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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 June 30, 2000
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)
99 Hayden Avenue, Suite 200 02421-7966
Lexington, Massachusetts (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(781) 860-5150
(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 August 1, 2000, the registrant had 44,117,434 shares of common stock
outstanding.
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GENTA INCORPORATED
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 1999
and June 30, 2000 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
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GENTA INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------
ASSETS 1999 2000
-------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 10,100,603 $ 6,899,677
Short term investments ................................................... -- 1,277,479
Notes receivable ......................................................... 1,333,739 1,577,115
Prepaid expenses and other current assets ................................ 22,087 117,975
------------- -------------
Total current assets ........................................................ 11,456,429 9,872,246
------------- -------------
Property and equipment, net ................................................. 30,357 41,370
Intangibles, net ............................................................ 576,904 3,304,750
Deposits and other assets ................................................... 164,500 --
------------- -------------
Total assets ................................................................ $ 12,228,190 $ 13,218,366
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 414,965 $ 553,194
Accrued compensation ..................................................... 487,609 281,981
Other accrued expenses ................................................... 544,728 767,521
Net liabilities of liquidated foreign subsidiary ......................... 574,812 574,812
------------- -------------
Total current liabilities ................................................... 2,022,114 2,177,508
------------- -------------
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized, convertible preferred shares
outstanding:
Series A convertible preferred stock, $.001 par value; 277,100 and
268,700 shares issued and outstanding at December 31, 1999 and
June 30, 2000, respectively, liquidation value is $13,435,000 at
June 30, 2000 ........................................................ 277 269
Series D convertible preferred stock, $.001 par value; 123,451 and zero
shares issued and outstanding at December 31, 1999 and June 30, 2000,
respectively; liquidation value is zero at June 30, 2000 ............. 124 0
Common stock; $.001 par value; 95,000,000 shares authorized,
25,456,123 and 43,559,669 shares issued and outstanding at
December 31, 1999 and June 30, 2000, respectively ...................... 25,456 43,560
Additional paid-in capital ............................................... 146,862,374 163,751,483
Accumulated deficit ...................................................... (139,497,618) (151,173,863)
Accrued dividends payable ................................................ 5,134,912 0
Deferred compensation .................................................... (2,319,449) (1,580,591)
------------- -------------
Total stockholders' equity .................................................. 10,206,076 11,040,858
------------- -------------
Total liabilities and stockholders' equity .................................. $ 12,228,190 $ 13,218,366
============= =============
</TABLE>
See accompanying notes.
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GENTA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating expenses:
Research and development (excluding non-cash 608,070 2,047,916 1,698,036 2,553,707
stock compensation charges of $144,921 and
($50,846) for the three months ended June 30,
1999 and 2000, respectively, and $144,921 and
$1,156,434 for the six months ended June 30,
1999 and 2000, respectively)
General and administrative (excluding non-cash 1,203,445 976,665 2,173,357 1,830,389
stock compensation charges of ($1,830) and
$116,821 for the three months ended June 30,
1999 and 2000, respectively, and $140,670 and
$6,900,220 for the six months ended June 30,
1999 and 2000)
Non-cash equity related compensation ........... 143,091 65,975 285,591 8,056,654
------------ ------------ ------------ ------------
1,954,606 3,090,556 4,156,984 12,440,750
------------ ------------ ------------ ------------
Loss from operations ........................... (1,954,606) (3,090,556) (4,156,984) (12,440,750)
Equity in net (loss) income of
joint venture ............................... 2,284,018 501,945
Other income (expense):
Interest income ............................. 31,240 153,712 83,104 269,072
Interest expense ............................ (5,825) (173) (10,531)
Other income (expense) ...................... -- 4,022 (149,114) 4,022
------------ ------------ ------------ ------------
Net loss from continuing operations ............ (1,923,366) (2,938,647) (1,939,149) (11,676,242)
Loss from discontinued operations .............. 0 0 (189,407) 0
Gain on sale of discontinued operations ........ 1,606,956 0 1,606,956 0
------------ ------------ ------------ ------------
Net loss ....................................... (316,410) (2,938,647) (521,600) (11,676,242)
Dividends accrued on preferred stock ........... (2,027,648) 0 (2,916,348) (3,442,561)
------------ ------------ ------------ ------------
Net loss applicable to common shares ........... $ (2,344,058) $ (2,938,647) $ (3,437,948) $(15,118,803)
============ ============ ============ ============
Net (loss) income per share
Continuing operations ....................... $ (0.24) $ (0.09) $ (0.33) $ (0.49)
Discontinued operations ..................... 0.10 -- 0.10 --
------------ ------------ ------------ ------------
Net loss per common share ...................... $ (0.14) $ (0.09) $ (0.23) $ (0.49)
============ ============ ============ ============
Shares used in computing net
loss per common share ....................... 16,392,981 33,373,359 14,657,253 30,587,995
============ ============ ============ ============
</TABLE>
See accompanying notes.
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GENTA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1999 2000
---- ----
(restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ........................................................... $ (521,600) $(11,676,242)
Items reflected in net loss not requiring cash:
Depreciation and amortization ................................... 356,325 165,886
Equity in net gain of joint venture ............................. (2,284,018) --
Gain on sale of discontinued operations ......................... (1,606,956) --
Loss on abandonment of fixed assets ............................. 118,157 --
Compensation expense related to stock options ................... 285,591 8,056,654
Loss on sale of fixed assets .................................... 149,026 --
Changes in operating assets and liabilities ........................ (51,731) (90,450)
------------ ------------
Net cash used in operating activities .............................. (3,555,206) (3,544,152)
INVESTING ACTIVITIES
Purchase of short-term investments ................................. (501,400) (2,295,624)
Maturities of short-term investments ............................... 892,372 1,018,145
Purchase of property and equipment ................................. (36,531) (20,363)
Proceeds from sale of property and equipment ....................... 66,087 --
Principal payments received on notes receivable .................... -- 80,000
Purchase of intangibles ............................................ (100,000) (400,000)
Deposits and other ................................................. 5,069 --
------------ ------------
Net cash provided by investing activities .......................... 325,597 (1,617,842)
FINANCING ACTIVITIES
Issuance of common stock upon exercise of warrants and options ..... 95,319 1,970,015
Proceeds from equipment conversion to lease ........................ 51,827 --
Proceeds from sale of discontinued operations ...................... 4,750,000
-----------------------------------
Net cash provided by financing activities .......................... 4,897,146 1,970,015
-----------------------------------
(Decrease) increase in cash and cash equivalents ................... 1,667,537 (3,191,979)
Less cash at liquidated foreign subsidiary ......................... (8,947) (8,947)
Cash and cash equivalents at beginning of period ................... 1,566,288 10,100,603
------------ ------------
Cash and cash equivalents at end of period ......................... $ 3,224,878 $ 6,899,677
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid ...................................................... $ 173 $ 4,706
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock dividends accrued .................................. 2,916,348 3,442,561
Common stock issued in payment of dividends on preferred stock ..... 18,597 953,028
Note receivable from sale of discontinued operations................ 1,200,000
Note receivable from sale of equipment.............................. 200,000
Common stock issued in payment of patent portfolio.................. 2,400,000
Common stock issued in payment of patent portfolio.................. 84,380
</TABLE>
See accompanying notes.
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GENTA INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Genta
Incorporated, a Delaware corporation (the "Company" or "Genta"), 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 a complete set of
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. Accrued dividends have been restated for the three
and six months ended June 30, 1999 to conform with the 1999 year end
presentation and to record accrued dividends at fair market value. The impact
for the three and six months ended June 30, 1999 was an increase in net loss of
$1,627,628 and $2,173,919, or $0.10 and $0.15 per share, respectively.
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 consolidated
financial statements for the preceding fiscal year. Accordingly, these condensed
consolidated 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,
1999, as amended (the "1999 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 Biosciences, Inc., (f/k/a JBL Acquisition
Corp.) ("Promega") whereby 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, 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 (see
note 6).
As a result of the sale of JBL's business, the Company's specialty
biochemical manufacturing segment (JBL) has been presented as discontinued
operations for the period of January 1, 1999 through May 10, 1999. The assets
and liabilities relating to the discontinued operations have been charged to
gain on sale of JBL as of May 10, 1999. The results of operations for the
discontinued segment are included in discontinued operations in the condensed
consolidated statements of operations for the period of January 1, 1999 through
May 10, 1999. In connection with the sale of JBL's business, 252,300 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 "Accounting for Equity Instruments
that are Issued to other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services," 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 $1.7 million as of May 9, 2000 of which $0.9 million is included in
continuing operations for the six months ended June 30, 2000, and is based on
services provided and have been charged to research and development expense.
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(3) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include money market funds and highly liquid debt
instruments with remaining maturities of three months or less when purchased.
Short-term investments consist of corporate notes, all of which mature within 90
days from June 30, 2000. The estimated fair value of each investment security
approximates the amortized cost and therefore, no unrealized gains or losses
existed as of June 30, 2000.
(4) NET LOSS PER COMMON SHARE
Under SFAS No. 128, "Earnings per Share," the Company is required to
present basic and diluted earnings per share if applicable. Basic earnings per
share include 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 three and six months ended June 30, 1999
and 2000 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.
(5) STOCKHOLDERS' EQUITY
In May 2000, the Company entered into a licensing arrangement with
Molecular Biosystems, Inc. ("MBI"), for a broad portfolio of patents and
technology that relate to antisense for therapeutic and diagnostic applications.
The arrangement includes grants of both exclusive and non-exclusive rights from
MBI to Genta on a royalty-free basis in return for cash and shares of Common
Stock. The Company has recorded these costs as intangible assets which will be
amortized over five years. During August 2000, the Company entered into a
non-exclusive license agreement with Sequitur Incorporated for the
above-mentioned patents. The non-exclusive license agreement includes upfront
payments in cash and future royalties on product sales.
In April 2000, the Company entered into an asset purchase agreement with
Relgen LLC, a privately held corporation and a related party of Genta, in which
the Company acquired all assets, rights and technology to a portfolio of gallium
containing compounds, known as Ganite(TM), in exchange for 10,000 shares of
common stock, valued at $84,000, which is included in intangible assets and will
be amortized over five years. These compounds are used to treat cancer-related
hypercalcemia.
On March 27, 2000, the Board of Directors approved the mandatory conversion
of all Series D Convertible Preferred Stock, par value $.001 per share ("Series
D Preferred Stock"), and the mandatory redemption of all outstanding Class D
Warrants. As a result of the conversion of the Series D Preferred Stock, on June
15, 2000 the Company issued approximately 11.4 million shares of Common Stock.
The Company realized approximately $1.0 million from the exercise of the Class D
Warrants and issued 1,120,289 shares of Common Stock as a result of the
mandatory redemption on July 14, 2000. The Company will redeem the remaining
158,140 Class D Warrants, which have not been exercised prior to the redemption
date, at $0.10 per warrant for approximately $15,800. The Company has not
accrued dividends since the January 29, 2000 dividend date due to the mandatory
conversion of the Series D Preferred Stock.
During the six months ended June 30, 2000, an aggregate of 127,268 shares
of the Series D Preferred Stock, including the mandatory conversion, were
converted into an aggregate of 14,369,433 shares of Common Stock at a conversion
price of $0.88477 per share. An aggregate of 8,400 shares of the Company's
Series A Preferred Stock, par value $.001 per share ("Series A Preferred
Stock"), were converted at the option of the holders thereof into an aggregate
of 62,014 shares of Common Stock at a conversion price of $6.77 per share.
During the six months ended June 30, 2000, an aggregate of 1,353,429 and 982,571
shares of Common Stock were issued pursuant to the exercise of warrants
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and options, respectively, yielding proceeds to the Company of approximately
$976,137 and $1,970,015 is for the three and six months ended June 30, 2000,
respectively.
On March 27, 2000, four members of the Company's Board of Directors
resigned. The Company accelerated the vesting of their outstanding options and
extended the exercise period for one year. The Company expensed $6.6 million
during the first quarter of 2000 in connection with these options.
On January 29, 2000, the Company declared a dividend for the Series D
Preferred Stock. An aggregate of 953,028 shares of Common Stock were issued
during the second quarter which were valued at $8.6 million.
(6) 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 (see Note 2). The
principal of the note and accrued interest was due and payable as follows:
$700,000 plus interest is due on June 30, 2000 and $500,000 plus interest is due
on the later of June 30, 2000 or the Environmental Compliance Date as defined in
the JBL Agreement (see Note 2). Accrued interest on June 30, 2000 was $95,700.
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.), 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 believes that Promega's claims are without merit and intends to
vigorously pursue its rights under the JBL agreement. However, there can be no
assurance that the Company will not incur material costs or that losses may
occur in relation to this claim.
The Company also accepted a non-interest bearing promissory note in May
1999 from HealthStar, Inc. in the amount of $200,000 for the sale of equipment
to be paid in 10 equal monthly installments which was paid in full in April
2000.
(7) 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 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. The Company reversed its
$2.3 million deficit in Genta Jago and effectively forgave payment in working
capital loans to Genta Jago, for the three months ended March 31, 1999. In
accordance with revised revenue sharing agreements, Genta reported $502,000 in
income for the six months ended June 30, 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.
(8) COMMITMENTS AND CONTINGENCIES
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
chloroform and PCEs have decreased in all of the monitoring sites. The
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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, 1999
and June 30, 2000, the Company has $39,100 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.
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 third quarter of 2000. While
the terms of the settlement with the EPA have not been finalized, they should
contain standard contribution protection and release language. 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. The Company has agreed to
indemnify Promega in respect of this matter.
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 June 30, 2000, approximately $783,200) 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 June 30, 2000, approximately
$607,300) 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 loan for the repayment. The Company's legal counsel in Europe
has again notified ANVAR that the Company does not agree that the loan 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 he 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 June 30, 2000, approximately $96,200) and early termination payment of
FF1,852,429 (as of June 30, 2000, approximately $268,700). A court hearing has
been scheduled for September 4, 2000. 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 June 30, 2000, 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.
In June 2000, the Company signed a new five year lease agreement for 12,807
square feet of office space, at a cost of $320,000 per year.
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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, 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 activities, regulatory activities,
possible establishment of manufacturing activities and a sales and marketing
organization. From the period since its inception to June 30, 2000, the Company
has incurred a cumulative net loss of approximately $151.2 million. The Company
has experienced significant quarterly fluctuations in operating results and
expects that these fluctuations in revenues, expenses and losses will continue.
The 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 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
and 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 Management's Discussion and Analysis of
Financial Condition and Results of Operations ("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
The following discussion of results of operations relates to the Company's
continuing business and accordingly excludes the operations of the Company's
discontinued segment JBL Scientific.
Costs and expenses totaled $2.0 million in the three months ended June 30,
1999, and increased to $3.1 million for the same period in 2000, and $4.2
million for the six months ended June 30, 1999 compared with $12.4 million for
the same period in 2000. Primarily, the overall increase reflects non-cash stock
compensation charges as a result of acceleration of stock options for retiring
Board members, and increased costs associated with the Company's Phase 3
clinical trials.
Research and development expenses totaled $0.6 million in the three months
ended June 30, 1999, and increased to $2.0 million for the same period in 2000,
and $1.7 million for the six months ended June 30, 1999 compared with $2.6
million for the same period in 2000. The increase in research and development
expenses is primarily attributable to the cost of the drug supplies associated
with more clinical trials and patients being treated at higher doses. During the
six months ended June 30, 2000, $1.7 million was recorded for clinical trials
and for related drug supplies compared with $1.1 million for the same period in
the previous year.
As a result of the recent initiation of Phase 3 clinical trials for
melanoma, it is anticipated that research and development expenses will increase
in the future, as the development program for Genasense(TM) expands and more
patients are treated in clinical trials at higher doses, through longer or more
treatment cycles, or both. Furthermore, the Company is pursuing other
opportunities for new product development candidates which, if such pursuits are
successful, will require additional research and development expenses. There can
be no assurance, however, that the clinical trials will proceed in this manner
or that the Company will initiate new development programs.
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General and administrative expenses were $1.1 million for the three months
ended June 30, 1999, compared to $1.0 million for the same period in 2000, and
$2.1 million for the six months ended June 30, 1999 compared with $1.8 million
for the same period in 2000. The decrease partially reflects lower legal and
accounting fees, and non-cash patent write offs for the same periods of 1999 and
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 six months ended June 30, 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.
Interest income has fluctuated 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 equity securities. Cash provided from these
offerings totaled $134.9 million through June 30, 2000, including net proceeds
of $10.4 million raised in 1999 and $17.0 million raised during 1997. At June
30, 2000, the Company had cash, cash equivalents and short term investments
totaling $8.2 million compared to $10.1 million at December 31, 1999. Management
believes at the current rate of spending, the Company will have sufficient funds
to maintain its present operations through December 31, 2000.
As discussed in Note 2 to the Company's condensed consolidated financial
statements, the Company entered into an Asset Purchase 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, as defined in the JBL Agreement, 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.
During May 2000, Promega Biosciences, Inc. (f/k/a JBL Acquisition Corp.),
notified Genta by letter of two claims against Genta and Genta's subsidiary,
Genko Scientific, Inc. (f/k/a JBL Scientific, Inc.), 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 provides for a payment of $700,000 on June 30, 2000) and that
therefore Genta owes Promega approximately $1.6 million. Genta believes that
Promega's claims are without merit and intends to vigorously pursue its rights
under the JBL Agreement. However, there can be no assurance that the Company
will not incur material costs or that losses may occur in relation to this
claim.
On March 27, 2000, the Board of Directors approved the mandatory conversion
of all Series D Preferred Stock and the mandatory redemption of all outstanding
Class D Warrants. As a result of the conversion of the Series D Preferred Stock,
on June 15, 2000, the Company issued approximately 11.4 million shares of Common
Stock. The Company realized approximately $1.0 million from the exercise of the
Class D Warrants and issued 1,120,289 shares of Common Stock as a result of the
mandatory redemption on July 14, 2000. The Company will redeem the remaining
158,140 Class D Warrants, which have not been exercised prior to the redemption
date, at $0.10 per warrant for approximately $15,800. The Company did not accrue
dividends since January 29, 2000 due to the mandatory conversion of the Series D
Preferred Stock.
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During the six months ended June 30, 2000, including the mandatory
conversion, the holders of an aggregate of 127,268 shares of Series D Preferred
Stock converted those shares into an aggregate of 14,369,433 shares of Common
Stock, and the holders of an aggregate of 8,400 shares of Series A Preferred
Stock converted those shares into an aggregate of 62,014 shares of Common Stock.
An aggregate of 1,353,429 and 982,571 shares of common stock were issued
pursuant to the exercise of warrants and options, respectively.
During June 2000, the Company signed a new five year lease agreement for
12,807 square feet of office space, at a cost of $320,000 per year.
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 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 - We May be Liable For Claims of 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. 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.
IMPACT OF YEAR 2000
The Company has acquired and installed new computer hardware and upgraded
software in its facility. The total year 2000 project cost was $31,600 and has
been completed. As a result of the modifications to existing software and
conversions to new software the Company experienced no significant operational
problems for its computer systems related to the year 2000 date change. The
Company will continue to monitor its mission critical computer applications and
those of its suppliers throughout the year 2000 to ensure that any latent year
2000 matters that may arise are addressed promptly.
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.
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 our private offering in December 1999, will be
adequate to satisfy our capital needs through December 31, 2000. Our future
capital requirements will depend on the results of our research and development
activities, pre-clinical studies and bioequivalence and clinical
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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 or 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;
- cease operations; or
- declare bankruptcy.
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 Anticode(TM)
pharmaceutical products based upon oligonucleotide technology. While we have
demonstrated the activity of Anticode(TM) oligonucleotide technology in model
systems in vitro in animals, only one of these potential Anticode(TM)
oligonucleotide products, Genasense, has begun to be 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 trials.
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;
- 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 ("FDA") 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
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market any of our products under development until the product successfully
complete 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 cannot assure the commercial success of our products.
Even if our products are successfully developed and approved by the FDA and
corresponding foreign regulatory agencies, they may not enjoy commercial
acceptance or success, which would adversely affect our business and results of
operations. Several factors could limit our success, including:
- possible limited market acceptance among patients, physicians,
medical centers and third-party payors;
- our inability to access a sales force capable of marketing the
product;
- our inability to supply a significant amount of the product to
meet market demand; and
- the number and relative efficacy of competitive products that may
subsequently enter the market.
In addition, it is possible that we, or our collaborative partners, will be
unsuccessful in developing, marketing and implementing a commercialization
strategy for our products.
We may be unable to obtain or enforce patents and other proprietary rights to
protect our business.
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 100 U.S. and international patents and applications to
aspects of oligonucleotide 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.
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We rely on our collaborative arrangements with research institutions and
corporate partners for development 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. Furthermore, we currently rely on a potential
competitor, which is itself a development stage biotechnology company, to supply
us with chemical compounds necessary to the development of our drugs. 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 quality,
we could be materially adversely affected.
Our business will suffer if we fail to compete effectively with our competitors
and to keep up with new technologies.
The industries in which we operate are highly competitive and may become
even more competitive. We will need to continue to devote substantial efforts
and expense to research and development in order to maintain a competitive
position. It is possible that developments by others may succeed in developing
other new therapeutic drug candidates that are more effective and less costly
than those that we propose to develop and may render our current and proposed
products or technologies obsolete. Many of our competitors have greater
financial and human resources and more experience in research and development
than we have. Competitors that complete clinical trials, obtain regulatory
approvals and begin commercial sales of their products before us will enjoy a
significant competitive advantage. We anticipate that we will face increased
competition in the future as new companies enter the market and alternative
technologies become available.
Furthermore, biotechnology and related pharmaceutical technologies have
undergone and continue to be subject to rapid and significant change. We expect
that the technologies associated with biotechnology research and development
will continue to develop rapidly. Our future will depend in large part on our
ability to compete with these technologies. Any compounds, drugs or processes
that we develop may become obsolete before we recover the expenses incurred in
developing them.
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
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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 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.
The nature of our business exposes us to potential product and professional
liability risks, which are inherent in the testing, production, marketing and
sale of human therapeutic products. While we are covered against those claims by
a product liability insurance policy (subject to various deductibles), we cannot
be certain that our insurance coverage will be sufficient to cover any claim.
Uninsured product liability could have a material adverse effect on our
financial results. Additionally, it is possible that any insurance will not
provide us with adequate protection against potential liabilities.
We have used hazardous materials and could be held liable for damages for past
or accidental contamination or injury.
In October of 1996, JBL hired an environmental consulting firm to
investigate an incident of soil and groundwater contamination at JBL's facility.
Sampling of soil and groundwater revealed the presence of contaminants. The
California Regional Water Quality Control Board is monitoring the situation.
Results of recent testing have indicated a reduction in contaminant levels.
Based on an estimate provided to the Company by the consulting firm, at December
31, 1999 and June 30, 2000, the Company has $39,100 and $49,700, respectively,
accrued to cover remedial costs. We have agreed to indemnify Promega
Corporation, the purchaser of JBL's assets, for any liability that may result
from this alleged contamination. We believe that any costs that result from
further investigation or remediation will not have a material adverse effect on
our operation, but we can give no assurance to that end.
On October 16, 1998, the Environmental Protection Agency identified JBL as
a de minimis potentially responsible party at a California waste disposal
facility showing evidence of environmental contamination. The EPA
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currently estimates that Genta will be required to pay approximately $63,200 to
settle this potential liability. We have agreed to indemnify Promega Corporation
for any costs resulting from this contamination. Based on the volume amount from
the EPA, Genta accrued $75,000 to pay for any potential liability arising from
this incident. We are expecting to finalize the terms of settlement during the
third quarter of 2000. We believe that any costs that result from further
investigation or remediation will not have a material adverse affect on our
operation, but we can give no assurance to that end.
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 the liquidation, dissolution or winding up of the Company,
the common stock is expressly subordinate to the approximately $13.4 million
preference of the 268,700 outstanding shares of Series A Preferred Stock.
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 to
appoint a majority of the members of the Board of Directors of the Company,
Paramount Capital Assets 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. In the regular course of 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 such
other companies will not have interests in conflict with those of the Company.
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.
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We have a history of operating losses and anticipate future losses.
The Company 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 June 30, 2000,
the Company has incurred a cumulative net loss of approximately $151.2 million.
The Company has experienced significant quarterly fluctuations in operating
results and expects that these fluctuations in revenues, expenses and losses
will continue.
We may be liable for claims of 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 (or, as of June 30, 2000, approximately $783,200) of funding in
the form of a loan from the French government agency L'Agence National 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 June 30, 2000, approximately
$607,300) 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 loan for repayment. The Company's legal counsel in Europe has
again notified ANVAR that it does not agree that the loan 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.
On June 30, 1998, Marseille Amanagement, 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 of 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 June 30, 2000, approximately, $96,200) and early termination payment of
FF1,1852,429 (as of June 30, 2000 approximately $268,700). A court hearing has
been scheduled for September 4, 2000. 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 June 30, 2000, 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. The Company
currently intends to retain its earnings, if any, for the development of its
business.
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 the Company will be able to attract and retain the qualified
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personnel necessary for the development of its business.
Volatility of Stock Price.
The market price of the Company's Common Stock, like that of the common
stock of many other biopharmaceutical companies, has been highly volatile and
may be so in the future. Factors such as, among other things, the results of
preclinical studies and clinical trials by the Company or its competitors, other
evidence of the safety or efficacy of the 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 their
respective competitors, including litigation, fluctuations in the Company's
future price of the Common Stock. As of August 1, 2000, the Company has
44,117,434 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 outstanding convertible securities and
warrants, or the availability of such securities for sale, will have on the
market price of the Common Stock prevailing from time to time. Sale of
substantial amounts of Common Stock, or the perception that such sales might
occur, could adversely affect prevailing market prices.
19
<PAGE> 20
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 show that chloroform and
PCEs 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, 1999 and June 30,
2000, the company has $39,100 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.
JBL received notice on October 16, 1998 from Region IX of the Environmental
Protection Agency ("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
probably that a liability had been incurred and accrued $75,000 during 1998. In
1999, the EPA estimated that the Company will be required to pay approximately
$63,200 to settle their potential liability. The Company expects to receive a
revised settlement proposal from the EPA by the third quarter of 2000. While the
terms of the settlement with the EPA have not been finalized, they should
contain standard contribution protection and release language. 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. The Company has agreed to
indemnify Promega in respect of this matter.
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 June 30, 2000, approximately $783,200) 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 the Company. 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 June 30, 2000, approximately
$607,300) 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 loan for the repayment. The Company's legal counsel in Europe
has again notified ANVAR that the Company does not agree that the loan 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
FF663,412.64 (as of June 30, 2000, approximately $96,200) and early termination
payment of FF1,852,429 (as of June 30, 2000,
20
<PAGE> 21
approximately $268,700). A court hearing has been scheduled for September 4,
2000. 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 June 30, 2000, 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.
See "Submission of Matters to a Vote of Security Holders" in the
Company's Form 10-Q for the Quarterly Period ended March 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.1 * License Agreement dated as of May 30, 2000 between the Company and
Molecular Biosystems, Inc.
10.2 Master Lease Agreement dated as of June 28, 2000 between the Company
and The Connell Company.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None.
-------------
* Material has been omitted from this exhibit pursuant to a request for
confidential treatment. The omitted material has been filed separately with
the Securities and Exchange Commission.
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<PAGE> 22
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: 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: August 14, 2000
22
