Company believes that the forward-looking
statements contained herein are reasonable, it can give no assurances that the
Company's expectations are correct.
RESULTS OF OPERATIONS
In January 2001, the Company entered into a worldwide non-exclusive
license agreement with Atugen for a broad portfolio of patents and technologies
that relate to antisense for therapeutic and diagnostic applications. This
agreement has an initial term which expires in July 2010 and includes an upfront
payment in cash and future royalties on product sales. The Company has
recognized $70,000 of revenues for the three months ended March 31, 2001 in
relation to this license agreement.
Costs and expenses totaled approximately $8.2 million in the three
months ended March 31, 2001, a decrease of approximately $1.2 million for the
same period in 2000. Costs, excluding non-cash equity related compensation and
the write-down of the Promega note, increased approximately $5.7 million for the
period ended March 31, 2001, mainly due to increased drug supply costs and
investigator and monitor fees for current on-going clinical studies along with
increased payroll costs due to increased headcount.
Research and development expenses, excluding non-cash equity related
compensation, totaled approximately $5.7 million in the three months ended March
31, 2001, an increase of approximately $5.2 million from the same period in
2000. The increase in research and development expenses is primarily
attributable to drug supply costs and investigator and monitor fees for current
on-going clinical studies, and increased payroll costs due to increased
headcount.
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As a result of the initiation of Phase 3 clinical trials for melanoma,
chronic lymphocytic leukemia (CLL) and multiple myeloma, it is anticipated that
research and development expenses will continue to increase in the future as the
development program for Genasense(TM) expands and more patients are treated in
clinical trials. Furthermore, the Company is pursuing other opportunities for
new product development candidates which pursuits, if successful, will require
additional research and development expenses. There can be no assurance,
however, that the trials will proceed in this manner or that the Company will
initiate new development programs. There were no Phase 3 on-going clinical
studies and related drug supply costs in the three months ended March 31, 2000.
General and administrative expenses, excluding non-cash equity related
compensation, were approximately $1.4 million for the three months ended March
31, 2001, an increase of $0.5 million from the same period in 2000. The increase
is primarily related to payroll costs resulting from additional headcount and
increased marketing-related spending.
In April 2001, the Company verbally agreed to settle its lawsuit with
Promega (See Note 2). The Company agreed to reduce the $1.2 million promissory
note to $200,000 and forgive all the accrued interest at March 31, 2001 of
approximately $158,700. The Company has recorded a one time cost for the Promega
settlement of $1.0 million for the three months ended March 31, 2001. The
accrued interest has been recorded in full against a provision established by
the Company at the time of the sale of JBL, and, therefore, will not be
reflected in the Company's consolidated statement of operations in fiscal 2001.
The remaining balance of $200,000 is to be repaid by Promega upon the settlement
of both the Spill and Casmalia Disposal Site (See Note 10).
Non-cash equity related compensation totaled approximately $0.2 million
in the three months ended March 31, 2001, decreasing approximately $7.8 million
from the same period in 2000. The decrease is primarily attributable to the
acceleration of stock options for retiring Board members in fiscal 2000.
On March 4, 1999, the Company and SkyePharma (on behalf of itself and
its affiliates) entered into the Interim JV Agreement pursuant to which the
Company was released from all liability relating to unpaid development costs and
funding obligations of Genta Jago. SkyePharma agreed to be responsible for
substantially all the obligations of the joint venture to third parties and for
the further development of the joint venture's products, with any net income
resulting therefrom to be allocated in agreed-upon percentages between the
Company and SkyePharma. As a result of the Interim JV Agreement, the Company
wrote off its equity interest in the net loss of the joint venture and, as such,
recorded a gain of approximately $2.3 million for the three months ended March
31, 1999. In accordance with revised revenue sharing agreements, the Company
recorded $502,000 in income for the three months ended March 31, 2000 for its
share of net income of Genta Jago in relation to Skyepharma's royalty agreement
with Elan Corporation for Genta Jago's product, Naproxen.
The Company's net loss from operations before accrued dividends totaled
approximately $7.5 million, or $0.15 per common share, for the three months
ended March 31, 2001 compared to a net loss from continuing operations of
approximately $8.7 million, or $0.31 per common share, for the same period in
2000. During the three months ended March 31, 2000, as a result of accrued
dividends on the Company's preferred stock of approximately $3.4 million, the
Company's net loss per common share was $0.44. As a result of the mandatory
conversion of Series D Convertible Preferred Stock in June 2000, no dividends
were required to be paid beyond January 29, 2000, and therefore, there were no
accrued dividends during the three months ended March 31, 2001. The Company's
net loss applicable to common shares for the three months ended March 31, 2001
was less than those reported for the comparable period of 2000 primarily as a
result of higher non-cash stock compensation charges and dividends accrued on
preferred stock in fiscal 2000.
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 for each period.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from
private and public offerings of its
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equity securities. Cash provided from these offerings totaled approximately
$175.6 million through March 31, 2001, including net proceeds of $40.0 million
received in 2000 and $10.4 million received in 1999. At March 31, 2001, the
Company had cash, cash equivalents and short-term investments totaling $43.6
million compared to approximately $49.6 million at December 31, 2000. Management
believes that at the current rate of spending, the Company will have sufficient
cash funds to maintain its present operations into the second quarter of 2002.
The Company entered into the JBL Agreement with Promega on March 19,
1999. Under the agreement, a wholly owned subsidiary of Promega acquired
substantially all of the assets and assumed certain liabilities of JBL for
approximately $4.8 million in cash, a promissory note for $1.2 million at a 7%
annual interest rate maturing on the later of June 30, 2000 or the Environmental
Compliance Date, and certain pharmaceutical development services in support of
the Company's development activities. The closing of the sale of JBL was
completed on May 10, 1999. As previously discussed, the Company verbally agreed
to settle this matter. The Company has agreed to reduce the $1.2 million
promissory note to $200,000 and forgive all the accrued interest at March 31,
2001 of approximately $158,700. The Company has recorded a one time cost for the
Promega settlement of $1.0 million for the three months ended March 31, 2001.
The accrued interest has been recorded in full against a provision established
by the Company at the time of the sale of JBL, and therefore, will not be
reflected in the Company's consolidated statement of operations in fiscal 2001.
The remaining balance of $200,000 is to be repaid by Promega upon the settlement
of both the Spill and Casmalia Disposal Site (See Note 10).
The Company's major source of expenditures relates to its research and
development activities, which includes the Company's current and on-going
clinical trials. The Company expects this to continue in the future until the
lead anti-cancer drug, Genasense(TM), is approved for commercialization.
In the quarter ended March 31, 2001, the Company entered into
commitments relating to the Company's Gallium products franchise with various
firms to develop and manufacture certain gallium-containing compounds. The
Company believes that successful development of this program may yield
substantial clinical and competitive advantages. The cost of these commitments
is expected to be approximately $800,000, all of which will be expensed in
research and development as incurred for registration and anticipated clinical
trials.
The Company will need substantial additional funds before it can expect
to realize significant product revenue. To the extent that the Company is
successful in accelerating its development of Genasense(TM) or in expanding its
development portfolio or acquiring or adding new development candidates, the
current cash resources would be consumed at a greater rate. 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 engage legal services 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 financing, will be required in order for the Company to continue its
planned operations beyond the second quarter of 2002. 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 that the Company
devotes to sales and marketing capabilities; (iv) technological advances; (v)
the activities of competitors; and (vi) 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 -- Our Business Will Suffer if We Fail
to Obtain Timely Funding."
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
and clinical testing activities, the manufacturing and/or market introduction of
potential products and expansion of its administrative activities.
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RECENT ACCOUNTING PRONOUNCEMENTS
The Company implemented SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended, on January 1, 2001 and did not have any
derivative instruments that resulted in a transition adjustment.
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.
The Company may be unsuccessful in our efforts to commercialize our
pharmaceutical products, such as Ganite(TM) and Genasense(TM).
The commercialization of our pharmaceutical products involves a number
of significant challenges. In particular, our ability to commercialize products,
such as Ganite(TM) and Genasense(TM), depends, in large part, on the success of
our clinical development programs, and our sales and marketing efforts to
physicians, patients and third-party payors. A number of factors could impact
these efforts, including our ability to demonstrate clinically that our products
have utility beyond current indications, delays by regulatory authorities in
granting marketing approvals, our limited financial resources and sales and
marketing experience relative to our competitors, perceived differences between
our products and those of our competitors, the availability and level of
reimbursement of our products by third-party payors, incidents of adverse
reactions, side effects or misuse of our products and the unfavorable publicity
that could result, or the occurrence of manufacturing, supply or distribution
disruptions. In particular, the Company has said that it intends to be a direct
marketer of its products in the United States. Our inability to build a sales
force capable of marketing our pharmaceutical products will adversely affect our
sales and limit the commercial success of our products.
Ultimately, our efforts may not prove to be as effective as the efforts
of our competitors. In the United States and elsewhere, our products face
significant competition in the marketplace. The conditions that our products
treat, and some of the other disorders for which we are conducting additional
studies, are currently treated with several drugs, many of which have been
available for a number of years or are available in inexpensive generic forms.
Thus, we will need to demonstrate to physicians, patients and third party payors
that the cost of our products is reasonable and appropriate in light of their
safety and efficacy, the price of competing products and the related health care
benefits to the patient. Even if we are able to increase sales over the next
several years, we cannot be sure that such sales and other revenue will reach a
level at which we will attain profitability.
Our business will suffer if we fail to obtain timely funding.
Our Company's operations to date have consumed substantial amounts of
cash. Based on our current operating plan, we believe that our available
resources, including the proceeds from two private offerings in September and
November 2000, will be adequate to satisfy our capital needs into the second
quarter of 2002. Our future capital requirements will depend on the results of
our research and development activities, pre-clinical studies and bioequivalence
and clinical trials, competitive and technological advances, and regulatory
processes of the FDA and other regulatory authority. If our operations do not
become profitable before we exhaust existing resources, we will need to raise
additional financing in order to continue our operations. We may seek additional
financing through public and private resources, including debt or equity
financing, or through collaborative or other arrangements with research
institutions and corporate partners. We may not be able to obtain adequate funds
for our operations from these sources when needed or on acceptable terms. If we
raise additional capital by issuing equity, or securities convertible into
equity, the ownership interest of existing Genta stockholders will be subject to
further dilution and share prices may decline. If we are unable to raise
additional financing, we will need to do the following:
- delay, scale back or eliminate some or all of our research and product
development programs;
- license third parties to commercialize products or technologies that
we would otherwise seek to develop ourselves;
- sell Genta to a third party;
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- to cease operations; or
- declare bankruptcy.
Many of our products are in an early stage of development.
Most of our resources have been dedicated to applying molecular biology
and medicinal chemistry to the research and development of potential antisense
pharmaceutical products based upon oligonucleotide technology. While we have
demonstrated the activity of antisense oligonucleotide technology in model
systems in vitro in animals, only one of these potential antisense
oligonucleotide products, Genasense(TM), has been tested in humans. Results
obtained in preclinical studies or early clinical investigations are not
necessarily indicative of results that will be obtained in extended human
clinical trials. Our products may prove to have undesirable and unintended side
effects or other characteristics that may prevent our obtaining FDA or foreign
regulatory approval for any indication. In addition, it is possible that
research and discoveries by others will render our oligonucleotide technology
obsolete or noncompetitive.
Clinical trials are costly and time consuming and are subject to delays.
Clinical trials are very costly and time-consuming. How quickly we are
able to complete a clinical study depends upon several factors, including the
size of the patient population, how easily patients can get to the site of the
clinical study, and the criteria for determining which patients are eligible to
join the study. Delays in patient enrollment could delay completion of a
clinical study and increase its costs, and could also delay the commercial sale
of the drug that is the subject of the clinical trial.
Our commencement and rate of completion of clinical trials also may be
delayed by many other factors, including the following:
- inability to obtain sufficient quantities of materials used for
clinical trials;
- inability to adequately monitor patient progress after treatment;
- unforeseen safety issues;
- the failure of the products to perform well during clinical trials;
and
- government or regulatory delays.
We cannot market and sell our products in the United States or in other
countries if we fail to obtain the necessary regulatory approvals.
The United States Food and Drug Administration and comparable agencies
in foreign countries impose substantial premarket approval requirements on the
introduction of pharmaceutical products through lengthy and detailed preclinical
and clinical testing procedures and other costly and time-consuming procedures.
Satisfaction of these requirements typically takes several years or more
depending upon the type, complexity and novelty of the product. While limited
trials of our products have produced favorable results, we cannot apply for FDA
approval to market any of our products under development until the product
successfully completes its preclinical and clinical trials. Several factors
could prevent successful completion or cause significant delays of these trials,
including an inability to enroll the required number of patients or failure to
demonstrate adequately that the product is safe and effective for use in humans.
If safety concerns develop, the FDA could stop our trials before completion. If
we are not able to obtain regulatory approvals for use of our products under
development, or if the patient populations for which they are approved are not
sufficiently broad, the commercial success of our products could be limited.
We may be unable to obtain or enforce patents and other proprietary rights to
protect our business.
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Our success will depend to a large extent on our ability to (1) obtain
U.S. and foreign patent or other proprietary protection for our technologies,
products and processes, (2) preserve trade secrets and (3) operate without
infringing the patent and other proprietary rights of third parties. Legal
standards relating to the validity of patents covering pharmaceutical and
biotechnological inventions and the scope of claims made under such patents are
still developing. There is no consistent policy regarding the breadth of claims
allowed in biotechnology patents. As a result, our ability to obtain and enforce
patents that protect our drugs is highly uncertain and involves complex legal
and factual questions.
We have more than 74 U.S. and international patents to aspects of our
technology, which includes novel compositions of matter, methods of large-scale
synthesis and methods of controlling gene expression. We may not receive any
issued patents based on pending or future applications. Our issued patents may
not contain claims sufficiently broad to protect us against competitors with
similar technology. Additionally, our patents, our partners' patents and patents
for which we have license rights may be challenged, narrowed, invalidated or
circumvented. Furthermore, rights granted under our patents may not cover
commercially valuable drugs or processes and may not provide us with any
competitive advantage.
We may have to initiate arbitration or litigation to enforce our patent
and license rights. If our competitors file patent applications that claim
technology also claimed by us, we may have to participate in interference or
opposition proceedings to determine the priority of invention. An adverse
outcome could subject us to significant liabilities to third parties and require
us to cease using the technology or to license the disputed rights from third
parties. We may not be able to obtain any required licenses on commercially
acceptable terms or at all.
The cost to us of any litigation or proceeding relating to patent
rights, even if resolved in our favor, could be substantial. Some of our
competitors may be able to sustain the costs of complex patent litigation more
effectively than we can because of their substantially greater resources.
Uncertainties resulting from the initiation and continuation of any pending
patent or related litigation could have a material adverse effect on our ability
to compete in the marketplace.
We rely on our contractual collaborative arrangements with research
institutions and corporate partners for development and commercialization of our
products.
Our business strategy depends in part on our continued ability to
develop and maintain relationships with leading academic and research
institutions and independent researchers. The competition for such relationships
is intense, and we can give no assurances that we will be able to develop and
maintain such relationships on acceptable terms. We have entered into a number
of collaborative relationships relating to specific disease targets and other
research activities in order to augment our internal research capabilities and
to obtain access to specialized knowledge and expertise. The loss of any of
these collaborative relationships could have a material adverse effect on our
business.
Similarly, strategic alliances with corporate partners, primarily
pharmaceutical and biotechnology companies, may help us develop and
commercialize drugs. Various problems can arise in strategic alliances. A
partner responsible for conducting clinical trials and obtaining regulatory
approval may fail to develop a marketable drug. A partner may decide to pursue
an alternative strategy or alternative partners. A partner that has been granted
marketing rights for a certain drug within a geographic area may fail to market
the drug successfully. Consequently, strategic alliances that we may enter into
in the future may not be scientifically or commercially successful. We may be
unable to negotiate advantageous strategic alliances in the future. The absence
of, or failure of, strategic alliances could harm our efforts to develop and
commercialize our drugs.
The raw materials for our products are produced by a limited number of
suppliers.
The raw materials that we require to manufacture our drugs,
particularly oligonucleotides, are available from only a few suppliers, namely
those with access to our patented technology. If these few suppliers cease to
provide us with the necessary raw materials or fail to provide us with adequate
supply of materials at an acceptable price and
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quality, we could be materially adversely affected.
The successful commercialization of our products will depend on obtaining
coverage and reimbursement for use of our products from third-party payors.
Our ability to commercialize drugs successfully will depend in part on
the extent to which various third parties are willing to reimburse patients for
the costs of our drugs and related treatments. These third parties include
government authorities, private health insurers, and other organizations, such
as health maintenance organizations. Third-party payors often challenge the
prices charged for medical products and services. Accordingly, if less costly
drugs are available, third-party payors may not authorize or may limit
reimbursement for our drugs, even if they are safer or more effective than the
alternatives. In addition, the federal government and private insurers have
considered ways to change, and have changed, the manner in which health care
services are provided and paid for in the United States. In particular, these
third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products. In the future, it is possible that the government may institute price
controls and further limits on Medicare and Medicaid spending. These controls
and limits could affect the payments we collect from sales of our products.
Internationally, medical reimbursement systems vary significantly, with some
medical centers having fixed budgets, regardless of levels of patient treatment,
and other countries requiring application for, and approval of, government or
third-party reimbursement. Even if we or our partners succeed in bringing
therapeutic products to market, uncertainties regarding future health care
policy, legislation and regulation, as well as private market practices, could
affect our ability to sell our products in commercially acceptable quantities at
profitable prices.
We could become involved in time-consuming and expensive patent litigation
and adverse decisions in patent litigation could cause us to incur additional
costs and experience delays in bringing new drugs to market.
The pharmaceutical and biotechnology industries have been characterized
by time-consuming and extremely expensive litigation regarding patents and other
intellectual property rights. We may be required to commence, or may be made a
party to, litigation relating to the scope and validity of our intellectual
property rights, or the intellectual property rights of others. Such litigation
could result in adverse decisions regarding the patentability of our inventions
and products, or the enforceability, validity, or scope of protection offered by
our patents. Such decisions could make us liable for substantial money damages,
or could bar us from the manufacture, use, or sale of certain products,
resulting in additional costs and delays in bringing drugs to market. We may not
have sufficient resources to bring any such proceedings to a successful
conclusion. It may be that entry into a licensing arrangement would allow us to
avoid any such proceedings. We may not be able, however, to enter into any such
licensing arrangement on terms acceptable to us, or at all.
We also may be required to participate in interference proceedings
declared by the U.S. Patent and Trademark Office and in International Trade
Commission proceedings aimed at preventing the importing of drugs that would
compete unfairly with our drugs. Such proceedings could cause us to incur
considerable costs.
Our business exposes us to potential product liability which may have a
negative effect on our financial performance.
The administration of drugs to humans, whether in clinical trials or
commercially, exposes us to potential product and professional liability risks,
which are inherent in the testing, production, marketing and sale of human
therapeutic products. Product liability claims can be expensive to defend and
may result in large judgments or settlements against us, which could have a
negative effect on our financial performance. We maintain product liability
insurance (subject to various deductibles), but our insurance coverage may not
be sufficient to cover claims. Furthermore, we cannot be certain that we will
always be able to purchase sufficient insurance at an affordable price. Even if
a product liability claim is not successful, the adverse publicity and time and
expense of defending such a claim may interfere with our business.
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If we cease doing business and liquidate our assets, we are required to
distribute proceeds to holders of our preferred stock before we distribute
proceeds to holders of our common stock.
In the event of a dissolution or liquidation of Genta, holders of Genta
common stock will not receive any proceeds until holders of 261,200 outstanding
shares of Genta Series A preferred stock are paid a $13.1 million dollar
liquidation preference.
There currently exist certain interlocking relationships and potential
conflicts of interest.
Certain of our affiliates, Aries Domestic Fund, LP, Aries Domestic Fund
II, LP, and Aries Trust (together the "Aries Funds") have the contractual right,
which expires January 1, 2002, to appoint a majority of the members of the Board
of Directors of the Company. Paramount Capital Asset Management, Inc. ("PCAM")
is the investment manager of The Aries Funds. The Aries Funds have the right to
convert and exercise their securities into a significant portion of the
outstanding Common Stock. Dr. Lindsay A. Rosenwald, the Chairman and sole
stockholder of PCAM, is also the Chairman of Paramount Capital, Inc. and of
Paramount Capital Investments LLC ("PCI"), a New York-based merchant banking and
venture capital firm specializing in biotechnology companies. PCAM, PCI and its
affiliates collectively control approximately 38% of the Company's Common Stock
when calculated on a fully diluted basis. In the regular course of its business,
PCI identifies, evaluates and pursues investment opportunities in biomedical and
pharmaceutical products, technologies and companies. Generally, the law requires
that any transactions between Genta and any of its affiliates be on terms that,
when taken as a whole, are substantially as favorable to us as those then
reasonably obtainable from a person who is not an affiliate in an arms-length
transaction. Nevertheless, our affiliates including PCAM and PCI are not
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 we do not expect and you should not expect, that any
biomedical or pharmaceutical product or technology developed by any affiliate in
the future will be made available to us. In addition, some of our 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. We cannot assure you that
these other companies will not have interests in conflict with ours.
Concentration of ownership of our stock could lead to a delay or prevent a
change of control.
Our directors, executive officers and principal stockholders and their
affiliates own a significant percentage of our outstanding common stock and
preferred stock. They also own, through the exercise of options and warrants,
the right to acquire even more common stock and preferred stock. As a result,
these stockholders, if acting together, have the ability to influence the
outcome of corporate actions requiring stockholder approval. This concentration
of ownership may have the effect of delaying or preventing a change in control
of Genta.
Anti-takeover provisions in our certificate of incorporation and Delaware law
may prevent our stockholders from receiving a premium for their shares.
Our certificate of incorporation and by-laws include provisions that
could discourage takeover attempts and impede stockholders ability to change
management. The approval of 66-2/3% of our voting stock is required to approve
certain transactions and to take certain stockholder actions, including the
amendment of the by-laws and the amendment, if any, of the anti-takeover
provisions contained in our certificate of incorporation.
We anticipate that we will incur additional losses.
The Company has not been profitable to date, incurring substantial
operating losses associated with ongoing research and development activities,
preclinical testing, clinical trials and manufacturing activities. From the
period since its inception to March 31, 2001, the Company has incurred a
cumulative net loss of $159.4 million. We expect to continue to incur losses
until such time as product and other revenue exceed expenses of operating our
business. While we seek to attain profitability, we cannot be sure that we will
ever achieve product and other revenue sufficient for us to attain this
objective.
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Claims of Genta's Default Under Various Agreements.
During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe"), a
wholly-owned subsidiary of the Company, received approximately 5.4 million
French Francs (as of March 31, 2001, approximately $726,900) of funding in the
form of a loan from the French government agency L'Agence Nationale de
Valorisation de la Recherche ("ANVAR") towards research and development
activities pursuant to an agreement (the "ANVAR Agreement") between ANVAR, Genta
Europe and Genta. In October 1996, as part of the Company's restructuring
program, Genta Europe terminated all scientific personnel. 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, ANVAR notified Genta Europe by letter of its claim that
the Company remains liable for FF4,187,423 (as of March 31, 2001, approximately
$563,700) and is required to pay this amount immediately. The Company does not
believe that under the terms of the ANVAR Agreement ANVAR is entitled to request
early repayment. ANVAR notified the Company that it was responsible as a
guarantor of the note for the repayment. The Company's legal counsel in Europe
has again notified ANVAR that the Company does not agree that the note is
payable. The Company is working with ANVAR to achieve a mutually satisfactory
resolution. However, there can be no assurance that such a resolution will be
obtained. 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.
On June 30, 1998, Marseille Amenagement, a company affiliated with the
city of Marseilles, France, filed suit in France to evict Genta Europe from its
facilities in Marseilles and to demand payment of alleged back rent due and of a
lease guarantee for nine years' rent. Following the filing of this claim and in
consideration of the request for repayment of the loan from ANVAR, Genta
Europe's Board of Directors directed the management to declare a "Cessation of
Payment." Under this procedure, Genta Europe ceased any operations and
terminated its only employee. A liquidator was appointed by the Court to take
control of any assets of Genta Europe and to make payment to creditors. In
December 1998, the Court in Marseilles dismissed the case against Genta Europe
and indicated that it had no jurisdiction against Genta Incorporated. In August
1999, Marseille Amenagement instituted legal proceedings against the Company at
the Commercial Court in France, claiming alleged back rent payment of FF663,413
(as of March 31, 2001, approximately $89,300) and early termination payment of
FF1,852,429 (as of March 31, 2001, approximately $249,400). A court hearing has
been scheduled for June 11, 2001. The Company is working with its counsel in
France to achieve a mutually satisfactory resolution. However, there can be no
assurance that such a resolution will be obtained. On March 31, 2001, the
Company has $574,800 of net liabilities of liquidated subsidiary recorded and,
therefore, management believes no additional accrual is necessary. There can be
no assurance that the Company will not incur material costs in relation to this
claim.
Dividends.
The Company has never paid cash dividends on its common stock and does
not anticipate paying any such dividends in the foreseeable future. As a result
of the mandatory conversion of Series D Convertible Preferred Stock in June
2000, no dividends were required to be paid beyond January 29, 2000. The Company
currently intends to retain its earnings, if any, for the development of its
business.
The Company is dependent on key executives and scientists.
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.
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
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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 the Company or its competitors, other evidence of the
safety or efficacy of products of the Company or its competitors, announcements
of technological innovations or new therapeutic products by the Company or its
competitors, governmental regulation, developments in patent or other
proprietary rights of the Company or its 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. As of May 7, 2001, the Company
had 52,710,330 shares of common stock outstanding. 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 -- If we
cease doing business and liquidate our assets, we are required to distribute
proceeds to holders of our preferred stock before we distribute proceeds to
holders of our common stock," 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. A
semi-annual groundwater-monitoring program is being conducted, under the
supervision of the California Regional Water Quality Control Board for the
purpose of determining whether the levels of chloroform and PCEs have decreased
over time. The results of the latest sampling conducted by JBL shows that PCEs
and chloroform have decreased in all but one of the monitoring sites. The
Company has agreed to indemnify Promega in respect of this matter. Based on an
estimate provided to the Company by the consulting firm, at December 31, 2000
and March 31, 2001 the Company has $49,700 and $34,700, respectively, accrued to
cover remedial costs. Prior to 1999, such costs were not estimable and,
therefore, no loss provision had been recorded. The Company believes that any
costs stemming from 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. Based on volume amounts from the EPA, the Company concluded that
it was probable that a liability had been incurred and accrued $75,000 during
1998. In 1999, the EPA estimated that the Company would be required to pay
approximately $63,200 to settle their potential liability. The Company expects
to receive a revised settlement proposal from the EPA during the second quarter
of 2001. While the terms of the settlement with the EPA have not been finalized,
they should contain standard contribution protection and release language. The
Company has agreed to indemnify Promega in respect of this matter. The Company
believes that any costs stemming from further investigation or remediating this
contamination will not have a material adverse effect on the business of the
Company, although there can be no assurance thereof.
During May 2000, Promega notified Genta by letter of two claims against
Genta and Genta's subsidiary, Genko Scientific, Inc. (f/k/a JBL Scientific,
Inc.) ("Genko"), for indemnifiable damages in the aggregate amount of $2,820,000
under the JBL Agreement. Promega's letter stated that it intends to reduce to
zero the principal amount of the $1.2 million promissory note it issued as
partial payment for the assets of Genko (which note provided for a payment of
$700,000 on June 30, 2000) and that therefore Genta owes Promega approximately
$1.6 million. Genta believed that Promega's claims were without merit and ,
accordingly, on October 16, 2000 Genta filed suit in the US District Court of
California against Promega for the non-payment of the $1.2 million note plus
interest. On November 6, 2000, Promega filed a countersuit alleging
indemnifiable damages in the aggregate amount of $2,820,000. In April 2001, the
Company came to a verbal settlement with Promega regarding the unpaid note of
$1.2 million (See Note 8). Under the tentative agreement, the Company has agreed
to the following (i) write-off the accrued interest (ii) write down the $1.2
million note receivable to $200,000, which is to be repaid upon the settlement
of both the Spill and Casmalia Disposal Site (See Note 10).
During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe"), a
wholly-owned subsidiary of the Company, received approximately 5.4 million
French Francs (as of March 31, 2001, approximately $726,900) of funding in the
form of a loan from the French government agency L'Agence Nationale de
Valorisation de la Recherche ("ANVAR") towards research and development
activities pursuant to an agreement (the "ANVAR Agreement") between ANVAR, Genta
Europe and Genta. In October 1996, as part of the Company's restructuring
program, Genta Europe terminated all scientific personnel. 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, ANVAR notified Genta Europe by letter of its claim that
the Company remains liable for FF4,187,423 (as of March 31, 2001, approximately
$563,700) and is required to pay this amount immediately. The Company does not
believe that under the terms of the ANVAR Agreement ANVAR is entitled to request
early repayment. ANVAR notified the Company that it was responsible as a
guarantor of the note for the repayment. The Company's legal counsel in Europe
has again notified ANVAR that the Company does not
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agree that the note is payable. The Company is working with ANVAR to achieve a
mutually satisfactory resolution. However, there can be no assurance that such a
resolution will be obtained. 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.
On June 30, 1998, Marseille Amenagement, a company affiliated with the
city of Marseilles, France, filed suit in France to evict Genta Europe from its
facilities in Marseilles and to demand payment of alleged back rent due and of a
lease guarantee for nine years' rent. Following the filing of this claim and in
consideration of the request for repayment of the loan from ANVAR, Genta
Europe's Board of Directors directed the management to declare a "Cessation of
Payment." Under this procedure, Genta Europe ceased any operations and
terminated its only employee. A liquidator was appointed by the Court to take
control of any assets of Genta Europe and to make payment to creditors. In
December 1998, the Court in Marseilles dismissed the case against Genta Europe
and indicated that it had no jurisdiction against Genta Incorporated. In August
1999, Marseille Amenagement instituted legal proceedings against the Company at
the Commercial Court in France, claiming alleged back rent payment of FF663,413
(as of March 31, 2001, approximately $89,300) and early termination payment of
FF1,852,429 (as of March 31, 2001, approximately $249,400). A court hearing has
been scheduled for June 11, 2001. The Company is working with its counsel in
France to achieve a mutually satisfactory resolution. However, there can be no
assurance that such a resolution will be obtained. On March 31, 2001, the
Company has $574,800 of net liabilities of liquidated subsidiary recorded and,
therefore, management believes no additional accrual is necessary. There can be
no assurance that the Company will not incur material costs in relation to this
claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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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/ Raymond P. Warrell, Jr., M.D.
------------------------------------
Name: Raymond P. Warrell, Jr., M.D.
Title: Chairman, President, Chief Executive Officer
and Principal Executive Officer
By: /s/ Gerald M. Schimmoeller
-------------------------------
Name: Gerald M. Schimmoeller
Title: Vice President, Chief Financial Officer
and Principal Accounting Officer
Date: May 15, 2001
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