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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] 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 INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
TWO OAK WAY
BERKELEY HEIGHTS, NEW JERSEY 07922
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(908) 286 9800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting common equity held by
non-affiliates of the registrant was $218,959,702 as of March 9, 2001. For
purposes of determining this number, 17,688,599 shares of common stock held by
affiliates are excluded.
As of March 9, 2001, the registrant had 51,374,707 shares of Common Stock
outstanding. As of March 9, 2001, 754 persons held common stock of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Certain provisions of the registrant's definitive proxy statement to be
filed not later than April 30, 2001 pursuant to Regulation 14A are incorporated
by reference in Items 10 through 13 of Part III of this Annual Report on Form
10-K.
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The statements contained in this Annual Report on Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect the Company's views as of the date they are
made with respect to future events and financial performance, but are subject to
many risks and uncertainties, which could cause the actual results of the
Company to differ materially from any future results expressed or implied by
such forward-looking statements. Examples of such risks and uncertainties
include, but are not limited to: the obtaining of sufficient financing to
maintain the Company's planned operations; the timely development of, receipt of
necessary regulatory approvals for and acceptance of new products; the ability
of the Company to commercialize its 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; the changing of market
conditions and the other risks detailed in the Certain Trends and Uncertainties
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations in this Annual Report on Form 10-K and elsewhere herein.
The Company does not undertake to update any forward-looking statements.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Genta Incorporated ("Genta" or the "Company"), incorporated under the laws
of the State of Delaware on February 4, 1988, is a biopharmaceutical company
whose research efforts are focused on the development of new biopharmaceutical
products for the treatment of patients with cancer. The Company's research
portfolio is currently divided into four areas: the Antisense Program; the
Gallium Products Franchise; Androgenics Compounds; and Decoy Aptamers. The
Company aims to be a direct marketer of its products in the United States.
In 2000, the Company's bcl-2 antisense compound, Genasense, was designated
as an Orphan Drug by the U.S. Food and Drug Administration ("FDA"). The
designation applies to the Company's treatment of patients with advanced
malignant melanoma. Orphan drug status provides for a period of marketing
exclusivity, certain tax benefits, and an exemption from certain fees at the
time of submission, to the FDA, for marketing approval of a New Drug Application
("NDA"). In 1999, the FDA granted fast-track designation to Genasense for use in
combination with Dacarbazine (DTIC) for treatment of advanced malignant
melanoma. The FDA's fast-track designation is intended to expedite the review of
NDA's for products that have the potential to address unmet medical needs for
serious, life-threatening diseases.
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 in return for paid-up royalties in cash and shares of Common Stock.
In April 2000, the Company entered into an asset purchase agreement with
Relgen LLC, a privately held biopharmaceutical corporation and a related party
of Genta, in which the Company acquired all assets, rights and technology to a
portfolio of gallium containing compounds, including a product that has received
regulatory approval for marketing in North America (Ganite(TM)). These compounds
are used to treat diseases associated with accelerated bone resorption (see
Gallium Products Franchise, below).
In August 1999, Genta acquired Androgenics Technologies, Inc.,
("Androgenics") a company with license rights to a series of compounds that were
invented at the University of Maryland, Baltimore to treat hormone-sensitive
prostate cancer. (See Androgenics Compounds, below.)
In 1998, the Company closed its offices and research and development
facilities in San Diego, CA, and in the second quarter of 1999, its headquarters
offices moved into temporary space in Lexington, MA. In the third quarter of
2000, the Company consolidated its operations in its current headquarters
location, Berkeley Heights, NJ.
SUMMARY OF BUSINESS AND RESEARCH AND DEVELOPMENT PROGRAMS
ANTISENSE PROGRAMS
Antisense represents a new approach to drug development. Many human
diseases involve over-expression of proteins that are products of normal or
mutated genes. Antisense therapy involves the administration of synthetic
oligonucleotides that are complementary to specific mRNA transcripts. Antisense
targets the mRNA of interest by Watson-Crick base pairing, thereby providing
specificity and avidity. Phosphorothioate (PS) oligonucleotides (oligos) contain
at least one of the non-bridging oxygens of the inter-nucleotide phosphodiester
linkages replaced with sulfur. PS oligos inhibit gene expression by
hybridization arrest (i.e., interference with the processing of mRNA by
hybridization), followed by cleavage of the mRNA by RNase-H. These oligos are
polyanionic and, as a result, can bind to a number of factors that may produce
non-specific effects. Critical to their function is resistance to nuclease
digestion. If the protein encoded by the target gene (such as Bcl-2) is
important in tumor cell survival, progression, or in the resistance to
treatment, then antisense administration may be beneficial.
Antisense oligonucleotides must be incorporated into cells in order to be
effective. Although they may be active at nanomolar to micromolar
concentrations, uptake varies with the cell type. Intracellular uptake appears
to occur
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by pinocytosis. Because of their highly selective binding properties,
the Company believes that antisense oligonucleotides should not interfere with
the function of normal cells, and therefore may elicit fewer side effects than
traditional drugs.
Genta has also advanced its antisense research into new oligonucleotides
that have mixed phosphorothioate and methylphosphonate backbones. The Company
has licensed patents covering phosphorothioate oligonucleotide constructions and
has applied for and received certain patents covering the mixed backbone
constructions. Genta's scientists have also improved the backbone technologies
by introducing mixed chirally-enriched or chirally-pure oligonucleotides. In
preclinical studies, these oligonucleotides effectively interfere with the
action of targeted mRNA sequences inside cells. Intravenous administration of
these oligonucleotides (which the Company calls "3rd-generation technology") to
certain animals has demonstrated that these compounds have substantially greater
stability in the circulatory system and intact urinary excretion. This approach
is currently in preclinical development and a 3rd-generation molecule targeted
to the Bcl-2 mRNA has been identified and validated in model systems.
The Company has devoted most of its resources to the development of
2nd-generation antisense compound directed against Bcl-2, a protein that is
central to the process of programmed cell death (apoptosis).
APOPTOSIS: MOLECULAR MECHANISMS
Apoptotic cell death is involved in embryogenesis, CNS development, and
immune regulation, and deregulation of apoptosis is a feature of many diseases.
For example, neurodegenerative diseases and acquired immunodeficiency syndrome
(AIDS) are characterized by increased apoptosis, while repression of apoptosis
is a common feature in neoplasia. Chromatin cleavage by endonucleases results in
display of nucleosomal-sized (180bp) DNA fragments that are visualized on
agarose gel electrophoreses as "DNA-ladders". Apoptosis is genetically regulated
and is highly conserved from an evolutionary standpoint. A number of regulatory
genes were identified in lower organisms, and the search for mammalian homologs
of these genes resulted in the identification of Bcl-2 and other proteins. Over
the last decade, many additional genes and gene products involved in this
process have also been characterized, and the principal molecular events - both
at different levels (triggers, signal transducers, effectors) and at different
cellular locations (membrane, cytoplasm, mitochondria, nucleus) - are now better
understood.
Current understanding of the apoptotic process includes the following events:
- "Triggering events", such as damage to DNA, microtubulin, and/or
membranes; incompatible growth regulatory signals; and some specific
ligand-receptor interactions.
- Signal transduction involving several components (for instance p53,
Rb, c-Myc) that alters the balance between pro- and anti-apoptotic
components of the Bcl-2 family; or direct activation of specific
proteases (caspases).
- Collapse of the mitochondrial transmembrane potential and release of
cytochrome c in the cytoplasm.
- Activation of caspases that leads to chromatin fragmentation by
cleavage of nuclear and cytoplasmic proteins that are involved in
maintenance of DNA integrity or cellular architecture.
Bcl-2: ANTI-APOPTOTIC MECHANISMS
Much of the understanding concerning the molecular regulation of programmed
cell death originates with the bcl-2 gene family. The best characterized members
of this family, Bcl-2 and Bax, act by differential homo- and heterodimerization.
Bcl-2 homodimers act as repressors of apoptosis, whereas Bcl-2/Bax heterodimers
act as promoters. These effects are more dependent on the balance between Bcl-2
and Bax than on Bcl-2 quantity alone. Many new members of the Bcl-2 family have
been characterized, including the death promoters BCL-xS, BAD, BIK, BAK, and the
apoptosis suppressors BCL-xL and BFL-1.
BCL-2 (B-Cell Lymphoma/leukemia associated gene 2) was originally
identified owing to its association with the t(14;18) chromosomal translocation
that is present in most follicular B-cell non Hodgkin's lymphomas. With this
translocation, the bcl-2 gene is moved from its normal chromosomal location at
18q21 into juxtaposition with the immunoglobulin heavy chain (IgH) locus at
14q32 resulting in deregulation of the bcl-2 /IgH fusion gene. As a result,
Bcl-2 protein is over-expressed.
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Bcl-2 protein appears to either form selective membrane pores, or more
likely to control pre-existing "permeability transition pores". Bcl-2 is
probably able to stabilize the mitochondrial transmembrane potential and
antagonize Bax-induced release of cytochrome c into the cytoplasm.
Immunoelectron microscopy has shown the association of Bcl-2 with the
mitochondrial membrane. Functional analysis has shown that Bcl-2 acts upstream
of caspases preventing their activation.
Bcl-2 is up-regulated in most types of human cancer, including the major
hematologic cancers (e.g., lymphomas, myeloma, and leukemia) and solid tumors
(e.g., cancers of the lung, colon, breast, and prostate). Bcl-2 is currently
thought to be responsible for extending the viability of malignant cells and
contributing to resistance of cancer cells to current forms of antisense therapy
(i.e. chemotherapy, radiation, monoclonal antibodies, etc.). Observations that
support these conclusions include:
- Chemo- and radio- therapy-sensitive cell lines can be made resistant
to apoptosis-inducing treatments by transfection with bcl-2.
- Elevated Bcl-2, or alteration in the ratio of Bcl-2:Bax, correlates
with an inferior prognosis and/or poor response to therapy in many
diseases.
- Up regulation of Bcl-2 coincides with the shift from
androgen-dependent to androgen-independent tumor growth in prostate
cancer.
- Non-tumorigenic cell lines can be made highly tumorigenic by
transfection with bcl-2.
GENASENSE(TM) (AUGMEROSEN, G3139; Bcl-2 ANTISENSE OLIGONUCLEOTIDE)
Genasense(TM), the Company's leading drug compound, is an all-PS
oligonucleotide consisting of 18 modified DNA bases (i.e., 18-mer). The molecule
targets the first 6 codons of Bcl-2 mRNA to form a DNA/RNA duplex. RNase H
recognizes the DNA/RNA duplex, cleaves the Bcl-2 mRNA strand, and renders the
message non-translatable. Bcl-2 mRNA fragments are subsequently destroyed by
ribonucleases.
PRECLINICAL STUDIES
After intravenous (IV) or subcutaneous (SC) injection, Genasense(TM)
distributes rapidly to highly perfused organs, especially lung and bone marrow.
Oligonucleotides are generally excreted unchanged, predominantly by the kidney.
Biodistribution studies of Genasense(TM) in vivo have demonstrated high
tissue:plasma ratios, particularly in kidney and liver but also significant
distribution to the bone marrow and spleen. In addition, in vitro and in vivo
studies showed both biologic and antitumor activity with sub-micromolar
concentrations (e.g., ~ 170 nM).
A number of in vitro studies have shown synergistic enhancement of tumor
cell killing when Bcl-2 antisense was used to reduce Bcl-2 protein content in
combination with standard antisense therapy (including antimetabolites,
alkylators, corticosteroids, other cytotoxic chemotherapy, radiation, and
monoclonal antibodies).
Several studies have demonstrated enhanced antitumor activity and durable
tumor regression in immunodeficient mice that were engrafted with xenografts of
human cancers and treated with Bcl-2 antisense followed by antitumor agents that
induce apoptosis. These studies include human lymphoma, melanoma, breast cancer,
and prostate cancer which were treated with Genasense(TM) in combination with
cyclophosphamide, dacarbazine, docetaxel and paclitaxel, respectively. Combined
treatment with Genasense(TM) followed by cyclophosphamide led to complete
eradication of a B-lymphoid human tumor xenograft using treatment conditions
that were not significantly toxic to the normal host.
GENASENSE(TM) CLINICAL STUDIES
NON-HODGKIN'S LYMPHOMA: A study of 21 patients with B-cell non-Hodgkin's
lymphoma was conducted in the U.K. using Genasense(TM) administered by
continuous subcutaneous infusion. Thrombocytopenia, infusion site reactions, and
fatigue were felt to be dose limiting in 2 patients treated at a level of 5.3
mg/kg/day. However, the tolerance to treatment in this study may have been
closely linked to the prolonged (2-week) infusion schedule given by the
subcutaneous route, and other studies have easily escalated the Genasense(TM)
doses to 7 mg/kg/day even when given intravenously in combination with cytotoxic
chemotherapy. Although the administered drug dose was quite low in most patients
i.e., substantially below doses that are now known to be both safe and optimally
effective with respect to Bcl-2 down-regulation, several major responses were
observed. One patient with low-grade lymphoma
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who had progressive disease in nodes and bone marrow after 2 prior regimens
attained a complete response using Genasense(TM) alone, which has been
maintained for longer than 3 years in addition to durable improvement in
tumor-related symptoms. Out of 14 patients entering the study with circulating
lymphoma cells in peripheral blood, 10 demonstrated significant reductions after
only one cycle of therapy. Subjective improvement was also noted in a majority
of patients who entered the study with tumor-related symptoms. Bcl-2 content of
lymphoma cells was assayed by serial biopsy and/or assay of circulating
malignant cells in peripheral blood, and these studies demonstrated that
Genasense(TM) infusions could down-regulate Bcl-2 protein within 5 days of
reaching steady-state plasma levels. In 2000, these data were published in The
Journal of Clinical Oncology.
ACUTE LEUKEMIA: At Ohio State University, a Phase I study evaluated a
constant IV infusion dose of Genasense(TM) with escalating doses of fludarabine,
Ara-C, and G-CSF (FLAG) for refractory or relapsed acute leukemia. Genasense(TM)
(4 or 7 mg/kg/day in successive cohorts) was administered by continuous
intravenous infusion on days l-10, with fludarabine (starting at 15 mg/m2) and
Ara-C (starting at 1000mg/m2) given daily on days 6-10 and escalated in
successive cohorts. Twelve patients with refractory or relapsed myeloid leukemia
were treated. Adverse events of the Genasense/chemotherapy combination included
myelosuppression, fever, nausea, and fluid retention, but these reactions were
manageable and not dose-limiting. Six patients achieved major responses with
complete regression of leukemic blasts. Four of these patients achieved a
complete remission (CR). Two other patients had no evidence of leukemia after
treatment, but had persistent neutropenia or thrombocytopenia. Three patients
obtained response despite the recent treatment failure of high-dose Ara-C. One
patient with CR had Philadelphia chromosome positive ALL, and all other patients
had AML. These preliminary data have suggested that Genasense(TM) may be safely
added to chemotherapy regimens for leukemia, including treatment of older
patients. In 2000, portions of these data were presented at the annual meeting
of the American Society of Hematology.
MALIGNANT MELANOMA: A Phase I-II clinical study of Genasense(TM) combined
with dacarbazine (DTIC) was conducted at the University of Vienna. Daily IV
infusions (or twice daily SC injections) of Genasense(TM) were given at doses
ranging from 1.7 to 12 mg/kg/day. Serial biopsies of cutaneous melanoma
metastases showed reduced Bcl-2 protein content (assayed by Western analysis) in
tumor cells by day 5 of treatment. Durable responses and prolonged (> 1 year)
progression-free survival were also observed in this study, even though most
patients had failed both immunotherapy and chemotherapy. Six of the first 14
patients treated showed objective responses. The Genasense(TM)/DTIC regimen was
well tolerated up to the dose level of 7 mg/kg/day. Tolerance was acceptable in
patients who received > 10 cycles of combination therapy, age up to 90 years
old, and/or antecedent hepatic dysfunction. The predominant dose limiting
toxicity was grade 3-4 thrombocytopenia observed in 2 patients treated at the
dose level of 12 mg/kg/day in combination with DTIC. In late 2000, details of
this study were reported in The Lancet.
OTHER PHASE 1-2 STUDIES IN PATIENTS WITH ADVANCED SOLID TUMORS: Thirty-five
patients (mostly with genitourinary cancers) were entered into a dose-escalation
trial using both a 14-day and 21-day IV infusion schedule of Genasense(TM),
either alone or in combination with paclitaxel. Fatigue and fever were observed
after 2 weeks at doses ranging from 4.1 to 7 mg/kg/day x 14 days. Similar
reactions were observed on the 21-day infusion schedule. Transient elevation of
serum transaminases, which recurred despite a 25% dose reduction, was observed
at the 7 mg/kg-dose level. However, 2 of the 3 patients at this level continued
treatment after further dose reduction, and both displayed evidence of major
clinical response (i.e., PR in one patient with bladder cancer and liver
metastases and stabilization of disease in another). Other dose-ranging
combination studies of Genasense(TM) have been conducted in patients receiving
mitoxantrone or docetaxel for advanced prostate cancer, docetaxel for breast
cancer, multidrug chemotherapy for non-Hodgkin's lymphoma, and irinotecan for
colorectal cancer.
SUMMARY OF PHASE 1-2 STUDIES
In general, significant thrombocytopenia, liver function abnormalities, or
fatigue have not been dose limiting in Phase I-II studies that used short
infusions (i.e. 5 to 7 days) at a dose of 7 mg/kg/day, including studies where
the drug was combined with myelosuppressive chemotherapy. Current studies
suggest that the major biological activity of Genasense(TM) (i.e., reduction of
Bcl-2 protein) may be observed within the first 3 to 5 days. Thus, current
studies are generally using a 5 to 7-day schedule in combination with
chemotherapy. Most current studies use Genasense(TM) administered at least 3
days prior to the initiation of other cytotoxic therapy.
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PHASE 3/"REGISTRATION-QUALITY" STUDIES
In the summer of 2000, the Genasense(TM)/DTIC combination entered a Phase 3
randomized trial in which Genasense(TM) is administered at a dose of 7 mg/kg/day
x 5 days by continuous IV infusion prior to each dose of DTIC. This combination
is re-cycled every 3 weeks. The study contemplates accrual of approximately 270
evaluable patients, and completion of accrual is currently projected in 2001. In
late 2000, the Company announced that it intends to initiate
"registration-quality" studies (i.e. Phase 2b or 3) in acute myeloid leukemia
(AML) in combination with Mylotarg(TM) (gemtuzumab ozogamicin), in chronic
lymphocytic leukemia (CLL) with fludarabine/cyclophosphamide, and in multiple
myeloma in combination with high-dose dexamethasone.
OLIGONUCLEOTIDE COLLABORATIVE AND LICENSING AGREEMENTS
Gen-Probe (Chugai). In February 1989, Genta entered into a development,
license and supply agreement with Gen-Probe Incorporated ("Gen-Probe"). Chugai
Pharmaceutical Company, Ltd. ("Chugai"), a Japanese corporation, subsequently
acquired Gen-Probe. Gen-Probe had the option to acquire an exclusive worldwide
license to any product consisting of, including, derived from or based on
oligonucleotides for the treatment or prevention of Epstein-Barr virus,
cytomegalovirus, HIV, human T-cell leukemia virus-1 and all leukemias and
lymphomas. Genta was obligated to pursue the development of a therapeutic
compound for the treatment of one of these indications as its first therapeutic
development program, which it did. In February 1996, Gen-Probe elected not to
exercise such option with respect to Genta's anti-bcl-2 products, waiving any
rights it may have had to develop or commercialize such products.
Ts'o/Miller/Hopkins. In February 1989, the Company entered into a license
agreement with Drs. Paul Ts'o and Paul Miller (the "Ts'o/Miller Agreement")
pursuant to which Drs. Ts'o and Miller (the "Ts'o/Miller Partnership") granted
an exclusive license to the Company to certain issued patents, patent
applications and related technology regarding the use of nucleic acids and
oligonucleotides including methylphosphonate as pharmaceutical agents. Dr. Ts'o
is a Professor of Biophysics, Department of Biochemistry, and Dr. Miller is a
Professor of Biochemistry, both at the School of Public Health and Hygiene,
Johns Hopkins University ("Johns Hopkins"). In May 1990, the Company entered
into a license agreement with Johns Hopkins (the "Johns Hopkins Agreement," and
collectively with the Ts'o/Miller Agreement, referred to herein as the
"Ts'o/Miller/Hopkins Agreements") pursuant to which Johns Hopkins granted Genta
an exclusive license to its rights in certain issued patents, patent
applications and related technology developed as a result of research conducted
at Johns Hopkins by Drs. Ts'o and Miller and related to the use of nucleic acids
and oligonucleotides as pharmaceutical agents. In addition, Johns Hopkins
granted Genta certain rights of first negotiation to inventions made by Drs.
Ts'o and Miller in their laboratories in the area of oligonucleotides and to
inventions made by investigators at Johns Hopkins in the course of research
funded by Genta, which inventions are not otherwise included in the
Ts'o/Miller/Hopkins Agreements. Genta had agreed to pay Dr. Ts'o, Dr. Miller and
Johns Hopkins royalties on net sales of products covered by the issued patents
and patent applications, but not the related technology, licensed to the Company
under the Ts'o/Miller/Hopkins Agreements. The Company also agreed to pay certain
minimum royalties prior to commencement of commercial sales of such products,
which royalties may be credited under certain conditions against royalties
payable on subsequent sales. On February 14, 1997, the Company received notice
from Johns Hopkins that the Company was in material breach of the Johns Hopkins
Agreement. The Johns Hopkins Agreement provides that, if a material payment
default is not cured within 90 days of receipt of notice of such breach, Johns
Hopkins may terminate the Johns Hopkins Agreement.
In August 1999, the Company settled lawsuits with Johns Hopkins and the
Ts'o/Miller Partnership for $380,000. As part of the settlement of claims, the
Company agreed to pay $180,000 in cash over a six-month period of which $52,500
remains outstanding as of December 31, 1999 and issued 69,734 shares of common
stock to Johns Hopkins, acting on its behalf and on behalf of Ts'o/Miller
Partnership, sufficient to provide a value of $200,000.
GALLIUM PRODUCTS FRANCHISE
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. Gallium is a bone-seeking element that exerts potent
effects on the skeletal system. Available data suggest that gallium inhibits
accelerated loss of bone mass that characterizes a number of human diseases,
including osteoporosis, Paget's disease, bone metastases (i.e. cancer that has
spread into bone), and
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hypercalcemia (i.e., abnormally high blood levels of calcium). The drug appears
to inhibit the ability of osteoclasts (i.e., cells that normally participate in
the process of bone remodeling) to resorb bone.
Gallium nitrate was originally developed in the 1970s by the U.S. National
Cancer Institute as a cancer chemotherapy agent. However, with the possible
exceptions of malignant lymphoma and bladder cancer, no major activity was
consistently observed, and the drug was never approved for this use. The drug
was approved in 1991 (as Ganite(R)) for treatment of cancer-related
hypercalcemia when administered intravenously as a continuous infusion for up to
5 days. The Company currently intends to begin marketing the drug in late 2001
or early 2002, depending upon various factors that are reviewed below (see Risk
Factors).
The Company also seeks to synthesize a novel formulation of a
gallium-containing compound that will be suitable for oral administration.
Unlike hypercalcemia, treatment of most diseases that are characterized by
accelerated bone loss requires extended - occasionally lifelong - therapy,
particularly for oncology indications. Existing products in this market (such as
Aredia(R) [pamidronate disodium; Novartis Pharmaceuticals, Inc.]) are currently
limited to intravenous formulations. The Company believes that successful
development of an oral gallium-containing compound may yield substantial
clinical and competitive advantages. The Company plans to work with an external
firm that will develop suitable and patentable formulations.
DECOY APTAMERS
In 2000, the Company licensed patents and technology from the U.S. National
Institutes of Health ("NIH") that involve novel uses of oligonucleotides. Unlike
antisense technology, which uses oligonucleotides that bind and destroy mRNA,
decoy aptamers employ oligonucleotides to bind to specific proteins known as
transcription factors. Normally, transcription factors bind to specific portions
of DNA known as response elements. By doing so, they regulate the function of
genes in a positive or negative fashion (i.e., they can turn genes on or off).
Decoy technology creates artificial forms of response elements by using short
segments of DNA bases that are fused together. By then flooding the cell with an
excess of these artificial decoys, transcription factors are fooled into binding
to the decoys, rather than the normal response elements found in genes, thereby
preventing their normal function. Thus, depending upon the function of the
response element, the function of the gene can then be regulated.
This licensing agreement is beneficial to the Company for several reasons.
First, the technology employed oligonucleotide chemistry in which the Company
already has considerable expertise by virtue of our antisense franchise. Second,
the technology offered the Company an entirely novel but related platform for
future product development. Third, the license afforded the Company rights to a
novel target (i.e. the cyclic adenosine monophosphate response element ("CRE")
binding protein) that was not currently being addressed by competitors. Lastly,
the decoy to the CRE-binding protein had already been generated and had shown a
high degree of selectivity for killing human cancer cells in laboratory
experiments. At present, the Company is sponsoring continued laboratory
development of the CRE decoy at NIH and has not made a determination whether to
take the existing decoy into animal toxicology testing (with a goal toward
beginning trials in human subjects) or to synthesize further enhancements of the
existing compound.
ANDROGENICS TECHNOLOGIES
In August 1999, the Company acquired Androgenics Technologies, Inc.
("Androgenics"), which developed a proprietary series of compounds that act to
inhibit the growth of prostate cancer cells. Androgenics products are comprised
of a portfolio of small molecules that are useful for the treatment of prostate
cancer. An analogous drug is Proscar(TM) (finasteride; Merck), which inhibits
5-(alpha) reductase, one of the final enzymatic steps in the pathway of
testosterone biosynthesis. Paradoxically, however, Proscar actually increases
serum testosterone, which stimulates the growth of prostate cancer cells and
makes it not useful as a cancer treatment. Like Proscar, androgenics drugs
inhibit the reductase enzyme; however, they also inhibit a hydroxylase enzyme
which is found in both the testes and the adrenal glands. Because of this dual
action, androgenics drugs induce profound reductions in serum testosterone.
Moreover, these compounds are also potent antagonists of androgen receptors that
mediate the actions of testosterone. Thus, these drugs have unique activities as
enzyme inhibitors and hormone receptor antagonists, and they have proved
markedly effective in preclinical models of human prostate cancer.
GENTA JAGO
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The Company currently owns 50% of a drug delivery system joint venture
(Genta Jago Technologies B.V. ["Genta Jago"]), with SkyePharma, PLC
("SkyePharma," formerly with Jagotec AG ["Jagotec"], which was acquired by
SkyePharma). The joint venture was established to develop oral
controlled-release drugs. The joint venture's original plan was to use Jagotec's
patented GEOMATRIX(R) drug delivery technology ("GEOMATRIX") in a two-pronged
commercialization strategy: the development of generic versions of successful
brand-name controlled-release drugs; and the development of controlled-release
formulations of drugs currently marketed in only immediate-release form. The
only products in development to date are those intended to be comparable to the
commercially available, brand name, controlled-release drugs. On March 4, 1999,
Genta and SkyePharma (on behalf of itself and its affiliates) entered into an
interim 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. SkyePharma agreed to be responsible for substantially
all of the obligations of the joint venture to third parties and for the further
development of the joint venture's products. As set forth in the interim
agreement, any resulting net income would be allocated in agreed-upon
percentages between Genta and SkyePharma. In the first quarter 2000, the Company
received $689,500 from SkyePharma as a royalty payment based on SkyePharma's
agreement with Elan Corporation for the sale of naproxen, of which $187,500 was
attributable to 1999.
RESEARCH AND DEVELOPMENT
In addition to the Company's current focus in the four areas already
described and in an effort to focus its research and development efforts on
areas that provide the most significant commercial opportunities, the Company
continually evaluates its ongoing programs in light of the latest market
information and conditions, availability of third-party funding, technological
advances, and other factors. As a result of such evaluation, the Company's
product development plans have changed from time to time, and the Company
anticipates that it will continue to do so in the future. The Company recorded
research and development expenses of $2.1 million, $4.2 million and $6.8 million
during 1998, 1999 and 2000, respectively. In 1998, $50,000, was funded pursuant
to collaborative research and development agreements and approximately $56,000
was funded pursuant to a related party contract revenue agreement with Genta
Jago. See "MD&A -- Results of Operations."
SALES AND MARKETING
The Company intends to be a direct marketer or co-marketer of its
pharmaceutical products by building a sales and marketing infrastructure in the
United States to launch and fully realize the commercial potential of our
products. This is evident by the recent hiring of a Vice President of Sales and
Marketing. For international product sales, the Company intends to distribute
its products through collaborations with third parties.
MANUFACTURING
The Company's ability to conduct clinical trials on a timely basis, to
obtain regulatory approvals and to commercialize its products will depend in
part upon its ability to manufacture its products, either directly or through
third parties, at a competitive cost and in accordance with applicable FDA and
other regulatory requirements, including current Good Manufacturing Practice, or
cGMP, regulations.
We rely on third parties to manufacture our products. In December 2000, the
Company signed a two-year agreement with Avecia Ltd., a leading multinational
manufacturer of pharmaceutical products, to supply quantities of its lead
antisense compound, Genasense.
In the past, the Company had manufactured and marketed specialty
biochemicals and intermediate products to the in vitro diagnostic and
pharmaceutical industries through its manufacturing subsidiary, JBL Scientific,
Inc. ("JBL"), a California corporation that was acquired by the Company in
February 1991. On March 19, 1999, the Company entered into an Asset Purchase
Agreement with Promega Corporation whereby its wholly owned subsidiary, Promega
Biosciences, Inc. ("Promega"), acquired substantially all of the assets and
assumed certain liabilities of JBL. JBL has been reported as a discontinued
operation in the accompanying consolidated financial statements. The closing of
the sale of JBL was completed on May 10, 1999.
GENTA EUROPE
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 December 31, 2000, approximately $775,200) of funding in
the form of a loan from the French government agency L'Agence Nationale de
Valorisation de la
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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 December 31, 2000, approximately $601,100) 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 Genta Incorporated that it was responsible as a guarantor of the
note for the repayment. Genta's legal counsel in Europe has again notified ANVAR
that it 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.
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 December 31, 2000, approximately $95,200) and early termination payment
of FF1,852,429 (as of December 31, 1999, approximately $265,900). 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 December 31,
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.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's policy is to protect its technology by, among other things,
filing patent applications with respect to technology considered important to
the development of its business. The Company also relies upon trade secrets,
unpatented know-how, continuing technological innovation and the pursuit of
licensing opportunities to develop and maintain its competitive position.
Genta has a portfolio of intellectual property rights, including a series
of applications, to aspects of oligonucleotide technology, which includes novel
compositions of matter, methods of large-scale synthesis, methods of controlling
gene expression and cationic lipid delivery systems. In addition, foreign
counterparts of certain applications have been filed or will be filed at the
appropriate time. Allowed patents generally would not expire until 17 years
after the date of allowance if filed in the United States before June 8, 1995
or, in other cases, 20 years from the date of application. Generally, it is the
Company's strategy to apply for patent protection in the United States, Canada,
Western Europe, Japan, Australia and New Zealand.
Since its incorporation, Genta has filed an aggregate of over 175 United
States and foreign patent applications covering new compositions and improved
methods to use, synthesize and purify oligonucleotides, linker-arm technology,
and compositions for their delivery. Seventy-four patents have been issued; 34
in the United States (13 in 1998, five in 1999 and 12 in 2000) and 40 have
issued overseas.
Genta also gained access to certain rights from the National Institutes of
Health ("NIH") covering phosphorothioate oligonucleotides. This includes rights
to three United States issued patents, one issued European patent, one issued in
Japan and other corresponding foreign applications that are still pending. In
addition, under an agreement with the University of Pennsylvania, Genta has
acquired exclusive rights to antisense oligonucleotides directed against the
bcl-2 gene as well as methods of their use for the treatment of cancer. In 1998,
two United States patents were issued encompassing the Company's licensed
antisense oligonucleotide compounds targeted against the bcl-2 gene and in vitro
uses of the same. These claims cover the Company's proprietary antisense
oligonucleotide molecules, which target the bcl-2 gene including its lead
clinical candidate, Genasense. Other related United States and corresponding
foreign patent applications are still pending.
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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.
Jagotec's GEOMATRIX technology is the subject of issued patents and pending
applications. Jagotec currently holds four issued United States patents, five
granted foreign patents, and other corresponding foreign patent applications
still pending that cover the GEOMATRIX technology. Certain rights to GEOMATRIX
technology have been licensed to Genta Jago. See "Genta Jago."
The patent positions of biopharmaceutical and biotechnology firms,
including Genta, can be uncertain and involve complex legal and factual
questions. Consequently, even though Genta is currently prosecuting its patent
applications with the United States and foreign patent offices, the Company does
not know whether any of its applications will result in the issuance of any
patents or if any issued patents will provide significant proprietary protection
or will be circumvented or invalidated. Since patent applications in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months, Genta cannot be certain that others have not
filed patent applications directed to inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions.
Competitors or potential competitors may have filed applications for, or
have received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes competitive with those of the Company.
Accordingly, there can be no assurance that the Company's patent applications
will result in issued patents or that, if issued, the patents will afford
protection against competitors with similar technology; nor can there be any
assurance that any patents issued to Genta will not be infringed or circumvented
by others; nor can there be any assurance that others will not obtain patents
that the Company would need to license or design around. There can be no
assurance that the Company will be able to obtain a license to technology that
it may require or that, if obtainable, such a license would be available on
reasonable terms.
Even if issued, patents can be challenged in the courts. Moreover, the
Company may become involved in interference proceedings declared by the United
States Patent and Trademark Office (or comparable foreign office or process) in
connection with one or more of its patents or patent applications to determine
priority of invention, which could result in substantial cost to the Company, as
well as a possible adverse decision as to priority of invention of the patent or
patent application involved.
The Company also relies upon unpatented trade secrets and no assurance can
be given that third parties will not independently develop substantially
equivalent proprietary information and techniques or gain access to the
Company's trade secrets or disclose such technologies to the public, or that the
Company can meaningfully maintain and protect unpatented trade secrets.
Genta requires its employees, consultants, outside scientific collaborators
and sponsored researchers and other advisors to execute a confidentiality
agreement upon the commencement of an employment or consulting relationship with
the Company. These agreements generally provide that all confidential
information developed or made known to an individual during the course of the
individual's relationship with Genta shall be kept confidential and shall not be
disclosed to third parties except in specific circumstances. In the case of
employees, the agreement generally provide that all inventions conceived by the
individual shall be assigned to, and made the exclusive property of, the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or adequate remedies in
the event of unauthorized use or disclosure of such information, or in the event
of an employee's refusal to assign any patents to the Company in spite of such
contractual obligation.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the Company's ongoing research and product
development activities and in the manufacture and marketing of the Company's
proposed products. All of the Company's therapeutic products will require
regulatory approval by
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governmental agencies prior to commercialization. In particular, human
therapeutic products are subject to rigorous preclinical and clinical testing
and pre-market approval procedures by the FDA and similar authorities in foreign
countries. Various federal, and in some cases state, statutes and regulations
also govern or influence the development, testing, manufacturing, safety,
labeling, storage, record keeping and marketing of such products. The lengthy
process of seeking these approvals, and the subsequent compliance with
applicable federal and, in some cases, state statutes and regulations, require
the expenditure of substantial resources. Any failure by the Company, its
collaborators or its licensees to obtain, or any delay in obtaining, regulatory
approvals could adversely affect the marketing of any products developed by the
Company and its ability to receive product or royalty revenue.
The activities required before a new pharmaceutical agent may be marketed
in the United States begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and animal studies to assess the
potential safety and efficacy of the product and its formulations. The results
of these studies must be submitted to the FDA as part of an Investigational New
Drug Application ("IND"). An IND becomes effective within 30 days of filing with
the FDA unless the FDA imposes a clinical hold on the IND. In addition, the FDA
may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA
imposes a clinical hold, clinical trials cannot commence or recommence, as the
case may be, without prior FDA authorization and then only under terms
authorized by the FDA. Typically, clinical testing involves a three-phase
process. In Phase 1, clinical trials are conducted with a small number of
subjects to determine the early safety profile and the pattern of drug
distribution and metabolism. In Phase 2, clinical trials are conducted with
groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
3, large-scale, multi-center, comparative clinical trials are conducted with
patients afflicted with a target disease in order to provide enough data for the
statistical proof of efficacy and safety required by the FDA and others. In the
case of products for life-threatening diseases, the initial human testing is
generally done in patients rather than in healthy volunteers. Since these
patients are already afflicted with the target disease, it is possible that such
studies may provide results traditionally obtained in Phase 2 trials. These
trials are frequently referred to as "Phase 1/2A" trials.
The results of the preclinical and clinical testing, together with
chemistry, manufacturing and control information, are then submitted to the FDA
for a pharmaceutical product in the form of a New Drug Application ("NDA"), for
a biological product in the form of a Biologics License Application ("BLA") for
approval to commence commercial sales. In responding to an NDA, BLA or PMA, the
FDA may grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. There can be no assurance that the approvals that
are being sought or may be sought by the Company in the future will be granted
on a timely basis, if at all, or if granted will cover all the clinical
indications for which the Company is seeking approval or will not contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
In circumstances where a company intends to develop and introduce a novel
formulation of an active drug ingredient already approved by the FDA, clinical
and preclinical testing requirements may not be as extensive. Limited additional
data about the safety and/or effectiveness of the proposed new drug formulation,
along with chemistry and manufacturing information and public information about
the active ingredient, may be satisfactory for product approval. Consequently,
the new product formulation may receive marketing approval more rapidly than a
traditional full NDA, although no assurance can be given that a product will be
granted such treatment by the FDA.
For clinical investigation and marketing outside the United States, the
Company is or may be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. The Company's approach is to design its European
clinical trial studies to meet FDA, European Economic Community ("EEC") and
other European countries' standards. At present, the marketing authorizations
are applied for at a national level, although certain EEC procedures are
available to companies wishing to market a product in more than one EEC member
state. If the competent authority is satisfied that adequate evidence of safety,
quality and efficacy has been presented, a market authorization will be granted.
The registration system proposed for medicines in the EEC after 1992 is a dual
one in which products, such as biotechnology and high technology products and
those containing new active substances, will have access to a central regulatory
system that provides registration throughout the entire EEC. Other products will
be registered by national authorities under the local laws of each EEC member
state. With regulatory harmonization finalized in the EEC, the Company's
clinical trials will be designed to develop a regulatory package sufficient for
multi-country approval in the Company's European target markets without the need
to duplicate studies for individual country approvals. This approach also takes
advantage
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of regulatory requirements in some countries, such as in the United Kingdom,
which allow Phase 1 studies to commence after appropriate toxicology and
preclinical pharmacology studies, prior to formal regulatory approval.
Prior to the enactment of the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman/Hatch Act"), the FDA, by regulation,
permitted certain pre-1962 drugs to be approved under an abbreviated procedure
which waived submission of the extensive animal and human studies of safety and
effectiveness normally required to be in a NDA. Instead, the manufacturer only
needed to provide an Abbreviated New Drug Application ("ANDA") containing
labeling; information on chemistry and manufacturing procedures and data
establishing that the original "pioneer" product and the proposed "generic"
product are bioequivalent when administered to humans.
Originally, the FDA's regulations permitted this abbreviated procedure only
for copies of a drug that was approved by the FDA as safe before 1962 and which
was subsequently determined by the FDA to be effective for its intended use. In
1984, the Waxman/Hatch Act extended permission to use the abbreviated procedure
established by the FDA to copies of post-1962 drugs subject to the submission of
the required data and information, including data establishing bioequivalence.
However, effective approval of such ANDAs was dependent upon there being no
outstanding patent or non-patent exclusivity.
Additionally, the FDA allows, under section 505(b)(2) of the Food Drug and
Cosmetic Act, for the submission and approval of a hybrid application for
certain changes in drugs which, but for the changes, would be eligible for an
effective ANDA approval. Under these procedures the applicant is required to
submit the clinical efficacy and/or safety data necessary to support the changes
from the ANDA eligible drug (without submitting the basic underlying safety and
efficacy data for the chemical entity involved) plus manufacturing and chemistry
data and information. Effective approval of a 505(b)(2) application is dependent
upon the ANDA-eligible drug upon which the applicant relies for the basic safety
and efficacy data being subject to no outstanding patent or non-patent
exclusivity. As compared to a NDA, an ANDA or a 505(b)(2) application typically
involves reduced research and development costs. However, there can be no
assurance that any such applications will be approved. Furthermore, the supply
of raw materials must also be approved by the FDA.
The Company is also subject to various foreign, federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, manufacture, storage, handling and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research and development work and
manufacturing processes. Although the Company believes it is in compliance with
these laws and regulations in all material respects, there can be no assurance
that the Company will not be required to incur significant costs to comply with
such regulations in the future.
COMPETITION
In many cases, the Company's products under development will be competing
with existing therapies for market share. In addition, a number of companies are
pursuing the development of antisense technology and controlled-release
formulation technology and the development of pharmaceuticals utilizing such
technologies. The Company competes with fully integrated pharmaceutical
companies that have more substantial experience, financial and other resources
and superior expertise in research and development, manufacturing, testing,
obtaining regulatory approvals, marketing and distribution. Smaller companies
may also prove to be significant competitors, particularly through their
collaborative arrangements with large pharmaceutical companies or academic
institutions. Furthermore, academic institutions, governmental agencies and
other public and private research organizations have conducted and will continue
to conduct research, seek patent protection and establish arrangements for
commercializing products. Such products may compete directly with any products
that may be offered by the Company.
The Company's competition will be determined in part by the potential
indications for which the Company's products are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of the Company's or competitors' products. Accordingly, the
relative speed with which Genta can develop products, complete the clinical
trials and approval processes and supply commercial quantities of the products
to the market are expected to be important competitive factors. The Company
expects that competition among products approved
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for sale will be based, among other things, on product efficacy, safety,
reliability, availability, price, patent position and sales, marketing and
distribution capabilities. The development by others of new treatment methods
could render the Company's products under development non-competitive or
obsolete.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
HUMAN RESOURCES
As of March 1, 2001, Genta had 21 employees, five of whom hold doctoral
degrees. Twelve employees are engaged in development activities and nine are in
administration. Most of the management and professional employees of the Company
have had prior experience and positions with pharmaceutical and biotechnology
companies. Genta believes it maintains satisfactory relations with its
employees.
ITEM 2. PROPERTIES
In April 1999, the Company moved its headquarters to Lexington,
Massachusetts, and entered into a two-year sub-lease effective April 1, 1999 for
2,400 square feet. In February 2000, the Company received notice of lease
cancellation by the overtenant in Lexington MA, effective August 31, 2000.
Effective November 1, 2000, the Company moved its headquarters to Berkeley
Heights, NJ and leased 12,807 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
During 1995, Genta Europe received approximately 5.4 million French Francs
(as of December 31, 2000, approximately $775,200) 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 December 31, 2000, approximately $601,100) 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 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 December 31, 2000, approximately $95,200) and early termination payment
of FF1,852,429 (as of December 31, 2000, approximately $265,900). 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 December 31,
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.
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In October 1996, JBL retained a chemical consulting firm to advise it with
respect to an incident of soil and groundwater contamination (the "Spill").
Sampling conducted at the JBL facility revealed the presence of chloroform and
perchloroethylenes ("PCEs") in the soil and groundwater at this site. A
semi-annual groundwater-monitoring program is being conducted, under the
supervision of the California Regional Water Quality Control Board, for purposes
of determining whether the levels of chloroform and PCEs have decreased over
time. The results of the latest sampling conducted by JBL show that PCEs and
chloroform have decreased in all but one of the monitoring sites. Based on an
estimate provided to the Company by the consulting firm, the Company accrued
$65,000 in 1999 relating to remedial costs. Prior to 1999, such costs were not
estimable, and therefore, no loss provision had been recorded. The Company has
agreed to indemnify Promega in respect of this matter. 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
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 by the second quarter 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
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 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 believes that Promega's claims are without merit and intends
to vigorously pursue its rights under the JBL Agreement. 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. There can be no assurance that the Company will be
successful in pursuing this claim, nor that the Company will not incur material
costs and/or that losses may occur in relation to this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter
ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock is traded on the Nasdaq National Market under
the symbol "GNTA." From February 1997 through May 2000, the Company's common
stock traded on the Nasdaq SmallCap Market, initially under the symbol "GNTAC",
and, as of July 1997, under its current symbol. The following table sets forth,
for the periods indicated, the high and low sales prices for the common stock as
reported by Nasdaq (as adjusted for the reverse stock split).
HIGH LOW
---- ---
1999
First Quarter........................... 3 1 5/32
Second Quarter.......................... 4 1/16 1 15/16
Third Quarter........................... 2 2/32 2
Fourth Quarter.......................... 8 1/4 2 7/16
2000
First Quarter........................... 14 5 7/8
Second Quarter.......................... 11 13/16 6 7/16
Third Quarter........................... 10 1/8 5 3/8
Fourth Quarter.......................... 10 7 1/4
(b) Holders
There were 754 holders of record of the Company's common stock as of March
9, 2001.
(c) 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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Consolidated Statements of Operations Data:
Gain on sale of technology ..................................... $ 373 $ -- $ -- $ -- $ --
Related party contract revenue ................................. 1,559 350 55 -- --
Collaborative research and development ......................... -- 50 50 -- --
License revenue ................................................ -- -- -- -- 17
Royalty fees ................................................... -- -- -- -- 5
-------- -------- -------- -------- --------
Costs and expenses: ............................................... 1,932 400 105 -- 22
Research and development ....................................... 4,592 3,309 2,114 4,205 6,830
General and administrative ..................................... 5,096 6,132 3,868 4,054 3,323
LBC Settlement ................................................. -- 600 547 -- --
Non-cash equity related compensation ........................... -- -- 154 3,074 8,605
-------- -------- -------- -------- --------
9,688 10,041 6,683 11,333 18,758
-------- -------- -------- -------- --------
Loss from operations .............................................. (7,756) (9,641) (6,578) (11,333) (18,736)
Equity in net income (loss) of joint venture ...................... (2,712) (1,193) (132) 2,449 502
Net loss of liquidated foreign subsidiary ......................... -- -- (98) -- --
Gain on sale of marketable security ............................... -- -- -- -- 4,917
Other income (expense), net ....................................... (745) (2,850) (38) 22 866
-------- -------- -------- -------- --------
Net loss from continuing operations ............................... $(11,213) $(13,684) $ (6,846) $ (8,862) $(12,451)
Loss from discontinued operations ................................. (879) (1,741) (739) (189) --
Gain on sale of discontinued operations ........................... -- -- -- 1,607 --
-------- -------- -------- -------- --------
Net loss .......................................................... (12,092) (15,425) (7,586) (7,444) (12,451)
Preferred stock dividends ......................................... (4,873) (17,853) (633) (10,085) (3,443)
-------- -------- -------- -------- --------
Net loss applicable to common shares .............................. $(16,965) $(33,278) $ (8,219) $(17,529) $(15,894)
======== ======== ======== ======== ========
Continuing operations ............................................. $ (5.39) $ (7.13) $ (1.06) $ (1.07) $ (0.41)
Discontinued operations ........................................... (0.30) (0.39) (0.11) 0.08 --
-------- -------- -------- -------- --------
Net loss per share (1) ............................................ $ (5.69) $ (7.52) $ (1.17) $ (0.99) $ (0.41)
======== ======== ======== ======== ========
Weighted average shares used in computing net loss per share ...... 2,983 4,422 7,000 17,784 38,659
Deficiency of earnings to meet combined fixed charges and preferred
stock dividends (2) ........................................ $(16,965) $(33,278) $ (8,219) $(17,529) $(15,894)
DECEMBER 31
-----------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments .................. $ 532 $ 8,456 $ 2,458 $10,101 $50,199
Working capital (deficit) .......................................... (3,816) 5,807 3,629 9,434 48,321
Total assets ....................................................... 8,806 15,079 7,551 12,228 57,208
Notes payable and capital lease obligations, less current portion... 118 -- -- -- --
Total stockholders' equity ......................................... 4,074 9,425 2,959 10,206 53,567
(1) Computed on the basis of net loss per common share described in Note 1 of
Notes to Consolidated Financial Statements.
(2) The Company has incurred losses and, thus, has had a deficiency in fixed
charges and preferred stock dividend coverage since inception.
The above selected financial data reflects discontinued operations and balance
sheet data of JBL as a result of the sale of JBL in May 1999. See Note 2 of the
Notes to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its inception in February 1988, Genta has devoted its principal
efforts toward drug discovery, research and development. Genta has been
unprofitable to date and expects to incur substantial operating losses due to
continued requirements for ongoing and planned research and development
activities, preclinical and clinical testing, manufacturing activities,
regulatory activities, and establishment of a sales and marketing organization.
From the period since its inception to December 31, 2000, the Company has
incurred a cumulative net loss of $151.9 million. The Company has experienced
significant quarterly fluctuations in operating results and it expects that
these fluctuations in revenues, expenses and losses will continue.
Genta's strategy is to build a product and technology portfolio, primarily,
but not exclusively, focused on its antisense products. In order for the Company
to maximize this strategy, the number of employees is expected to increase. To
this end, the Company has significantly reduced its involvement with respect to
its 50% investment in an R&D joint venture, Genta Jago, through an interim
agreement reached in March 1999. The Company also entered into an Asset Purchase
Agreement on March 19, 1999 for the sale of substantially all of the assets and
certain liabilities of the Company's wholly owned specialty chemicals subsidiary
JBL Scientific, Inc. ("JBL") for cash, a promissory note and certain
pharmaceutical development services in support of Genta's Genasense development
project. The transaction was completed on May 10, 1999. Following the sale of
JBL, the Company is operating as one business segment. Accordingly, the
following information and accompanying financial statements reflect JBL as a
discontinued operation. The Company has closed its operation in France. In 1999,
the Company closed its facilities in San Diego, California and has moved its
headquarters to Lexington, Massachusetts. In October 2000, the Company moved its
entire operation to Berkeley Heights, New Jersey.
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. In August 2000 and September 2000, the Company
entered into non-exclusive license agreements with Sequitur Incorporated and
Oasis Biopharmaceuticals, Inc. for the above-mentioned patents. Both
non-exclusive license agreements include 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.
In August 1999, the Company acquired Androgenics Technologies, Inc.
("Androgencis"), a wholly owned entity of the Company's majority stockholder.
Androgenics is a company with license rights to a series of compounds invented
at the University of Maryland, Baltimore to treat prostate cancer. As
consideration for the acquisition, the Company paid $132,000 in cash (including
reimbursements of pre-closing expenses and on-going research funding) and issued
warrants (with exercise prices ranging from $1.25 to $2.50 per share) to
purchase an aggregate of 1,000,000 shares of common stock, 90% of which will not
become exercisable until the successful conclusion of certain development
milestones, ranging from the initial clinical patient trial through the
submission of an application for marketing authorization. As of December 31,
2000, none of the above mentioned milestones have been met.
The Company has recently completed two private placements for $43.5
million; however, its ability to continue operations beyond the second quarter
of 2002 depends upon the Company's success in obtaining additional funding.
There can be no assurance that the Company will be able to obtain additional
funds on satisfactory terms or at all. There are several factors that must be
considered risks in that regard and those that are known to management are
discussed in "MD&A -- Certain Trends and Uncertainties."
The statements contained in this Annual Report on Form 10-K 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
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Securities Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements reflect the Company's views as of the date they
are made with respect to future events and financial performance, but are
subject to many risks and uncertainties, which could cause the actual results of
the Company to differ materially from any future results expressed or implied by
such forward-looking statements. Examples of such risks and uncertainties
include, but are not limited to, obtaining sufficient financing to maintain the
Company's planned operations, the timely development, receipt of necessary
regulatory approvals and acceptance of new products, the successful application
of the Company's technology to produce new products, the obtaining of
proprietary protection for any such technology and products, the impact of
competitive products and pricing and reimbursement policies, changing market
conditions and the other risks detailed in the Certain Trends and Uncertainties
section of this Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Annual Report on Form 10-K. 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.
Operating revenues totaled $105,000 in 1998 compared to zero in 1999 and
$22,000 in 2000. Related party contract revenues decreased from $55,000 in 1998
to zero in 1999 and 2000. The Company has focused its resources on its
development of its lead antisense oligonucleotide, Genasense. The completion of
the sale of the assets of JBL resulted in a significant decrease in ongoing
revenues, as all of the Company's historical product sales have been
attributable to JBL.
Collaborative research and development revenues were $50,000 annually in
1998 and zero in 1999 and 2000, recognized pursuant to the Company's
collaboration with Johnson & Johnson Consumer Products, Inc. which has expired.
License and royalty revenues were $22,000 in 2000. These revenues were
derived from the two non-exclusive license agreements entered into in 2000 with
Sequitur Incorporated and Oasis Biopharmaceuticals, Inc., as discussed later.
Costs and expenses totaled $6.7 million in 1998 compared to $11.3 million
in 1999 and $18.8 million in 2000. These increases reflect additional clinical
trial activity and related drug supply, salaries and non-cash stock compensation
charges. Services and capabilities that have not been retained within the
Company are out-sourced through short-term contracts or from consultants. All
preclinical biology and clinical trial work are now conducted through such
collaborations with external scientists and clinicians. The Company anticipates
that, if sufficient collaborative revenues and other funding are available,
research and development expenses may increase in future years due to
requirements for preclinical studies, clinical trials, the Genasense antisense
oligonucleotide program and increased regulatory costs. The Company will be
required to assess the potential costs and benefits of developing its own
antisense oligonucleotide manufacturing, marketing and sales activities if and
as such products are successfully developed and approved for marketing, as
compared to establishing a corporate partner relationship.
Research and development expenses totaled $2.1 million in 1998, $4.2
million in 1999, and $6.8 million in 2000. Such expenses do not include charges
related to non-cash equity related compensation. The increase from 1998 through
2000 is due primarily to drug supply costs, investigator and monitor fees
related to expanded clinical trials, along with increased patent amortization
costs relating to the MBI and Relgen acquisitions in 2000. It is anticipated
that research and development expenses will continue to increase in the future,
as the development program for Genasense 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 successful, will require additional research
and development expenses.
In an effort to focus its research and development on areas that provide
the most significant commercial opportunities, the Company continually evaluates
its ongoing programs in light of the latest market information and conditions,
availability of third-party funding, technological advances, and other factors.
As a result of such evaluation, the Company's product development plans have
changed from time to time, and the Company anticipates that they will continue
to do so in the future.
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General and administrative expenses were $3.9 million in 1998, $4.1 million
in 1999, and $3.3 million in 2000. Such expenses do not include charges related
to non-cash equity related compensation. The $0.8 million decrease from 1999 to
2000 reflects reductions in accounting expenses and reduced patent abandonment
costs. The Company recorded charges to general and administrative expenses of
$577,000, $523,400 and $7,500 in 1998, 1999 and 2000, respectively, to account
for the carrying value of abandoned patents no longer related to the research
and development efforts of the Company. The Company's policy is to evaluate the
appropriateness of carrying values of the unamortized balances of intangible
assets on the basis of estimated future cash flows (undiscounted) and other
factors. If such evaluation were to identify a material impairment of these
intangible assets, such impairment would be recognized by a write-down of the
applicable assets. The Company continues to evaluate the continuing value of
patents and patent applications, particularly as expenses to prosecute or
maintain these patents come due. Through this evaluation, the Company may elect
to continue to maintain these patents, seek to out-license them, or abandon
them.
The Company recorded charges to non-cash equity related compensation of
$0.2 million in 1998, $3.1 million in 1999, and $8.6 million in 2000. This
increase is primarily due to the acceleration of outstanding stock options for
the four members of the Company's Board of Directors who resigned in March 2000.
See Note 9 Stockholders' Equity - Stock Benefit Plans for details.
The Company's equity in net loss of its joint venture (Genta Jago) totaled
$0.1 million in 1998, compared to a net gain of $2.4 million in 1999 and $0.5 in
2000. The increase in equity in net income of joint venture from 1998 to 1999 is
due to an agreement signed on March 4, 1999, between the Company and SkyePharma
(on behalf of itself and its affiliates) entered into an interim agreement (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, the joint venture between the Company 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 the Company and SkyePharma. As a result of the Interim JV
Agreement, the Company wrote off its liability relative to the Company's
recorded deficit in the joint venture and, as such, recorded a gain of
approximately $2.3 million for the three months ended March 31, 1999. Also,
according to revised revenue sharing agreements, the Company reported
approximately $164,500 for its proportionate share of net income of Genta Jago
in relation to SkyePharma's royalty agreement, with Elan Corporation, for Genta
Jago's product, Naproxen. . 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.
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 during each period.
The Company recorded a gain on the sale of marketable securities of
approximately $4.9 million in 2000. In September 2000, Genta exercised 66,221
warrants to purchase shares of common stock of CV Therapeutics, Inc. ("CV").
These warrants which were not traded and were restricted, were issued to Genta
by CV in connection with a licensing arrangement entered into in 1993. The
Company received approximately $4.9 million in cash upon the sale of such common
shares.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB Opinion No. 25". FIN No.
44 clarifies (i) the definition of employee for purposes of applying APB
applying APB Opinion No. 25, (ii) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (iii) the accounting consequences of
various modifications to the terms of a previously fixed stock option award, and
(iv) the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 is effective July 1, 2000 but certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998 and after January 12, 2000. The adoption of FIN No. 44 did not have a
material impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation,
and disclosure of revenue in financial statements filed with the SEC. SAB No.
101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition policies. The
Company has reviewed these criteria and believes its policies for revenue
recognition to be in accordance with SAB No. 101.
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21
In June 1998, June 1999 and June 2000, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133,"
and SFAS 138, "Accounting for Derivative Instruments and Hedging Activities --
An Amendment of SFAS No. 133." SFAS No. 133, as amended, requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the planned use of the
derivative and the resulting designation.
The Company is required to implement SFAS No. 133, as amended, in the first
quarter of 2001. At December 31, 2000, we did not have any derivative
instruments that would result in a transition adjustment upon the adoption of
this standard on January 1, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from
private and public offerings of its equity securities. Cash provided from these
offerings totaled approximately $175.6 million through December 31, 2000,
including net proceeds of $40.0 million received in 2000, $10.4 million received
in 1999 and $14.0 million received during 1998. The Company has funded its net
loss for the year ended December 31, 2000 of $12.4 million, after non-cash and
working capital of $10.5 million, resulting in operating cash outflows of $1.9
million. At December 31, 2000, the Company had cash, cash equivalents and
short-term investments totaling $50.2 million compared to $10.1 million at
December 31, 1999. Management believes that at the current rate of spending,
primarily in support of on-going and anticipated clinical trails, the Company
will have sufficient cash funds to maintain its present operations into the
second quarter of 2002.
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.
If the Company successfully secures sufficient levels of collaborative
revenues and other sources of financing, it expects to use such financing to
continue to expand its ongoing research and development activities, preclinical
testing and clinical trials, costs associated with the market introduction of
potential products, and expansion of its administrative activities. As
previously discussed in the MD&A Overview, the Company entered into an Asset
Purchase Agreement with Promega Corporation 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 $4.8 million in cash, a
$1.2 million promissory note, and pharmaceutical development services to be
provided to Genta.
In connection with the Genta Jago joint venture formed in late 1992, the
Company provided funding to Genta Jago pursuant to a working capital loan
agreement that expired in October 1998. As of December 31, 1998, the Company had
advanced working capital loans of approximately $15.8 million to Genta Jago, net
of principal repayments and credits, which amount fully satisfied what the
Company believes is the loan commitment established by the parties through
December 31, 1998 and in relation to the interim agreement signed on March 4,
1999. Such loans bore interest at rates per annum ranging from 5.81% to 7.5%,
and were payable in full on October 20, 1998. Genta Jago repaid Genta $1 million
in principal of its working capital loans, in November 1996, from license fee
revenues.
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into the interim 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 and SkyePharma agreed to
be responsible for 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 such interim agreement. Accordingly, the Company
reversed its $2.3 million deficit in joint venture and effectively forgave
payment of working capital loans to Genta Jago.
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
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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 2000, the Company entered into a non-exclusive
license agreement with Sequitur Incorporated and Oasis Biopharmaceuticals, Inc.
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.
In August 1999, the Company acquired Androgenics Technologies, Inc.
("Androgenics"), a wholly owned entity of the Company's majority stockholder. As
consideration for the acquisition, the Company paid $132,000 in cash (including
reimbursements of pre-closing expenses and on-going research funding) and issued
warrants (with exercise prices ranging from $1.25 to $2.50 per share) to
purchase an aggregate of 1,000,000 shares of common stock, 90% of which will not
become exercisable until the successful conclusion of certain development
milestones, ranging from the initial clinical patient trial through the
submission of an application for marketing authorization. The acquisition was
accounted for as a transfer between companies under common control. The cash and
warrants were issued in exchange for 100% of the shares of Androgenics and
licensed technology and the assumption of a research and development agreement
with the University of Maryland, Baltimore. The 1,000,000 warrants were
accounted for as a deemed distribution based on their fair value of $440,500.
The $132,000 in cash was also accounted for as a deemed distribution. The assets
and liabilities of Androgenics as of December 31, 1999 and the results of its
operations for the years then ended were immaterial to the Company's financial
statements. As of December 31, 2000, none of the above mentioned milestones have
been met.
Through December 31, 2000, the Company had acquired $11.2 million in
property and equipment of which $5.5 million was financed through capital leases
and other equipment financing arrangements, $4.4 million was funded in cash and
the remainder was acquired through the Company's acquisition of JBL. The Company
has commitments associated with its operating leases as discussed further in
Note 8 to the Company's consolidated financial statements.
In October 1996, JBL retained a chemical consulting firm to advise it with
respect to an incident of soil and groundwater contamination. 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 purposes of determining
whether the levels of chloroform and PCEs have decreased over time. The results
of the latest sampling conducted by JBL show that PCEs and chloroform have
decreased in all but one of the monitoring sites. Based on an estimate provided
to the Company by the consulting firm, the Company accrued $65,000 in 1999,
relating to remedial costs. Prior to 1999, such costs were not estimable, and
therefore, no loss provisions had been recorded. Pursuant to the JBL agreement,
the Company has agreed to indemnify Promega in respect of this matter. The
Company believes that any costs associated with further investigation or
remediation 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 by the second quarter 2001. While the
terms of a settlement with the EPA have not been finalized, they should contain
standard contribution, protection and release language. See "MD&A -- Certain
Trends and Uncertainties -- 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 Company believes that any costs associated with further
investigating or remediating this contamination will not have a material adverse
effect on the business of the Company, although there can be no assurance
thereof. The Company has agreed to indemnify Promega in respect of this matter.
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In November 2000, the Company received gross proceeds of approximately
$28.9 million (approximately $26.9 net of placement costs) through the private
placement of 4,285,112 shares of common stock.
In September 2000, the Company received gross proceeds of approximately
$14.6 million (approximately $13.7 million, net of placement costs) through the
private placement of 2,162,700 shares of common stock. In connection with the
financing, 135,639 warrants were issued to the placement agent. The value of
such warrants of $867,000 were considered part of the cost of the placement.
In December 1999, the Company received gross proceeds of approximately
$11.4 million (approximately $10.4 million net of placement costs) through the
private placement of 114 units. Each unit sold in the private placement consists
of (i) 33,333 shares of common stock, par value $.001 per share, and (ii)
warrants to purchase 8,333 shares of the Company's common stock at any time
prior to the fifth anniversary of the final closing (the "Warrants"). The
Warrants are convertible at the option of the holder into shares of common stock
at an initial conversion rate equal to the market price of $4.83 per share
(subject to antidilution adjustment).
In June 1997, the Company received gross proceeds of approximately $16.2
million (approximately $14 million net of placement costs) through the private
placement of 161.58 Premium Preferred Units(TM). Each unit sold in the private
placement consists of (i) 1,000 shares of Premium Preferred Stock(TM), par value
$.001 per share, stated value $100 per share (the "Series D Preferred Stock"),
and (ii) warrants to purchase 5,000 shares of the Company's common stock at any
time prior to the fifth anniversary of the final closing (the "Class D
Warrants"). The Series D Preferred Stock is immediately convertible at the
option of the holder into shares of common stock at an initial conversion price
of $0.94375 per share (subject to antidilution adjustment).
On May 29, 1998, the Company requested, and subsequently received, consents
(the "Letter Agreements") from the holders of a majority of the Series D
Preferred Stock to waive the Company's obligation to use best efforts to obtain
the effectiveness of a registration statement with the SEC as to common stock
issuable upon conversion of Series D Preferred Stock and exercise of Class D
Warrants. In exchange, the Company agreed to waive the contractual "lock-up"
provisions to which such consenting holders were subject and which provisions
would have prevented the sale of up to 75% of their securities for a nine-month
period following the effectiveness of the registration statement; and to extend
to January 29, 1999 from June 29, 1998 the Reset Date referred to in the
Certificate of Designation of the Series D Preferred Stock. In addition, through
the Letter Agreements, the Company agreed to issue and did issue to such holders
warrants to purchase at $0.94375 per share, an aggregate of up to 807,900 shares
of common stock, subject to certain anti-dilution adjustments, exercisable until
June 29, 2002. The shares were valued at approximately $633,000 and recorded as
a dividend. The Company had conditioned the effectiveness of such consent on its
acceptance by a majority of the Series D Preferred Stockholders. The Series D
Preferred Stock began earning dividends, payable in shares of the Company's
common stock, at the rate of 10% per annum subsequent to the new Reset Date of
January 29, 1999.
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 of December 31, 2000, as a result of the conversion of the Series D
Preferred Stock, the Company issued approximately 14.4 million shares of common
stock. The Company realized approximately $1.4 million from the exercise of the
Class D Warrants and issued 2,009,614 shares of common stock. The Company will
redeem the remaining 155,640 Class D Warrants, which have not been exercised
prior to the redemption date, at $0.10 per warrant for approximately $15,600.
The Company has not accrued dividends since the January 29, 2000 dividend date
due to the mandatory conversion of the Series D Preferred Stock.
In February 1997, the Company received gross proceeds of $3 million in a
private placement of units consisting of (i) Senior Secured Convertible Bridge
Notes (the "Convertible Notes") that bore interest at a stated rate of 12% per
annum and matured on December 31, 1997, as extended, and (ii) warrants to
purchase an aggregate of approximately 6.4 million shares of common stock. The
Convertible Notes were convertible into Series D Convertible Preferred Stock at
the option of the holder, at an initial conversion price of $50.00 per share,
subject to antidilution adjustments. In May 1997, $650,000 of the Convertible
Notes were converted into 13,000 shares of Series D Preferred Stock and in
December 1997, the remaining $2,350,000 of the Convertible Notes and accrued
interest were converted into 52,415 shares of Series D Preferred Stock.
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In September 1996, the Company received gross proceeds of $2 million
(approximately $1.9 million net of offering costs) through the sale of
Convertible Debentures to investors in a private placement outside the United
States. The Convertible Debentures were convertible, at the option of the
holders, at any time on or after October 23, 1996, into shares of common stock
at a conversion price equal to 75% of the average Nasdaq closing bid price of
Genta's common stock for a specified period prior to the date of conversion.
Terms of the Convertible Debentures also provided for interest payable in shares
of the Company's common stock. In November 1996, $1.65 million of the
Convertible Debentures and the related accrued interest was converted into
approximately 590,000 shares of common stock and in 1997, the remaining $350,000
and related accrued interest was converted into 204,263 shares of common stock.
In March 1996, the Company received gross proceeds of $6 million
(approximately $5.5 million net of offering fees) through the issuance of Series
C Convertible Preferred Stock (the "Series C Preferred Stock"), sold to
institutional investors in a private placement. The Series C Preferred Stock was
immediately convertible, at the option of the holder, into shares of common
stock at a conversion price equal to 75% of the average Nasdaq closing bid price
of Genta's common stock for a specified period prior to the date of conversion.
In 1996, 5,620 shares of the Series C Preferred Stock and accrued dividends were
converted at the option of the holders into 524,749 shares of Genta's common
stock. In 1997, 1,424 shares of the Series C Preferred Stock and accrued
dividends were converted at the option of the holders into 952,841 shares of
Genta's common stock. In April 1998, in consideration of EITF D-60, which was
issued in March 1997, the Company recorded imputed non-cash dividends on
preferred stock totaling $2,348,000 in 1996 for discounted conversion terms
related to Series C convertible preferred stock.
In December 1995, the Company completed the sale of 3,000 shares of Series
B Convertible preferred stock (the "Series B Preferred Stock"), at a price of
$1,000 per share to institutional investors outside of the United States.
Proceeds from the offering totaling approximately $2.8 million were reflected as
a receivable from sale of preferred stock at December 31, 1995 and were received
by the Company on January 2, 1996. The Series B Preferred Stock was immediately
convertible, at the option of the holder, into shares of common stock at a
conversion price equal to 75% of the average Nasdaq closing bid prices of
Genta's common stock for a specified period prior to the date of conversion. The
Series B Preferred Stock was converted into 226,943 shares of the Company's
common stock in February 1996 pursuant to terms of the Series B stock purchase
agreements.
In October 1993, the Company completed the sale of 600,000 shares of Series
A convertible preferred stock ("the Series A Preferred Stock"), in a private
placement of units consisting of (i) one share of Series A Preferred Stock and
(ii) one warrant to acquire one share of common stock, sold at an aggregate
price of $50 per unit. Each share of Series A Preferred Stock is immediately
convertible, at any time prior to redemption, into shares of the Company's
common stock, at a rate determined by dividing the aggregate liquidation
preference of the Series A Preferred Stock by the conversion price. The
conversion price is subject to adjustment for antidilution. From January 1
through October 31, 1998, each share of Series A Preferred Stock was convertible
into 7.255 shares of common stock. From November 1 through December 31, 1998,
each share of Series A Preferred Stock was convertible into 7.333 shares of
common stock. At December 31, 1999 each share of Series A Preferred Stock was
convertible into 7.3825 shares of common stock.
Terms of the Company's Series A Preferred Stock require the payment of
dividends annually in amounts ranging from $3 per share per annum for the first
year to $5 per share per annum in the third and fourth years. Dividends were to
be paid in cash or common stock or a combination thereof, at the Company's
option. Dividends on the Series A Preferred Stock accrued on a daily basis
(whether or not declared) and accumulated to the extent not paid on the annual
dividend payment date following the dividend period for which they accrued. The
Company may redeem the Series A Preferred Stock under certain circumstances, and
was required to redeem the Series A Preferred Stock, subject to certain
conditions, in September 1996 at a redemption price of $50 per share, plus
accrued and unpaid dividends (the "Redemption Price"). The Company elected to
pay the Redemption Price in common stock in order to conserve cash and was
required under the terms of the Series A Preferred Stock to use its best efforts
to arrange for a firm commitment underwriting for the resale of such common
stock which would allow the holders ultimately to receive cash instead of
securities for their Series A Preferred Stock. Despite using its best efforts,
the Company was unable to arrange for a firm commitment underwriting. Therefore,
under the terms of the Series A Preferred Stock, Genta was not required to
redeem such Series A Preferred Stock in cash, but rather was required to redeem
all shares of Series A Preferred Stock held by holders who elected to waive the
firm commitment underwriting requirement and receive the redemption price in
shares of common stock. A waiver of the firm commitment underwriting was
included as a condition of such redemption. The terms of the Series A Preferred
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Stock do not impose adverse consequences on the Company if it is unable to
arrange for such an underwriting despite its reasonable efforts in such regard.
In September 1996, holders of 55,900 shares of Series A Preferred Stock redeemed
such shares and related accrued and unpaid dividends for an aggregate of 242,350
shares of the Company's common stock. The effect on the financial statements of
the redemption was a reduction in Accrued dividends on preferred stock, a
reduction in the par value of convertible preferred stock, an increase in the
par value of common stock, and an increase in Additional Paid-in Capital. Should
the remaining shares of Series A Preferred stock be redeemed for, or converted
into, the Company's common stock, the effect on the financial statements will be
the same as that previously described. The Company is restricted from paying
cash dividends on common stock until such time as all cumulative dividends on
outstanding shares of Series A and Series D Preferred Stock have been paid. The
Company currently intends to retain its earnings, if any, after payment of
Dividends on outstanding shares of Series A and Series D Preferred Stock, for
the development of its business. See "MD&A -- 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 and
Volatility of Stock Price; Market Overhang From Convertible Securities and
Warrants."
The Company continually evaluates its intangible assets for impairment. If
evidence of impairment is noted, the Company determines the amount of impairment
and charges such impairment to expense in the period that impairment is
determined. Through December 31, 2000, management has considered projected
future cash flows from product sales, collaborations and proceeds on sale of
such assets and, other than the $577,000, $523,400 and $7,500 charge recorded in
1998, 1999, and 2000 respectively, related to the disposal of certain patents,
has determined that no additional impairment exists. See "MD&A -- Results of
Operations."
CERTAIN RISKS AND UNCERTAINTIES RELATED TO THE COMPANY'S BUSINESS
In addition to the other information contained in this Annual Report on
Form 10-K, 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, 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 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 recent private offering, will be adequate to satisfy our
capital needs into the second quarter 2002. Our future capital requirements will
depend on the results of our research and development activities, preclinical
studies and bioequivalence and clinical trials, competitive and
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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 substantial 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;
- 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, 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 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.
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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.
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
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.
We rely on our 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
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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 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 defined and
may result in large judgments or settlements against us, which could have a
negative effect on our financial performance. We maintain product
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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.
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 to
appoint a majority of the members of our Board of Directors. Paramount Capital
Asset Management, Inc. 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 Paramount Capital Asset Management, is also the Chairman
of Paramount Capital, Inc. and of Paramount Capital Investments, LLC, a New
York-based merchant banking and venture capital firm specializing in
biotechnology companies. In the regular course of its business, Paramount
Capital Inc. 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 our 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 Paramount
Capital Asset Management and Paramount Capital Inc., 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
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, manufacturing activities and development
activities undertaken by Genta Jago. From the period since its inception to
December 31, 2000, the Company has incurred a cumulative net loss of $156.9
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 (or, as of December 31, 2000 approximately $775,600) 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 December 31, 2000),
approximately $601,400 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 Genta Incorporated that it
was responsible as a guarantor of the note for the repayment. Genta's agent in
Europe has again notified ANVAR that it 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.
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 December 31, 2000, approximately $95,200) and early termination payment
of FF1,852,429 (as of December 31, 2000, approximately $266,000). 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 December 31,
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. In addition, the
Company is restricted from paying cash dividends on its common stock until such
time as all cumulative dividends have been paid on outstanding shares of its
Series D Preferred Stocks. The Company currently intends to retain its earnings,
if any, after payment of dividends on outstanding shares of Series D Preferred
Stocks, for the development of its business. See "MD&A -- Liquidity and Capital
Resources."
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 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
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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
March 9, 2001, the Company had 51,374,707 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 --
Subordination of Common Stock to Series A Preferred Stock; Risk of Dilution;
Anti-dilution Adjustments," or the availability of such securities for sale,
will have on the market price of the Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock, or the perception that such sales
might occur, could adversely affect prevailing market prices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Fair Value of Financial Instruments -- The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments". The estimated fair
values of financial instruments have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The Company has not entered into, and does not expect
to enter into, financial instruments for trading or hedging purposes. The
Company does not currently anticipate entering into interest rate swaps and/or
similar instruments. The Company's carrying values of cash, marketable
securities, accounts payable and accrued expenses are a reasonable approximation
of their fair value.
Since the Company has liquidated its Genta Europe subsidiary, the Company
has no material currency exchange or interest rate risk exposure as of December
31, 2000. With the liquidation, there will be no ongoing exposure to material
adverse effect on the Company's business, financial condition, or results of
operation for sensitivity to changes in interest rates or to changes in currency
exchange rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
GENTA INCORPORATED
INDEX TO FINANCIAL STATEMENTS COVERED
BY REPORTS OF INDEPENDENT AUDITORS
Genta Incorporated
Reports of Independent Auditors................................................................................ 33
Consolidated Balance Sheets at December 31, 1999 and 2000...................................................... 34
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000..................... 35
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1999 and 2000........... 36
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000..................... 39
Notes to Consolidated Financial Statements..................................................................... 40
Genta Jago Technologies B.V.
Reports of Independent Auditors................................................................................. 59
Balance Sheets at December 31, 1998............................................................................. 60
Statements of Operations for the year ended December 31, 1998................................................... 61
Statement of Stockholders' Equity (Net Capital Deficiency) for the years ended December 31, 1998................ 62
Statements of Cash Flows for the years ended December 31, 1998.................................................. 63
Notes to Financial Statements................................................................................... 64
32
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Genta Incorporated
We have audited the accompanying consolidated balance sheets of Genta
Incorporated and its subsidiaries as of December 31, 1999 and 2000 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 2001
33
34
GENTA INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
------------ ------------
ASSETS 1999 2000
---- ----
Current assets:
Cash and cash equivalents ................................................... $ 10,100,603 $ 19,025,179
Short term investments ...................................................... -- 31,174,041
Notes receivable ............................................................ 1,333,739 1,337,739
Prepaid expenses and other current assets ................................... 22,087 424,686
------------- -------------
Total current assets ........................................................... 11,456,429 52,208,271
------------- -------------
Property and equipment, net .................................................... 30,357 758,220
Intangibles, net ............................................................... 576,904 2,922,989
Restrictive cash relating to office lease ...................................... -- 246,626
Deposits and other assets ...................................................... 164,500 49,840
Prepaid royalties .............................................................. -- 1,268,347
------------- -------------
Total assets ................................................................... $ 12,228,190 $ 57,207,667
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ 414,965 613,330
Accrued compensation ........................................................ 487,609 225,006
Accrued costs relating to new offices ....................................... -- 194,659
Accrued costs relating to clinical trials ................................... -- 834,088
Accrued placement agent commission .......................................... -- 548,400
Other accrued expenses ...................................................... 544,728 650,310
Net liabilities of liquidated foreign subsidiary ............................ 574,812 574,812
------------- -------------
Total current liabilities ...................................................... 2,022,114 3,640,605
------------- -------------
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized, convertible preferred shares
outstanding:
Series A convertible preferred stock, $.001 par value;
277,100 and 261,200 shares issued and outstanding at
December 31, 1999 and December 31, 2000, respectively, liquidation
value is $13,060,000 at December 31, 2000 ............................... 277 261
Series D convertible preferred stock, $.001 par value; 123,451 and zero
shares issued and outstanding at December 31, 1999 and December 31, 2000,
respectively; all shares converted into common stock fiscal 2000 ........ 124 --
Common stock; $.001 par value; 95,000,000 shares authorized,
25,456,437 and 51,085,375 shares issued and outstanding at
December 31, 1999 and December 31, 2000, respectively ..................... 25,456 51,085
Additional paid-in capital .................................................. 146,862,374 206,451,331
Accumulated deficit ......................................................... (139,497,618) (151,948,771)
Accrued dividends payable ................................................... 5,134,912 --
Deferred compensation ....................................................... (2,319,449) (1,081,920)
Other comprehensive income .................................................. -- 95,076
------------- -------------
Total stockholders' equity ..................................................... 10,206,076 53,567,062
------------- -------------
Total liabilities and stockholders' equity ..................................... $ 12,228,190 $ 57,207,667
============= =============
See accompanying notes.
34
35
GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1999 2000
---- ---- ----
Revenues:
Related party contract revenue ........................... $ 55,087 $ -- $ --
Collaborative research and development ................... 50,000 -- --
License revenue .......................................... -- -- 16,666
Royalty fees ............................................. -- -- 5,278
------------ ------------ ------------
105,087 -- 21,944
Costs and expenses:
Research and development (1) ............................. 2,113,544 4,204,912 6,829,683
General and administrative (1) ........................... 3,868,212 4,053,880 3,323,471
LBC settlement ........................................... 547,000 -- --
Non-cash equity related compensation ..................... 154,367 3,074,346 8,605,322
------------ ------------ ------------
6,683,123 11,333,138 18,758,476
------------ ------------ ------------
Loss from operations ........................................ (6,578,036) (11,333,138) (18,736,532)
Equity in net (loss) income of
joint venture ............................................. (131,719) 2,448,518 501,945
Net loss of liquidated foreign subsidiary ................... (98,134) -- --
Other income (expense):
Interest income (net) .................................... 263,675 172,137 866,266
Other expense ............................................ (301,587) (149,027) --
Gain on sale of marketable security ...................... -- -- 4,917,168
------------ ------------ ------------
Net loss from continuing operations ......................... (6,845,801) (8,861,510) (12,451,153)
Loss from discontinued operations ........................... (739,965) (189,407) --
Gain on sale of discontinued operations ..................... -- 1,606,956 --
------------ ------------ ------------
Net loss .................................................... (7,585,766) (7,443,961) (12,451,153)
Dividends accrued on preferred stock ........................ (632,790) (10,084,580) (3,442,561)
------------ ------------ ------------
Net loss applicable to common shares ........................ $ (8,218,556) $(17,528,541) $(15,893,714)
============ ============ ============
Net (loss) income per share
Continuing operations ..................................... $ (1.06) $ (1.07) $ (0.41)
Discontinued operations ................................... (0.11) 0.08 --
------------ ------------ ------------
Net loss per common share ................................... $ (1.17) $ (0.99) $ (0.41)
============ ============ ============
Shares used in computing net
loss per common ............................................ 7,000,191 17,783,516 38,659,057
============ ============ ============
(1) Excludes non-cash equity related compensation as follows:
Research and development .................................. $ 2,410 $ 1,128,931 $ 1,481,213
General and administrative ................................ 151,957 1,945,415 7,124,109
------------ ------------ ------------
$ 154,367 $ 3,074,346 $ 8,605,322
============ ============ ============
See accompanying notes.
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36
GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
Convertible
Preferred Stock Common Stock Additional
------------------------- ----------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ ----------
BALANCE AT JANUARY 1,
1998 ......................... 683,595 $ 684 5,712,363 $ 5,712 $ 129,320,493
Issuance of common stock
upon conversion of Series A
convertible preferred stock
and related accrued dividends (9,000) (9) 65,295 65 89,944
Issuance of common stock
upon conversion of Series D
convertible preferred stock .. (43,874) (44) 4,648,557 4,649 (4,605)
Shares and warrants issued in
connection with legal
settlement ................... 2,900 3 -- -- 965,417
Deferred Compensation
related to stock options ..... -- -- -- -- 888,792
Amortization of deferred
compensation ................. -- -- -- -- --
Dividends accrued on preferred
stock ........................ -- -- -- -- (632,790)
Payment of dividend on Series
D convertible preferred stock -- -- -- -- 632,790
Net loss ...................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31,
1998 ......................... 633,621 $ 634 10,426,215 $ 10,426 $ 131,260,041
Issuance of common stock
upon conversion of Series A
convertible preferred stock
and related accrued dividends (170,500) (171) 1,366,388 1,366 1,641,805
Issuance of common stock
upon conversion of Series D
convertible preferred stock .. (69,499) (69) 7,552,118 7,552 (7,483)
Issuance of common stock in
connection with a private
placement, net of issuance
costs of $1,071,756 .......... -- -- 3,809,502 3,809 10,352,940
Issuance of common stock
in connection with legal
settlement ................... -- -- 69,734 70 199,930
Dividends accrued on Series D
preferred stock .............. -- -- -- -- (7,677,413)
Accrued Other Total
Accumulated Dividends Deferred Comprehensive Stockholders'
Deficit Payable Compensation Income Equity
----------- --------- ------------ ------------- -------------
BALANCE AT JANUARY 1,
1998 ......................... $(124,467,891) $ 4,566,000 $ -- $ -- $ 9,424,998
Issuance of common stock
upon conversion of Series A
convertible preferred stock
and related accrued dividends -- (90,000) -- -- --
Issuance of common stock
upon conversion of Series D
convertible preferred stock .. -- -- -- -- --
Shares and warrants issued in
connection with legal
settlement ................... -- -- -- -- 965,420
Deferred Compensation
related to stock options ..... -- -- (888,792) -- --
Amortization of deferred
compensation ................. -- -- 154,367 -- 154,367
Dividends accrued on preferred
stock ........................ -- 632,790 -- -- --
Payment of dividend on Series
D convertible preferred stock. -- (632,790) -- -- --
Net loss ...................... (7,585,766) -- -- -- (7,585,766)
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31,
1998 ......................... $(132,053,657) $ 4,476,000 $ (734,425) $ -- $ 2,959,019
Issuance of common stock
upon conversion of Series A
convertible preferred stock
and related accrued dividends -- (1,643,000) -- -- --
Issuance of common stock
upon conversion of Series D
convertible preferred stock .. -- -- -- -- --
Issuance of common stock in
connection with a private
placement, net of issuance
costs of $1,071,756 .......... -- -- -- -- 10,356,749
Issuance of common stock
in connection with legal
settlement ................... -- -- -- -- 200,000
Dividends accrued on Series D
preferred stock .............. -- 7,677,413 -- -- --
See accompanying notes.
36
37
GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
Convertible
Preferred Stock Common Stock Additional
------------------------- ----------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ ----------
Payment of dividends in
common stock for Series
A and D convertible preferred
stock including cash for
fractional shares ........... -- -- 2,009,939 2,010 5,373,417
Issuance of Series D
convertible preferred stock
upon exercise of placement
agency warrants ............. 6,929 7 -- -- (7)
Exercise of Class D warrants . -- -- 178,541 179 166,574
Exercise of stock options .... -- -- 44,000 44 41,981
Deferred Compensation
related to stock options .... -- -- -- -- 4,659,370
Amortization of deferred
compensation ................ -- -- -- -- --
Preferred stock dividends
accrued in connection with
related party acquisition ... -- -- -- -- (572,495)
Payment of preferred stock
dividends in connection with
related party acquisition,
including warrants and cash
of $131,967 ................. -- -- -- -- 440,528
Preferred stock dividends
accrued in connection with
issuance of penalty warrants -- -- -- -- (1,834,672)
Payment of preferred stock
dividends in connection with
issuance of penalty warrants. -- -- -- -- 1,834,672
Issuance of stock options in
connection with the sale of
discontinued operation ...... -- -- -- -- 983,186
Net loss ..................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31,
1999 ........................ 400,551 $ 401 25,456,437 $ 25,456 $ 146,862,374
Issuance of common stock
upon conversion of Series A
convertible preferred stock
and related accrued dividends (15,900) (16) 117,465 117 (101)
Accrued Other Total
Accumulated Dividends Deferred Comprehensive Stockholders'
Deficit Payable Compensation Income Equity
----------- --------- ------------ ------------- -------------
Payment of dividends in
common stock for Series
A and D convertible preferred
stock including cash for
fractional shares ........... -- (5,375,501) -- -- (74)
Issuance of Series D
convertible preferred stock
upon exercise of placement
agency warrants ............. -- -- -- -- --
Exercise of Class D warrants . -- -- -- -- 166,753
Exercise of stock options .... -- -- -- -- 42,025
Deferred Compensation
related to stock options .... -- -- (4,659,370) -- --
Amortization of deferred
compensation ................ -- -- 3,074,346 -- 3,074,346
Preferred stock dividends
accrued in connection with
related party acquisition ... -- 572,495 -- -- --
Payment of preferred stock
dividends in connection with
related party acquisition,
including warrants and cash
of $131,967 ................. -- (572,495) -- -- (131,967)
Preferred stock dividends
accrued in connection with
issuance of penalty warrants. -- 1,834,672 -- -- --
Payment of preferred stock
dividends in connection with
issuance of penalty warrants. -- (1,834,672) -- -- --
Issuance of stock options in
connection with the sale of
discontinued operation ...... -- -- -- -- 983,186
Net loss ..................... (7,443,961) -- -- -- (7,443,961)
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31,
1999 ........................ $(139,497,618) $ 5,134,912 $ (2,319,449) $ -- $ 10,206,076
Issuance of common stock
upon conversion of Series A
convertible preferred stock
and related accrued dividends --
See accompanying notes.
37
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GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
Convertible
Preferred Stock Common Stock Additional
------------------------- ----------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ ----------
Issuance of common stock
upon conversion of Series D
convertible preferred stock .... (123,451) (124) 14,369,433 14,369 (14,245)
Issuance of common stock in
connection with two private
placements, net of issuance
costs of $2,548,116 ............ -- -- 6,447,813 6,448 40,027,627
Dividends accrued on Series D
preferred stock ................ -- -- -- -- (3,442,561)
Payment of dividends in common
stock for Series D convertible
preferred stock including cash
for fractional shares .......... -- -- 953,028 953 8,576,499
Exercise of Class D warrants .... -- -- 2,009,614 2,010 1,420,564
Reserve for unredeemed Class
D warrants ..................... -- -- -- (15,564)
Exercise of stock options ....... -- -- 1,335,114 1,335 1,849,112
Deferred Compensation
related to stock options ....... -- -- -- -- 7,367,793
Amortization of deferred
compensation ................... -- -- -- -- --
Issuance of common stock in
connection with rights to
Relgen license agreement ....... -- -- 10,000 10 84,370
Issuance of common stock in
connection with MBI asset
purchase ....................... -- -- 376,471 377 2,399,626
Issuance of common stock to
outside consultants in
connection with the 1999 private
placement ...................... -- -- 10,000 10 67,490
Comprehensive income related
to available for sale securities
Unrealized gain related to change
in market value on short-term
investments .................... -- -- -- -- --
Value of shares to be issued
to university related to license
agreement ...................... -- -- -- -- 1,268,347
Net loss ........................ -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31,
2000 ........................... 261,200 $ 261 51,085,375 $ 51,085 $ 206,451,331
============= ============= ============= ============= =============
Accrued Other Total
Accumulated Dividends Deferred Comprehensive Stockholders'
Deficit Payable Compensation Income Equity
----------- --------- ------------ ------------- -------------
Issuance of common stock
upon conversion of Series D
convertible preferred stock .... -- -- -- -- --
Issuance of common stock in
connection with two private
placements, net of issuance
costs of $2,548,116 ............ -- -- -- -- 40,034,075
Dividends accrued on Series D
preferred stock ................ -- 3,442,561 -- -- --
Payment of dividends in common
stock for Series D convertible
preferred stock including cash
for fractional shares .......... -- (8,577,473) -- -- (21)
Exercise of Class D warrants .... -- -- -- -- 1,422,574
Reserve for unredeemed Class
D warrants ..................... -- -- -- -- (15,564)
Exercise of stock options ....... -- -- -- -- 1,850,447
Deferred Compensation
related to stock options ....... -- -- (7,367,793) -- --
Amortization of deferred
compensation ................... -- -- 8,605,322 -- 8,605,322
Issuance of common stock in
connection with rights to
Relgen license agreement ....... -- -- -- -- 84,380
Issuance of common stock in
connection with MBI asset
purchase ....................... -- -- -- -- 2,400,003
Issuance of common stock to
outside consultants in
connection with the 1999 private
placement ...................... -- -- -- -- 67,500
Comprehensive income related
to available for sale securities -- -- -- 64,271 64,271
Unrealized gain related to change
in market value on short-term
investments .................... -- -- -- 30,805 30,805
Value of shares to be issued
to university related to license
agreement ...................... -- -- -- -- 1,268,347
Net loss ........................ (12,451,153) -- -- -- (12,451,153)
------------- ------------ ------------- ------------- -------------
BALANCE AT DECEMBER 31,
2000 ........................... $(151,948,771) $ -- $ (1,081,920) $ 95,076 $ 53,567,062
============= ============ ============= ============= =============
See accompanying notes.
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39
GENTA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
---- ---- ----
OPERATING ACTIVITIES:
Net loss .................................................................... $ (7,585,766) $ (7,443,961) $(12,451,153)
Items reflected in net loss not requiring cash: .............................
Depreciation and amortization ........................................... 957,583 524,552 581,023
Equity in net loss of joint venture ..................................... 131,719 (2,448,518) --
Gain on sale of discontinued operations ................................. -- (1,606,956) --
Loss on disposal of fixed assets ........................................ 340,808 149,026 --
Loss on abandonment of patents .......................................... 576,544 523,786 7,457
LBC settlement .......................................................... 547,000 -- --
Non-cash equity related compensation .................................... 154,367 3,074,346 8,605,322
Shares issued to consultants for services rendered....................... -- -- 67,500
Changes in operating assets and liabilities:
Accounts and notes receivable ......................................... (400,962) 352,410 (84,000)
Inventories ........................................................... (137,603) (2,904) --
Prepaids and other assets ............................................. (382,166) 408,944 (287,939)
Accounts payable, accrued expenses and other .......................... 268,278 (789,775) 1,634,061
Deferred revenue ...................................................... (198,570) -- --
------------ ------------ ------------
Net cash used in operating activities ....................................... (5,728,768) (7,259,050) (1,927,729)
INVESTING ACTIVITIES:
Purchase of available-for-sale short-term investments ................... (1,882,290) (501,400) (33,374,589)
Maturities of available-for-sale short-term investments ................. 7,251,918 1,393,772 2,295,624
Purchase of property and euipment ....................................... (303,556) (37,983) (778,051)
Proceeds from sale of property and equipment ............................ 57,686 66,087 --
Principal payments received on notes receivable ......................... -- 120,000 80,000
Proceeds from sale of discontinued operations, net of expenses .......... -- 4,371,380 --
Purchase of intangibles ................................................. -- (100,000) (400,000)
Acquisition of related party ............................................ -- (131,967) --
Letter of credit relating to office lease ............................... (246,626)
Loans receivable from joint venture ..................................... (51,754) -- --
Deposits and other ...................................................... 37,575 5,069 --
------------ ------------ ------------
Net cash provided (used in) by investing activities ......................... 5,109,579 5,184,958 (32,423,642)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock for the private placement, net ... -- 10,356,749 40,034,075
Issuance of common stock upon exercise of warrants and options .......... -- 208,778 3,241,872
Proceeds from equipment conversion to lease ............................. -- 51,827 --
------------ ------------ ------------
Net cash provided by financing activities ................................... -- 10,617,354 43,275,947
(Decrease) increase in cash and cash equivalents ............................ (619,189) 8,543,262 8,924,576
Less cash at liquidated foreign subsidiary .................................. (8,947) (8,947) --
Cash and cash equivalents at beginning of year .............................. 2,194,424 1,566,288 10,100,603
------------ ------------ ------------
Cash and cash equivalents at end of year .................................... $ 1,566,288 $ 10,100,603 $ 19,025,179
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ............................................................... $ 8,661 $ 173 $ 35,864
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Warrant dividend ............................................................ 632,790 -- --
Preferred stock dividend accrued ............................................ -- 7,677,413 3,442,561
Preferred stock dividend imputed on penalty warrants ........................ -- 1,834,672 --
Common stock issued in payment of dividends on preferred stock .............. 90,000 -- 8,577,473
Conversion of accrued expenses into paid in capital related to LBC settlement 418,417 -- --
Notes Receivable and accrued interest from sale of discontinued operations .. -- 1,253,739 --
Notes Receivable from sale of equipment ..................................... -- 200,000 --
Dividends imputed in connection with related party acquisition .............. -- 440,528 --
Issuance of common stock in connection with legal settlement ................ -- 200,000 --
Common stock issued in payment of patent portfolio .......................... -- -- 2,484,380
Income receivable on securities to be sold .................................. -- -- 64,272
Market value change on available-for-sale short-term investments............. -- -- 30,804
Stock warrants issued to placement agent .................................... -- -- 867,311
Common stock to be issued in payment of future royalties .................... -- -- 1,268,347
See accompanying notes.
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40
GENTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 and 2000
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Genta Incorporated ("Genta" or the "Company") is an emerging
biopharmaceutical company engaged in only one reportable segment, pharmaceutical
(drug) research and development. The Company's research efforts have been
focused on the development of proprietary oligonucleotide pharmaceuticals
intended to block or regulate the production of disease-related proteins at the
genetic level. The Company had also manufactured and marketed specialty
biochemicals and intermediate products to the in vitro diagnostic and
pharmaceutical industries through its manufacturing subsidiary, JBL Scientific,
Inc. ("JBL"), until the Company entered into an Asset Purchase Agreement with
Promega Corporation ("Promega") on March 19, 1999, which closed on May 10, 1999.
Accordingly, JBL is presented as a discontinued operation (see Note 2). The
Company also has a 50% equity interest in a drug delivery system joint venture
with SkyePharma, PLC ("SkyePharma," formerly with Jagotec AG ("Jagotec")), Genta
Jago Technologies B.V. ("Genta Jago"), established to develop oral
controlled-release drugs. On March 4, 1999, Genta and SkyePharma, entered into
an interim agreement pursuant to which the parties to the joint venture released
each other from all liability relating to unpaid development costs and funding
obligations. In August 1999, the Company acquired Androgenics Technologies, Inc.
("Androgenics"), who developed a proprietary series of compounds that act to
inhibit the growth of prostate cancer cells. 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, including
Ganite(TM).
The Company has had recurring operating losses since inception, and
management expects that they will continue for the next several years.
Management's plans for funding future losses included the recent fundings from
two private placements of common stock of $14.6 million and $28.9 million ,
which closed on September 28, 2000 and November 10, 2000, respectively. Although
no assurances can be given, 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 is also actively seeking collaborative agreements, equity
financing and other financing arrangements with potential corporate partners and
other sources. However, there can be no assurance that any such collaborative
agreements or other sources of funding will be available on favorable terms, if
at all. The Company will need substantial additional funds before it can expect
to realize significant product revenue.
Principles of Consolidation
During 1998, the Company deconsolidated its European subsidiary, Genta
Pharmaceuticals Europe, S.A. ("Genta Europe"), based in Marseilles, France,
pursuant to a filing for "Cessation of Payment". As a result, the Company has
recorded all remaining net liabilities of Genta Europe at their estimated
liquidation value as of December 31, 1998, 1999 and 2000. During 1999, the
Company closed on an Asset Purchase Agreement whereby the Company's wholly owned
subsidiary JBL was sold to Promega Biosciences, Inc ("Promega"). Accordingly,
JBL is presented as a discontinued operation in, 1998 and 1999. In August 1999,
the Company acquired Androgenics in a transaction accounted for as a transfer of
assets between companies under common control. The financial position and
results of operations of Androgenics are reflected in the consolidated financial
statements included herein. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Investment in Joint Venture
The Company has a 50% ownership interest in a joint venture, Genta Jago, a
Netherlands corporation. The investment in joint venture is accounted for under
the equity method (Note 5).
Use of Estimates
40
41
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and disclosures made in the accompanying notes to the financial
statements. Actual results could differ from those estimates.
Revenue Recognition
Revenue from JBL product sales were recognized upon shipment. As a result
of the Company's sale of JBL, all product sales are reported in discontinued
operations.
Collaborative research and development revenues, including related party
contract revenues, are recorded as earned, generally ratably, as research and
development activities are performed under the terms of the contracts. Royalty
revenues from license arrangements are recognized when earned.
In 2000, the Company entered into two worldwide non-exclusive license
agreements. Both license agreements have initial terms which expire in 2010 and
include upfront payments in cash, annual licensing fee payments for the next two
years and future royalties on product sales. The Company's policy is to
recognize revenues under these arrangements when delivery has occurred or
services have been rendered, persuasive evidence of an arrangement exists, the
fee has been determined to be fixed and determinable and collectibility is
reasonably assured. Since each of the aforementioned licensing arrangements have
payment terms extending beyond one year, such fees are not considered fixed or
determinable and therefore the Company recognizes licensing revenues as payments
become due.
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. Management
determines the appropriate classification of debt and equity securities at the
time of purchase and reassesses the classification at each reporting date. The
estimated fair value of each marketable security has been compared to its cost,
and therefore, an unrealized gain of approximately $31,000 has been recognized
in comprehensive income at December 31, 2000.
The carrying amounts of cash, cash equivalents, short-term investments,
accounts receivable and accounts payable approximates fair value due to the
short-term nature of these instruments. The fair value of available-for-sale
marketable securities in the consolidated balance sheet is as follows:
Gross Gross
DECEMBER 31, 2000 unrealized unrealized Estimated
Amortized costs gains losses fair value
--------------- ---------- ---------- -----------
Corporate debt securities ............................... $31,078,965 $30,805 $ -- $31,109,770
Equity securities ....................................... -- 64,271 -- 64,271
----------- ------- ------- -----------
$31,078,965 $95,076 $ -- $31,174,041
=========== ======= ======= ===========
The fair value of corporate debt securities at December 31, 2000, by
contractual maturity, is as follows:
Due in one year or less.................... $18,900,241
Due after one year......................... 12,273,800
-----------
$31,174,041
===========
There were no available-for-sale marketable securities at December 31,
1999.
The Company invests its excess cash primarily in debt instruments of
domestic corporations with "AA" or greater credit ratings as defined by Standard
& Poors. The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any material losses on its cash
equivalents or short-term investments.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives, ranging from three to five years, of the assets using the
straight-line method. Included in property and equipment, are costs for
leasehold
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improvements incurred in the renovation of the Company's current offices. These
costs are being depreciated over five years, the life of the lease. The
Company's policy is to evaluate the appropriateness of the carrying value of the
undepreciated value of the long-lived assets on the basis of estimated future
cash flows (undiscounted) and other factors.
Intangible Assets
Intangible assets, consisting primarily of licensed technology and
capitalized patent costs, are amortized using the straight-line method over
their estimated useful lives. The Company's policy is to evaluate the
appropriateness of the carrying values of the unamortized balances of intangible
assets on the basis of estimated future cash flows (undiscounted) and other
factors. If such evaluation were to indicate an impairment of these intangible
assets, such impairment would be recognized by a write-down of the applicable
assets. The Company evaluates, each financial reporting period, the continuing
value of patents and patent applications. Through this evaluation, the Company
may elect to continue to maintain these patents, seek to out-license them, or
abandon them. As a result of such evaluation, the Company recorded charges to
general and administrative expenses of, $577,000, $523,400 and $7,500 in 1998,
1999 and 2000, respectively, for specific capitalized patents no longer related
to the research and development efforts of the Company.
Prepaid Royalties
In December 2000, the Company recorded $1.3 million as the fair value for
its commitment to issue 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
Company will amortize the prepaid royalties upon the commercialization of
Genasense, the Company's leading antisense drug, through the term of the
arrangement which expires twelve years from the date of first commercial sale.
Dividends
The number of shares of common stock issued in payment of dividends on
Series A Convertible Preferred Stock were based on the fair market value of such
shares of common stock on the date the dividends became due. Dividends on Series
D Convertible Preferred Stock were paid in shares of common stock, and were
based on the fair market value of such shares on the date the dividends were
paid. 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.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Deferred income taxes are determined based on the estimated future tax effects
of differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
The Company records valuation allowances against net deferred tax assets,if
based upon the available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income and when temporary differences become deductible. The Company
considers, among other available information, uncertainties surrounding the
recoverability of deferred tax assets, scheduled reversals of deferred tax
liabilities, projected future taxable income, and other matters in making this
assessment.
Research and Development
Research and development costs are expensed as incurred. Costs related to
the purchase of raw materials required to manufacture our drugs for clinical
trials, are expensed upon verification that the end-product manufactured drugs
have passed strict quality control measures.
Stock Options
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The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options as provided for
under SFAS No. 123, "Accounting for Stock-Based Compensation." The Company
provides pro forma disclosure pursuant to SFAS No. 123 in Note 9 to the
financial statements.
Under APB No. 25, deferred compensation is recorded for the excess of the
fair value of the stock on the measurement date (which is the later of the date
of the option grant or the date of stockholder approval of options available for
grant), over the exercise price of the option (intrinsic value method). The
deferred compensation is amortized over the vesting period of the option.
The Company accounts for stock option grants and similar equity instruments
granted to non-employees under the fair value method provided for in SFAS No.
123 and Emerging Issues Task Force ("EITF"), Issue No. 96-18 "Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
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 years ended December 31, 1998, 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, of 51,381,265, 45,086,254 and
28,298,352, in 1998, 1999, and 2000, respectively, have not been included in the
calculation of the net loss per common share as their effect is antidilutive.
Net loss per common share is based on net loss adjusted for imputed and accrued
dividends on preferred stock.
Comprehensive Loss
The Company has no other components of comprehensive loss which is
considered to be material.
Recently Issued Accounting Standards
In March 2000, the FASB issued interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of Opinion No. APB 25". FIN No. 44 clarifies (i) the definition
of employee for purposes of applying APB applying APB Opinion No. 25, (ii) the
criteria for determining whether a plan qualifies as a noncompensatory plan,
(iii) the accounting consequences of various modifications to the terms of a
previously fixed stock option award, and (iv) the accounting for an exchange of
stock compensation awards in a business combination. FIN No. 44 is effective
July 1, 2000 but certain conclusions in this interpretation cover specific
events that occur after either December 15, 1998 and after January 12, 2000. The
adoption of FIN No. 44 did not have a material impact on the Company's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation,
and disclosure of revenue in financial statements filed with the SEC. SAB No.
101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition policies. The
Company has reviewed these criteria and believes its policies for revenue
recognition to be in accordance with SAB No. 101.
In June 1998, June 1999 and June 2000, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133,"
and SFAS 138, "Accounting for Derivative Instruments and Hedging Activities --
An Amendment of SFAS No. 133." SFAS No. 133, as amended, requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the planned use of the
derivative and the resulting designation. The Company is required to implement
SFAS No. 133, as amended, in the first quarter of 2001. At December 31, 2000, we
did not have any derivative instruments that would result in a transition
adjustment upon the adoption of this standard on January 1, 2001.
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2. DISCONTINUED OPERATIONS
On March 19, 1999 (the "Measurement Date"), the Company entered into an
Asset Purchase Agreement (the "JBL Agreement") with Promega whereby its wholly
owned subsidiary Promega Biosciences Inc. would acquire substantially all of the
assets and assume 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 (the "Disposal Date"), with a gain on
the sale of approximately $1.6 million being recognized, based upon the purchase
price of JBL, less its net assets and costs and expenses associated with the
sale, including lease termination costs of $1.1 million, JBL losses of $147,000,
and legal, accounting, tax and other miscellaneous costs of the sale
approximating $653,000.
Additionally, in connection with the sale of JBL's business and pursuant to
a lease termination agreement, the Company granted stock options to acquire
450,000 shares of the Company's common stock, par value $.001 per share ("Common
Stock"), to the owners of the building previously leased to JBL, some of whom
were employees of JBL. Those options have been accounted for pursuant to the
Black-Scholes option pricing model and have an approximate value of $1.0 million
and have been charged against the gain on the sale of JBL. In addition, there
were 246,000 options granted to former employees of JBL upon the closing of the
sale of JBL's business in connection with an ongoing service arrangement between
Promega and the Company. These options were granted at an exercise price of
$2.03 per share with a one year vesting period and will expire two years after
the date of grant. The fair value of these options amounting to $1.7 million has
been charged to continuing operations in the amount of $757,000 and $948,000 for
the years ended December 31, 1999 and 2000, respectively.
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 all periods presented. The assets and liabilities relating to the
discontinued operations are included in net assets of discontinued operations in
the consolidated balance sheet at December 31, 1998 and 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 consolidated
statements of operations for the year ended December 31, 1998 and for the period
January 1, 1999 through the Measurement Date, March 19, 1999. Losses incurred by
JBL from the Measurement Date through the Disposal Date have been deferred and
charged to gain on sale of JBL.
Net assets of discontinued operations consisted of the following:
MAY 10, 1999
------------
Accounts receivable, net .................... $ 479,608
Inventories, net ............................ 966,515
Property and equipment, net.................. 605,364
Other assets ................................ 947,125
Liabilities ................................. (546,171)
-----------
Total ............................. $ 2,452,441
===========
Results of discontinued operations consisted of the following:
YEAR ENDED PERIOD FROM
DECEMBER JANUARY 1, 1999
31,1998 TO MAY 10, 1999
---------- ---------------
Product sales ................................................................ $ 5,346,795 $ 1,718,721
Operating expenses ........................................................... (6,087,565) (2,051,720)
Other income (expense) ....................................................... 805 (3,835)
Losses from March 19, 1999 through May 10, 1999 charged to Gain on Sale of JBL -- 147,427
----------- -----------
Loss ......................................................................... $ (739,965) $ (189,407)
=========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
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ESTIMATED DECEMBER 31,
--------- -------------------------
USEFUL LIVES 1999 2000
------------ ---- ----
Computer equipment ................................... 3 $ 30,538 $ 124,227
Software ............................................. 3 6,932 26,158
Leasehold improvements ................................ 5 -- 384,489
Furniture and fixtures ................................ 5 11,731 292,378
--------- ---------
49,201 827,252
Less accumulated depreciation and amortization......... (18,844) (69,032)
--------- ---------
Total ............................................ $ 30,357 $ 758,220
========= =========
4. NOTES RECEIVABLE
The Company accepted a $1.2 million promissory note (accruing 7% annual
interest rate) (the "JBL Note") 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 due the
Company was $53,700 and $137,700 at December 31, 1999 and 2000, respectively. As
of December 31, 2000, the JBL Note has not been collected as a result of the
pending litigation between Genta and Promega relating to the sale of JBL.
The Company's management believes they will prevail with respect to this
matter and anticipates settlement of the $1.2 million promissory note and
related interest within one year from the December 31, 2000 balance sheet date,
although there can be no assurance that the Company will be successful in
pursuing this claim, nor that the Company will not incur material costs and/or
that losses may occur in relation to this claim. Consequently, the Company
continues to include the principal and related accrued interest on such note as
a current asset as of December 31, 2000 (As further explained in Note 12).
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. All amounts due relating to this
promissory note have been paid as of December 31, 2000.
5. GENTA JAGO JOINT VENTURE
As previously mentioned, the Company has had a 50% ownership interest in
Genta Jago since 1992. However, beginning in 1996 and through the first quarter
of 1999, the Company has significantly reduced its involvement in Genta Jago. On
March 4, 1999, Genta and SkyePharma, PLC ("SkyePharma" formerly with Jagotec AG
("Jagotec") which was acquired by SkyePharma), on behalf of itself and its
affiliates, entered into an interim agreement (the "Interim Agreement") pursuant
to which the parties to the joint venture released each other from all liability
relating to unpaid development costs and funding obligations and SkyePharma
agreed to be responsible for substantially all of 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 such interim agreement.
As a result of the interim JV agreement, the Company wrote off its liability
relative to the Company's recorded deficit in the joint venture and, as such,
recorded a gain of approximately $2.3 million in the year ended December 31,
1999. Accordingly, during 1999, Genta Jago recorded an extraordinary gain for
its extinguishment of debt payable to Genta approximating $21.2 million.
Pursuant to the Interim Agreement, in the first quarter of 2000, the Company
received $689,500 from SkyePharma as a royalty payment based on SkyePharma's
agreement with Elan Corporation, for the sale of Naproxen, of which $187,500 and
$502,000 was recorded, net of expenses in equity in net income of joint venture
in 1999 and 2000, respectively. The following represents a history of the
formation, activities and accounting of Genta Jago.
In 1992, Genta and Jagotec AG ("Jagotec") determined to enter into a joint
venture (Genta Jago). Genta originally contributed $4 million in cash to Genta
Jago as well as the rights to apply its antisense oligonucleotide technology to
six products. Genta issued 120,000 shares of common stock valued at $7.2 million
to Jagotec and its affiliates in 1992 as consideration for its interest in Genta
Jago and to license certain technologies.
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From 1992 through December 31, 1998, the Company provided funding to Genta
Jago pursuant to a working capital loan agreement, which expired in October
1998. Since Genta was contractually obligated to fund 100% of Genta Jago losses,
the Company recorded all of the net losses incurred by Genta Jago as a reduction
of the Company's investment in joint venture or loans receivable from joint
venture, to the extent that Genta Jago's net losses exceeded the Company's
investment, creating a liability on the Company's financial statements.
As of December 31, 1998, the Company had advanced working capital loans of
approximately $15.8 million to Genta Jago, net of principal repayments and $4.4
million in forgiven principal and $0.3 million in forgiven interest accrued
thereon. Such loans bore interest at rates per annum ranging from 5.81% to 7.5%,
and were payable in full on October 20, 1998. However, Genta Jago did not repay
such loans to Genta as Genta and Jagotec were in the process of renegotiating
the terms of the joint venture agreement.
Additionally, under terms of the joint venture, Genta Jago contracted with
the Company to conduct research and development and provide certain other
services. Revenues associated with providing such services totaled, $55,000 for
the year ended December 31, 1998. No such services have been provided after
December 31, 1998, and no such services are expected to be provided in the
future. Terms of the arrangement also granted the Company an option to purchase
Jagotec's interest in Genta Jago exercisable from December 31, 1998 through
December 31, 2000. The Company did not exercise this option.
Unaudited condensed financial information for Genta Jago is set forth
below.
DECEMBER 31,
--------------------
1999 2000
---- ----
BALANCE SHEET DATA:
Receivables under collaboration agreements........... $ 1,000,000 $ --
Other current assets ................................ 9,500 --
----------- ---------
Total current assets ................................ 1,009,500 --
Other assets ........................................ -- --
----------- ---------
Total assets .......................................... $ 1,009,500 $ --
=========== =========
Current liabilities ................................. 902,800 95,800
Payable to Genta .................................... 187,500 --
Net capital deficiency .............................. (80,800) (95,800)
----------- ---------
Total liabilities and capital deficiency .............. $ 1,009,500 $ --
=========== =========
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
---- ---- ----
STATEMENTS OF OPERATIONS DATA:
Collaborative research and development revenues ............. $ 2,162,000 $ 1,000,000 $1,004,000
Costs and expenses .......................................... 2,112,000 473,000 9,500
----------- ----------- ----------
Income from operations ...................................... 50,000 527,000 994,500
Interest expense to Genta, net of interest income............ (1,314,000) -- --
Extraordinary items - extinguishment of debt ................ -- 21,228,600 --
----------- ----------- ----------
Net (loss)/income ........................................... $(1,264,000) $21,755,600 $ 994,500
=========== =========== ==========
Financials for the year ended December 31, 2000, were unavailable. The
numbers above are management's best estimate.
6. INTANGIBLES
In May 2000, the Company entered into a worldwide licensing arrangement
with Molecular Biosystems, Inc. ("MBI"), for a broad portfolio of patents and
technologies 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.
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, 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.
Intangibles consist of the following:
DECEMBER 31,
------------
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1999 2000
---- ----
Patent and patent applications................... $ 1,429,523 $ 3,952,437
Other amortizable costs ......................... 86,935 86,935
----------- -----------
1,516,458 4,039,372
Less accumulated amortization ................... (939,554) (1,116,383)
----------- -----------
$ 576,904 $ 2,922,989
=========== ===========
During 2000, the Company wrote-off $361,466 of fully amortized patents.
7. PREPAID ROYALTIES
In December 2000, the Company recorded $1.3 million as the fair value for
its commitment to issue 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.
These shares were issued in the first quarter of 2001. The Company will amortize
the prepaid royalties upon commercialization of Genasense, the Company's leading
antisense drug, through the term of the arrangement which expires twelve years
from the date of first commercial sale.
8. OPERATING LEASES
In February 2000, the Company received notice of lease cancellation by the
overtenant, at their prior offices in Lexington, Massachusetts, effective August
31, 2000. The Company signed a five-year lease agreement for 12,807 square feet
of office space in Berkeley Heights, New Jersey, effective November 1, 2000. At
the end of the initial lease term, the Company has the option to renew this
lease for an additional five years at the then prevailing market rental rate.
Total rent expense under Genta operating leases for the years ended December 31,
1998, 1999 and 2000 was, $57,000, $42,000 and $98,900, respectively. Rent
expense for the discontinued operations of JBL was approximately $428,000 in
1998. The JBL facilities were leased from its prior owners, who include an
executive officer and other stockholders of the Company.
The lessor of the Company's current office space in Berkeley Heights, NJ,
required the Company to obtain a letter of credit relating to the lease of this
office space. As required, the Company obtained such letter of credit and has
included, approximately $247,000, as restricted cash relating to the required
letter of credit. The Company anticipates that this letter of credit will not be
required due to the Company's current cash position resulting from the two
private placements completed in fiscal 2000.
Future minimum obligations under operating leases at December 31, 2000 are
as follows:
Operating
Leases
2001 $ 353,871
2002 356,235
2003 356,235
2004 356,235
2005 299,678
Thereafter 2,364
----------
$1,724,618
==========
9. STOCKHOLDERS' EQUITY
Common Stock
On January 12, 2000, the Board of Directors approved an amendment to
increase the authorized common stock to 95,000,000 shares from 65,000,000. This
amendment was approved by shareholders at the May 9, 2000 annual meeting of
stockholders. As of December 31, 2000, the Company has issued and outstanding
51,085,375 shares.
In December 2000, the Company recorded $1.3 million as the fair value for
its commitment to issue 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
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products containing the anitsense technology licensed from such university.
These shares were issued in the first quarter of 2001.
In November 2000, the Company received gross proceeds of approximately
$28.9 million (approximately $26.9 million net of placement costs) through the
private placement of 4,285,112 shares of its common stock. The placement agents,
one a related party shareholder, received cash commissions equal to 7.0% of the
gross sales price.
In September 2000, the Company received gross proceeds of approximately
$14.6 million (approximately $13.7 million, net of placement costs) through the
private placement of 2,162,700 shares of its common stock. The placement agent
received cash commissions equal to 7.0% of the gross sales price. In connection
with the financing, 135,639 warrants were issued to the placement agent. The
value of such warrants of $867,000 were considered part of the cost of the
placement. In addition, 20,641 penalty warrants were issued as a result of not
filing the registration statement with the SEC within the prescribed 30 day
period after closing.
In May 2000, the Company entered into a worldwide licensing arrangement for
a broad portfolio of patents and technologies that relate to antisense for
therapeutic and diagnostic applications. The arrangement includes grants of both
exclusive and non-exclusive rights from the licensor to Genta on a royalty-free
basis in return for cash and shares of common stock.
In April 2000, the Company entered into an asset purchase agreement with 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. These compounds are used to treat cancer-related
hypercalcemia.
In December 1999, the Company received gross proceeds of approximately
$11.4 million (approximately $10.4 million net of placement costs) through the
private placement of 114 units (the "1999 Private Placement"). Each unit sold in
the 1999 Private Placement consisted of (i) 33,333 shares of common stock, par
value $.001 per share ("common stock"), and (ii) warrants to purchase 8,333
shares of the Company's common stock at any time prior to the fifth anniversary
of the final closing (the "Warrants"). The Warrants are convertible at the
option of the holder into shares of common stock at an initial conversion rate
equal to the market price of $4.83 per share (subject to antidilution
adjustment). There were a total of 3,809,502 shares of common stock and 952,388
Warrants issued in connection with the 1999 Private Placement. The placement
agent, a related party, received cash commissions equal to 7.5% of the gross
sales price, reimbursable expenses up to $125,000 and warrants (the "Placement
Warrants") to purchase up to 10% of the units sold in the private placement for
110% of the offering price per Unit. (See Warrants below for Placement Agency
Warrants). In fiscal 2000, 57,147 penalty warrants were issued to the December
1999 investors, as a result of the SEC not declaring the registration statement
effective within the prescribed 120 day period after closing.
In August 1999, the Company settled lawsuits with Johns Hopkins University
("Johns Hopkins") and Drs. Paul Ts'o and Paul Miller ("Ts'o/Miller Partnership")
for $380,000. As part of the settlement of claims, the Company paid $180,000 in
cash and issued 69,734 shares of common stock to Johns Hopkins, acting on its
behalf and on behalf of Ts'o/Miller Partnership, sufficient to provide a value
of $200,000. The stock was sold by a broker under an agreement between the
Company and Johns Hopkins, with the proceeds from such sales delivered to Johns
Hopkins.
On March 24, 1999, the Company agreed to grant 50,000 shares of common
stock to Georgetown University (the "University") as consideration for services
to be performed pursuant to a clinical trials agreement. (the "Agreement").
According to the terms of the Agreement, the University is performing studies of
the Company's leading antisense drug, Genasense, on 24 patients, commencing
April 20, 1999. According to the terms of the grant, Genta is to issue 25,000 of
the shares to the University upon the completion of the first 12 patient
studies, with the remaining shares to be issued upon the completion of the
remaining patients. During 2000, the first 12 patient studies were completed.
Accordingly, the estimated fair value of these shares of $362,500, which was
included as a charge to non-cash equity related compensation in the amounts of
$147,500 and $215,000 in 1999 and 2000 respectively.
On April 4, 1997, the Board of Directors authorized, and the Shareholders
approved, a ten for one reverse stock split. All share and per share amounts and
stock option data have been restated to reflect the stock split retroactively.
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Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock. The Company
has issued and outstanding 261,200 shares of Series A Convertible Preferred
Stock as of December 31, 2000. Previously, the Company's authorized, issued, and
outstanding Series B and Series C Preferred Stock were converted in their
entirety into shares of common stock during 1996 and 1997, respectively, and
have since been retired. There are no accrued dividends nor any outstanding
warrants relating to the Series B and Series C Preferred Stock at December 31,
1999 and 2000. In 1999, the Board of Directors of the Company and certain
holders of common stock, Series A and D Preferred Stock approved, in accordance
with Delaware law, an amendment to the Company's Restated Certificate of
Incorporation to remove the "Fundamental Change" redemption right. The Company
has formally amended its Restated Certificate of Incorporation after the
expiration of the 20-day period provided for in Rule 14c-5 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Series D Preferred Stock
History
In June 1997, the Company received gross proceeds of approximately $16.2
million (approximately $14 million net of placement costs) through the private
placement of 161.58 Premium Preferred Units(TM). Each unit sold in the private
placement consisted of (i) 1,000 shares of Premium Preferred Stock(TM), par
value $.001 per share, stated value $100 per share (the "Series D Preferred
Stock"), and (ii) warrants to purchase 5,000 shares of the Company's common
stock, (the "Class D Warrants") at any time prior to the fifth anniversary of
the final closing (the "Class D Warrants").
On May 29, 1998, the Company requested, and subsequently received, consents
(the "Letter Agreements") from the holders of a majority of the Series D
Preferred Stock to waive the Company's obligation to use best efforts to obtain
the effectiveness of a registration statement with the SEC as to common stock
issuable upon conversion of Series D Preferred Stock and exercise of Class D
Warrants. In exchange, the Company agreed to waive the contractual "lock-up"
provisions to which such consenting holders were subject and which provisions
would have prevented the sale of up to 75% of their securities for a nine-month
period following the effectiveness of the registration statement; and to extend
to January 29, 1999 from June 29, 1998 the Reset Date referred to in the
Certificate of Designation of the Series D Preferred Stock. In addition, through
the Letter Agreements, the Company agreed to issue to such holder's warrants to
purchase at $0.94375 per share, an aggregate of up to 807,900 shares of common
stock, subject to certain anti-dilution adjustments, exercisable until June 29,
2002. The shares were valued at approximately $633,000 and recorded as a
dividend in fiscal year 1998. The Company had conditioned the effectiveness of
such consent on its acceptance by a majority of the Series D Preferred
Stockholders.
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 of December 31, 2000, as a result of the conversion of the Series D
Preferred Stock, the Company issued approximately 14.4 million shares of common
stock. The Company realized approximately $1.4 million from the exercise of the
Class D Warrants and issued 2,009,614 shares of common stock. The Company will
redeem the remaining 155,640 Class D Warrants, which have not been exercised
prior to the redemption date, at $0.10 per warrant for approximately $15,600.
The Company has not accrued dividends since the January 29, 2000 dividend date
due to the mandatory conversion of the Series D Preferred Stock.
On November 30, 1998, the Company entered into a Settlement Agreement and
Release (the "Settlement Agreement") with LBC Capital Resources, Inc. ("LBC")
and others. Pursuant to the Settlement Agreement, the Company agreed to issue to
LBC 2,900 shares of Series D Convertible Preferred Stock; to issue to LBC or its
designee five year warrants (the "LBC Warrants") to acquire 700,000 shares of
common stock at an exercise price of $0.52 per share; to make certain payments
to LBC totaling approximately $182,000; and to pay to LBC, upon the exercise of
certain warrants, a commission equal to up to $150,000 in the aggregate. The
respective conversion and exercise prices of the Series D Preferred Stock and
the LBC Warrants are subject to adjustment upon the occurrence of certain
events. Such Series D Preferred Stock and LBC Warrants were valued at $965,000
aggregating a total settlement of $1,147,000 of which $600,000 in 1997 and
$547,000 in 1998 were charged to operations. The $150,000 in commissions was not
accrued, as such commissions are payable upon the exercise of warrants which
have not occurred.
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Series D Preferred Stock Rights and Preferences
The Series D Preferred Stock began earning dividends, payable in shares of
the Company's common stock, at the rate of 10% per annum, based on a stated
value of $140 per share, subsequent to the new Reset Date of January 29, 1999.
In calculating the number of shares of common stock to be paid with respect to
each dividend, each share of common stock shall be deemed to have the value of
the Conversion Price at the time such dividend is paid. The Company was
restricted from paying cash dividends on common stock until such time as all
cumulative dividends on outstanding shares of Series D Preferred Stock had been
paid. Additionally, the Company could not declare a dividend to its common
stockholders until such time that a special dividend of $140 per share has been
paid on the Series D Preferred Stock. The Company issued 924,519 and 953,000
shares of common stock as payment of dividends in 1999 and 2000, respectively.
Accordingly, the Company provided dividends for $2.5 million and $5.1 million
for the years ended December 31, 1999 and 2000, respectively, based on the fair
value of the common stock. As a result of the Mandatory Conversion of Series D
Preferred Stock in June 2000, no further dividends are required to be paid.
Series A Preferred Stock
History
In October 1993, the Company completed the sale of 600,000 shares of Series
A Preferred Stock in a private placement of units consisting of (i) one share of
Series A Preferred Stock and (ii) one warrant to acquire one share of common
stock, sold at an aggregate price of $50 per unit.
Series A Preferred Stock Rights and Preferences
Each share of Series A Preferred Stock is immediately convertible, into
shares of the Company's common stock, at a rate determined by dividing the
aggregate liquidation preference of the Series A Preferred Stock by the
conversion price. The conversion price is subject to adjustment for
antidilution. As of December 31, 1999 and 2000, each share of Series A Preferred
Stock was convertible into 7.3825 and 7.3967 shares of common stock,
respectively.
Terms of the Company's Series A Preferred Stock required the payment of
dividends annually in amounts ranging from $3 per share per annum for the first
year to $4 per share in the second year to $5 per share per annum in the third
and fourth years, payable in cash or in shares of common stock at the option of
the Company's Board of Directors. To the extent that the dividend is paid by
issuing shares of common stock, the number of shares to be issued is equal to
the amount that such dividend is payable in cash divided by the fair market
value of a share of common stock as of the date on which the dividend is paid.
Dividends were paid in common stock in September 1996, for the first and second
year, pursuant to these terms. As 1998 represented the fifth year of the Series
A Preferred Stock, no further dividends were accrued. During 1999, the Company
issued 1,085,420 shares of common stock to Series A Preferred Stockholders in
payment of accrued dividends for the third and fourth year.
In the event of a liquidation of the Company, the holders of the Series A
Preferred Stock are entitled to a liquidation preference equal to $50 per share.
Warrants
In May 1995, the Company issued a five-year warrant to purchase 23,525
shares of common stock at an exercise price of $17.00 per share in connection
with a private placement of common stock. Also in May 1995, five year warrants
to purchase an aggregate of 24,731 shares of common stock at exercise prices
ranging from $19.40 to $21.30 per share were issued to two equipment financing
companies. These warrants expired in May 2000.
In October 1996, the Company issued a five-year warrant to purchase 37,512
shares of common stock at an exercise price of $13.20 per share to a patent law
firm, in exchange for legal services. Also in October 1996, the Company issued a
five-year warrant to purchase 10,000 shares of common stock at an exercise price
of $15.00 per share in connection with convertible debentures issued in
September 1996. As of December 31, 2000, none of these warrants have been
exercised.
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In connection with $3.0 million of convertible notes issued in February
1997, the Company issued warrants to purchase 6.4 million shares of common stock
at $0.471875 per share (subject to antidilution adjustments of 1.7 million
shares). As of December 31, 2000, 8,084,074 of these warrants were outstanding.
In June 1997, in connection with the issuance of the Premium Preferred
Units, the placement agent received warrants (the "Placement Warrants") to
purchase up to 10% of the Units sold in the Private Placement for 110% of the
offering price per Unit. Furthermore, the Company had entered into a financial
advisory agreement with the placement agent pursuant to which the financial
advisor received certain cash fees and has received warrants (the "Advisory
Warrants") to purchase up to 15% of the Units sold in the Private Placement for
110% of the offering price per Unit. This financial advisory agreement
terminated in June 1999. As of December 31, 2000, 670,957 and 239,242 have been
exercised in 1999 and 2000, respectively. The Placement Warrants and the
Advisory Warrants expire on June 29, 2007.
On March 27, 2000, the Board of Directors approved the mandatory redemption
of all outstanding Class D Warrants. As of December 31, 2000, as a result of the
conversion, the Company realized approximately $1.4 million from the exercise of
the Class D Warrants and issued 2,009,614 shares of common stock. The Company
will redeem the remaining 155,640 Class D Warrants, which have not been
exercised prior to the redemption date, at $0.10 per warrant for approximately
$15,600.
On August 6, 1999, the Company issued warrants to purchase 105,000 shares
of common stock, at prices ranging from $1.62 to $2.25 per share, to two
consultants to the Company for management consulting services previously
provided. The fair market value of these warrants, approximately, $200,000, were
included as a charge to non-cash equity related compensation in 1999. As of
December 31, 2000, all of these warrants have been exercised.
On August 30 1999, the Company acquired Androgenics Technologies, Inc.
("Androgenics"), a wholly owned entity of the Company's majority stockholder. As
consideration for the acquisition, the Company paid $132,000 in cash (including
reimbursements of pre-closing expenses and on-going research funding) and issued
warrants (with exercise prices ranging from $1.25 to $2.50 per share) to
purchase an aggregate of 1,000,000 shares of common stock, 90% of which will not
become exercisable until the successful conclusion of certain development
milestones, ranging from the initial clinical patient trial through the
submission of an application for marketing authorization. The acquisition was
accounted for as a transfer of interest between companies under common control.
The cash and warrants were issued in exchange for 100% of the shares of
Androgenics and licensed technology and the assumption of a research and
development agreement with the University of Maryland, Baltimore. The 1,000,000
warrants were accounted for as a deemed distribution based on their fair value
of $440,500. The assets and liabilities of Androgenics, as of December 31, 1999
and the results of its operations for the year then ended are immaterial. As of
December 31, 2000, none of the above mentioned milestones have been met.
On November 5, 1999, the Company issued to the Aries Funds 550,000 Bridge
Warrants in full settlement of the Company's obligation under a 1997 note and
warrant purchase agreement. The settlement of this obligation has been accounted
for as a capital distribution, since the Aries Funds are a shareholder of the
Company. Accordingly, these warrants have been accounted for at their fair value
of $1.8 million and are included in accrued dividends at December 31, 1999. As
of December 31, 2000, none of these warrants had been exercised.
In connection with the 1999 Private Placement, the placement agent, a
related party shareholder, received warrants (the "Related Party Warrants") to
purchase up to 10% of the Units sold in the Private Placement for 110% of the
offering price per Unit. The Related Party Warrants expire on December 23, 2004.
The Related Party Warrants have a fair value at the time of their issuance
approximating $1,376,500, resulting in no net effect to the Company's
stockholders' equity. Also, in connection with the 1999 Private Placement,
57,147 penalty warrants were issued in fiscal 2001, as a result of the SEC not
declaring the registration statement effective within the prescribed 120 day
period after closing.
In connection with the September 2000 financing, 135,639 warrants were
issued to the placement agent. The value of such warrants of $867,000 were
considered part of the cost of the placement. In addition, 20,641 penalty
warrants were issued as a result of not filing the registration statement with
the SEC within the prescribed 30 day period after closing.
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Stock Benefit Plans
1991 Plan
The Company's 1991 Stock Plan (the "Plan") provides for the sale of stock
and the grant of stock options to employees, directors, consultants and advisors
of the Company. Options may be designated as incentive stock options or
non-statutory stock options; however, incentive stock options may be granted
only to employees of the Company. Options under the Plan have a term of up to 10
years and must be granted at not less than the fair market value (85% of fair
market value for non-statutory options) on the date of grant. Common stock sold
and options granted pursuant to the Plan generally vest over a period of four to
five years.
Grants to Employees and Directors- 1991 Plan
In 1998, the Company granted 100,000 non-statutory options with an exercise
price below the market value of the Company's stock on the grant date. The
Company recognized total deferred compensation expense of $131,970 attributable
to the intrinsic value of the options, of which $31,408 and $100,562 was
included as a charge to non-cash equity related compensation in 1998 and 1999
respectively, and fully amortized at December 31, 1999.
Information with respect to the Company's 1991 Stock Plan is as follows:
WEIGHTED
AVERAGE
1991 PLAN SHARES UNDER EXERCISE PRICE
- --------- OPTION PER SHARE
------------ --------------
BALANCE AT DECEMBER 31, 1997........ 122,912 $ 22.90
Granted .......................... 100,000 3.00
Exercised ........................ -- --
Canceled ......................... (88,674) 24.75
-------- -------
BALANCE AT DECEMBER 31, 1998........ 134,238 6.85
Granted .......................... -- --
Exercised ........................ -- --
Canceled ......................... (26,670) 17.55
-------- -------
BALANCE AT DECEMBER 31, 1999........ 107,568 4.20
Granted .......................... -- --
Exercised ........................ -- --
Canceled ......................... (180) 20.21
-------- -------
BALANCE AT DECEMBER 31, 2000........ 107,388 $ 4.18
======== =======
At December 31, 2000, all of these outstanding stock options were
exercisable and 171,126 shares of common stock were available for grant or sale
under the Plan.
1998 Plan
Pursuant to the Company's 1998 Stock Plan (the "1998 Plan"), 11,000,000
shares have been provided for the grant of stock options to employees,
directors, consultants and advisors of the Company. Options may be designated as
incentive stock options or non-statutory stock options; however, incentive stock
options may be granted only to employees of the Company. Options under the 1998
Plan have a term of up to 10 years and must be granted at not less than the fair
market value, or 85% of fair market value for non-statutory options, on the date
of the grant. Common stock sold and options granted pursuant to the 1998 Plan
generally vest over a period of four years.
Grants to Employees and Directors- 1998 Plan
In May 1998, the Company granted options to purchase 2,236,263 shares of
the Company's common stock to the Company's Chief Executive Officer ("CEO"),
subject to shareholder approval, which was received in July 1998. As a result of
an increase in the Company's stock price between May and July 1998, the Company
recorded deferred compensation of $474,647 attributable to these options,
$69,219 and $405,428 was included as a charge to non-cash equity related
compensation in 1998 and 1999 and fully amortized on December 31, 1999.
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Also in 1998, the Company granted to an employee 315,000 options with an
exercise price below the market value of the Company's stock on the grant date.
The Company recognized total deferred compensation expense of $11,025
attributable to the intrinsic value of the options, of which $345, $2,756 and
$2,756 was included as a charge to non-cash equity related compensation in 1998,
1999 and 2000, respectively.
During the fourth quarter of 1999, the Company's CEO resigned. As of the
date of his resignation, the CEO was fully vested in 1,118,132 options and was
required to forfeit the remaining unvested 1,118,132 options, pursuant to the
terms of his original option grant. However, as a result of the CEO's
termination arrangement, the Company modified the CEO's original option grant
such that 618,131 of the unvested options would be forfeited and the remaining
500,000 unvested options would continue to vest over a period of one year. Since
no further service was required for these options to vest, the company recorded
compensation expense of $950,125 attributable to the intrinsic value of the
500,000 options as of the date of the modification. The total amount of
compensation expense recognized by the Company in 1999 attributable to the
former CEO's option grant modification was $712,801, which included the reversal
of a total of $237,324 in deferred compensation expense applicable of the
618,131 options, which were forfeited.
During 1999, the Company granted to certain key employees, including the new
CEO and the new Chairman of the Board, a total of 6,188,250 options with
exercise prices below the market value of the Company's common stock on the date
of grant. The Company recognized total deferred compensation expense of
$2,017,832 attributable to the intrinsic value of these options, of which
$495,921 and $519,234 was included as a charge to non-cash equity related
compensation in 1999 and 2000, respectively. In 2000, the Company recognized an
additional deferred compensation expense of $63,889 for the remeasurement of the
new CEO's options, of which $27,212 was included as a charge to non-cash equity
related compensation in 2000. In addition, the Company granted to its employees
495,000 and 558,362 options with exercise prices equal to fair market value on
the date of grant in 1999 and 2000 respectively.
During 2000, the Company granted to certain employee a total of 5,000
options with an exercise price below the market value of the Company's common
stock on the date of grant. The Company recognized total deferred compensation
expense of $32,190 attributable to the intrinsic value of these options, of
which the entire $32,190 was included as a charge to non-cash equity related
compensation in 2000.
Grants to Non-Employees - 1998 Plan
In connection with the sale of JBL's business in May 1999 and pursuant to a
related lease termination agreement, the Company granted stock options to
acquire 450,000 shares of common stock, to the owners of the building previously
leased to JBL, some of whom were also employees of JBL. Those options are
accounted for pursuant to guidelines in SFAS No. 123, using the Black-Scholes
method and have an approximate value of $1 million, which has been charged
against the gain on the sale of JBL.
Also in May 1999, a total of 245,500 options were granted to employees of
JBL upon the closing of the sale of JBL, in connection with an ongoing service
arrangement between Promega and the Company, which will be accounted for
pursuant to SFAS No. 123 using the Black-Scholes method. The estimated value of
these options will be amortized to non-cash equity related compensation until
the vesting date, which will be no later than one year from the closing date of
the sale. The Company has recognized $1,175,310 and $529,034 of deferred
compensation expense relative to these JBL options in 1999 and 2000,
respectively, of which, $756,699 and $947,645 was included as a charge to
non-cash equity related compensation in 1999 and 2000, respectively, and was
fully amortized at December 31, 2000.
The Company also granted 50,000 options to purchase common stock to certain
consultants and advisors to the Company during 1999, for which the Company
recognized a total of $136,374 and $32,597 in deferred compensation in 1999 and
2000, respectively, of which $99,917 and $69,054 was included as a charge to
non-cash equity related compensation in 1999 and 2000, respectively, as
accounted for pursuant to SFAS 123 and EITF 96-18.
Information with respect to the Company's 1998 Stock Plan is as follows:
WEIGHTED
AVERAGE
SHARES UNDER EXERCISE PRICE
OPTION PER SHARE
------------ --------------
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1998 PLAN
- ---------
BALANCE AT DECEMBER 31, 1997......... -- --
Granted ........................... 2,836,263 $ 0.94
Exercised ......................... -- --
Canceled .......................... -- --
---------- -------
BALANCE AT DECEMBER 31, 1998......... 2,836,263 0.94
Granted ........................... 7,428,750 2.42
Exercised ......................... (44,000) 0.95
Canceled .......................... (618,131) 0.94
---------- -------
BALANCE AT DECEMBER 31, 1999......... 9,602,882 2.08
Granted ........................... 558,362 7.09
Exercised ......................... (461,067) 1.81
Canceled .......................... (3,750) 2.41
---------- -------
BALANCE AT DECEMBER 31, 2000......... 9,696,427 $ 2.39
========== =======
At December 31, 2000, options to purchase approximately 5,206,553 shares of
common stock were exercisable at a weighted average exercise price of
approximately $1.82 per share and 798,506 shares of common stock were available
for grant or sale under the Plan.
1998 Non-Employee Directors' Plan
Pursuant to the Company's Non-Employee Directors' 1998 Stock Plan (the
"Directors' Plan"), 4,000,000 shares have been provided for the grant of stock
options to directors of the Company who are not Company employees. Options under
the Directors' Plan have a term of up to ten years and must be granted at not
less than the fair market value on the date of grant. Each option granted shall
become exercisable in full on the date of the next Annual Meeting following the
date of grant provided that the optionee continues to serve as a member of the
Board of Directors immediately following such Annual Meeting.
In May 1998, the Company granted stock options to purchase 1,725,000 shares
of common stock, subject to shareholder approval which was received in July
1998. As a result of an increase in the stock price between May and July 1998,
the Company recorded deferred compensation expense of $366,131, of which
$53,394, $152,552, $124,367 was included as a charge to non-cash equity related
compensation in 1998 1999, and 2000, respectively.
In March 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 recorded a one-time charge of
$6,610,173 to non-cash equity related compensation 2000.
In March 2000, the Company granted to a Company Director, 25,000 options
with an exercise price below the market value of the Company's common stock on
the date of grant. The Company recognized total deferred compensation expense of
$52,350 attributable to the intrinsic value of these options, of which $50,629
was included as a charge to non-cash equity related compensation in 2000.
The Company granted to the Company's directors, options to purchase a total
of 350,000 and 425,000 shares of common stock in 1999 and 2000, respectively.
The exercise price of these options was equal to the fair market value of the
common stock on the date of grant, and therefore no compensation expense has
been recognized.
WEIGHTED
AVERAGE
1998 DIRECTOR'S PLAN SHARES UNDER EXERCISE PRICE
- -------------------- OPTION PER SHARE
------------ --------------
BALANCE AT DECEMBER 31, 1997......... 1,725,000 $ 0.94
Granted ........................... -- --
Exercised ......................... -- --
Canceled .......................... -- --
--------- --------
BALANCE AT DECEMBER 31, 1998......... 1,725,000 0.94
Granted ........................... 350,000 2.88
Exercised ......................... -- --
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Canceled .......................... -- --
---------- --------
BALANCE AT DECEMBER 31, 1999......... 2,075,000 1.26
Granted ........................... 450,000 8.37
Exercised ......................... (871,887) 1.17
Canceled .......................... (32,813) 0.94
---------- --------
BALANCE AT DECEMBER 31, 2000......... 1,620,300 $ 3.30
========== ========
At December 31, 2000, options granted under the Directors' Plan to purchase
approximately 1,015,613 shares of common stock were exercisable at a weighted
average exercise price of approximately $1.42 per share and approximately
1,507,813 shares of common stock were available for grant or sale under the
Directors' Plan.
In 1998, a total of 4,561,263 options were granted pursuant to the 1998
Plan and the 1998 Directors Plan, of which 600,000 options were granted at fair
market value with a weighted average grant date fair value of $0.68 per share,
and 3,961,263 were granted below fair market value with a weighted average grant
date fair value of $0.78 per share. In 1999, a total of 7,778,750 options were
granted pursuant to the 1998 Plan and the 1998 Directors Plan, of which
1,570,500 were granted at fair market value with a weighted average grant date
fair value of $1.37 per share, and 6,208,250 were granted below fair market
value with a weighted average grant date fair value of $1.87 per share. In 2000,
a total of 1,008,362 options were granted pursuant to the 1998 Plan and the 1998
Directors Plan, of which 928,362 were granted at fair market value with a
weighted average grant date fair value of $7.76 per share, and 80,000 were
granted below fair market value with a weighted average grant date fair value of
8.49 per share. Following is a further breakdown of the options outstanding as
of December 31, 2000:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED EXERCISE
REMAINING AVERAGE PRICE
OPTIONS LIFE IN EXERCISE OPTIONS OF OPTIONS
RANGE OF PRICES OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE
- --------------- ----------- --------- -------- ----------- -----------
$ 0.88 - $ 0.97........... 3,665,682 7.82 $ 0.94 3,084,433 $ 0.94
$ 2.03 - $ 3.25........... 6,754,483 8.27 2.27 3,237,733 2.57
$ 5.00 - $ 9.75........... 997,550 9.37 7.83 1,000 5.00
$17.50 - $25.00........... 6,388 4.69 21.77 6,388 22.44
---------- ----- ------ ---------- ------
11,424,103 8.34 $ 2.53 6,329,554 $ 1.80
========== ===== ====== ========== ======
Pro Forma Disclosure
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using the Black-Scholes method for option
pricing with the following weighted-average assumptions for 1998, 1999, and
2000: volatility factors of the expected market value of the Company's common
stock of 72%, 90% and 74% respectively; risk-free interest rates of 6%; dividend
yields of 0%; and a weighted-average expected life of the options of four to
five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1999 2000
---- ---- ----
Pro forma net loss applicable to common shares... $ (8,699,775) $ (21,832,897) $ (20,594,626)
Pro forma loss per share ........................ $ (1.24) $ (1.23) $ (0.53)
The results above are not likely to be representative of the effects of
applying SFAS 123 on reported net income or loss for future years.
Common Stock Reserved
An aggregate of 28,298,352 shares of common stock were reserved for the
conversion of preferred stock and the exercise of outstanding options and
warrants at December 31, 2000.
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10. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1999 and 2000 are shown below. A 100% valuation allowance has been
recognized at December 31, 1999 and 2000 to offset the deferred tax assets as it
is more likely than not that the net deferred tax assets will not be realized.
The valuation allowance at December 31, 1998 approximated $41,214,000.
DECEMBER 31,
----------------------
1999 2000
---- ----
DEFERRED TAX ASSETS:
Capitalized research expense ........................... $ -- $ 4,834,000
Net operating loss carryforwards ....................... 33,913,000 30,725,000
Research and development credits ....................... 3,456,000 3,359,000
Purchased technology and license fees .................. 4,538,000 4,503,000
Other, net ............................................. 857,000 275,000
------------ ------------
Total deferred tax assets .............................. 42,764,000 43,696,000
Valuation allowance for deferred tax assets............. (42,257,000) (43,553,000)
------------ ------------
507,000 143,000
DEFERRED TAX LIABILITIES:
Patent expenses ........................................ (230,000) (134,000)
Net depreciation ....................................... (277,000) (9,000)
------------ ------------
(507,000) (143,000)
------------ ------------
Net deferred tax assets .................................. $ -- $ --
============ ============
At December 31, 2000, the Company has federal and state net operating loss
carryforwards of approximately $87.0 million and $4.4 million, respectively. The
difference between the federal and state tax loss carryforwards is primarily
attributable to the fact that the Company moved from Massachusetts to New Jersey
in 2000 and the net operating losses previously generated in California and
Massachusetts can not be utilized in New Jersey. The federal tax loss
carryforwards will begin expiring in 2003, unless previously utilized. The
Company also has federal research and development tax credit carryforwards of
$3.3 million, which will begin expiring in 2003, unless previously utilized.
Federal and New Jersey tax laws limit the utilization of income tax net
operating loss and credit carryforwards that arise prior to certain cumulative
changes in a corporation's ownership resulting in a change of control of the
Company. The future annual use of net operating loss carryforwards and research
and development tax credits will be limited due to the ownership changes.
11. EMPLOYEE SAVINGS PLAN
The Company adopted the Genta Incorporated Savings and Retirement Plan (the
"Genta 401(K) Plan") in 1994, allowing participating employees to contribute up
to 15% of their salary, subject to annual limits. In January 1998, the Board of
Directors approved an increase to 20%, effective April 1, 1998, and subject to
annual limits as established by the IRS. The Board of Directors may, at its sole
discretion, approve Company contributions. On January 20, 2001 the
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Board of Directors approved Company matching contributions of 100% on the first
4% and 50% of the next 2% of employee contributions to the 401(K) Plan.
12. CONTINGENCIES
JBL
In October 1996, JBL retained a chemical consulting firm (the "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 purposes of determining whether the levels of chloroform and
PCEs have decreased over time. The results of the latest sampling conducted by
JBL show that PCEs and chloroform have decreased in all but one of the
monitoring sites. Based on an estimate provided to the Company by the Consulting
Firm, the Company accrued $65,000 in 1999, relating to remedial costs. Prior to
1999, such costs were not estimable, and therefore no loss provisions had been
recorded. Pursuant to the JBL agreement the Company has agreed to indemnify
Promega in respect of this matter. 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
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 will continue to accrue
$75,000 pursuant to SFAS No. 5 "Accounting for Contingencies" until such amount
is settled. The Company expects to receive a revised settlement proposal from
the EPA by the second quarter 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 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.
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 believes that Promega's claims are without merit and intends
to vigorously pursue its rights under the JBL Agreement. 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. Although there can be no assurance that the Company will be
successful in pursuing this claim, nor that the Company will not incur material
costs and/or that losses may occur in relation to this claim, the Company
believes they will prevail with respect to this matter and anticipates
settlement of the $1.2 million promissory note and related interest within one
year from the December 31, 2000 balance sheet date. Consequently, the Company
continues to include the principal and related accrued interest on such note as
a current asset as of December 31, 2000.
GENTA EUROPE
As previously described, Genta Pharmaceuticals Europe S.A. ("Genta
Europe"), a wholly owned subsidiary of the Company, is in the process of
liquidation. As previously mentioned, pursuant to a filing for "Cessation of
Payment," the Company has deconsolidated the accounts for Genta Europe and,
accordingly, the aforementioned note payable and deposit are recorded in net
liabilities of liquidated foreign subsidiary at December 31, 1999 and 2000.
During 1995, Genta Europe, received approximately 5.4 million French Francs
(as of December 31, 2000, approximately $775,600) 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
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58
"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 December 31, 2000, approximately $601,400) 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 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 December 31, 2000, approximately $95,200) and early termination payment
of FF1,852,429 (as of December 31, 2000, approximately $266,000). 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 December 31, 2000, the fair value of the Company's debt obligations
pursuant to the aforementioned arrangements is not readily determinable. The
carrying value at December 31, 2000, approximating $964,000, represents the
value of the original issuance of such debt instruments which may be liquidated
against Genta Europe's $590,000 deposit with such French governmental agency. As
of December 31, 1999 and 2000, the Company has $574,800 of net liabilities of
liquidated subsidiary recorded and, therefore, pursuant to guidelines
established in SFAS No. 5 "Accounting for Contingencies" and Financial
Accounting Standards Board Interpretation No. 14 "Reasonable Estimation of the
Amount of a Loss," such amount is sufficient to cover any potential liability.
Therefore, management believes no additional accrual is necessary. However,
there can be no assurance that the Company will not incur additional material
costs in relation to this claim.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1999 QUARTER ENDED MAR. 31 JUN. 30 SEP. 30 DEC. 31
- ------------------ ------- ------- ------- -------
(in thousands, except per share data)
Revenues $ -- $ -- $ -- $ --
Operating expenses 2,060 1,812 1,566 2,821
Net loss from continuing
operations (16) (1,923) (1,949) (4,973)
Net loss (205) (316) (1,949) (4,973)
Earnings per share from
continuing operations:
Basic $ (0.07) $ (0.24) $ (0.21) $ (0.55)
Diluted $ (0.07) $ (0.24) $ (0.21) $ (0.55)
Earnings per share:
Basic $ (0.08) $ (0.14) $ (0.21) $ (0.56)
Diluted $ (0.08) $ (0.14) $ (0.21) $ (0.56)
2000 QUARTER ENDED MAR. 31 JUN. 30 SEP. 30 DEC. 31
- ------------------ ------- ------- ------- -------
(in thousands, except per share data)
Revenues $ -- $ -- $ 17 $ 5
Operating expenses 1,359 3,025 2,257 3,512
Net (loss) income from
continuing operations (8,738) (2,939) (2,304) 1,530
Net (loss) income (8,738) (2,939) (2,304) 1,530
Earnings per share from
continuing operations:
Basic $ (0.44) $ (0.09) $ (0.05) $ 0.17
Diluted $ (0.44) $ (0.09) $ (0.05) $ 0.02
Earnings per share:
Basic $ (0.44) $ (0.09) $ (0.05) $ 0.17
Diluted $ (0.44) $ (0.09) $ (0.05) $ 0.02
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Genta Jago Technologies B.V.
We have audited the accompanying balance sheet of Genta Jago Technologies B.V.
(the "Company") as of December 31, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, such financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is engaged in developing
and commercializing pharmaceuticals. As discussed in Note 1 to the financial
statements, the deficiency in working capital and net capital deficiency at
December 31, 1998 and the Company's operating losses since inception, raise
substantial doubt about its ability to continue as a going concern. Management
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
DELOITTE & TOUCHE EXPERTA LTD.
Basel, Switzerland
April 15, 1999
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GENTA JAGO TECHNOLOGIES B.V.
BALANCE SHEETS
DECEMBER 31,
1998
------------
Assets
Current assets:
Cash and cash equivalents $ --
Receivables under collaboration agreements 3,348,178
Other current assets 24,349
------------
Total current assets 3,372,527
Property and equipment, net 1,000
Other assets 10,927
------------
$ 3,384,454
============
Liabilities and net capital deficiency Current liabilities:
Accounts payable and accrued expenses $ 440,458
Payable to related parties 7,985,810
------------
Total current liabilities 8,426,268
Notes payable to Genta Incorporated 15,837,099
Stockholders' equity (net capital deficiency):
Common Stock, 14,700 shares authorized, 10,000 shares issued and
outstanding at stated value 512,000
Additional paid-in capital 3,741,950
Accumulated deficit (25,132,863)
------------
Net capital deficiency (20,878,913)
------------
$ 3,384,454
============
See accompanying notes.
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GENTA JAGO TECHNOLOGIES B.V.
STATEMENT OF OPERATIONS
YEAR ENDED
DECEMBER 31,
1998
------------
REVENUES:
Collaborative research and development ..... $ 2,161,954
COST AND EXPENSES:
Research and development, including
contractual amounts to related
parties of $1,876,444 ................. 1,963,326
General and administrative ................. 148,241
------------
2,111,567
------------
Income from operations ....................... 50,387
OTHER INCOME (EXPENSE):
Interest income .............................. 92
Interest expense ............................. (1,314,863)
------------
(1,314,771)
------------
Net loss ..................................... $ (1,264,384)
============
See accompanying notes.
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GENTA JAGO TECHNOLOGIES B.V.
STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
DECEMBER 31, 1998
-------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED NET CAPITAL
SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
------ ------ ---------- ----------- -------------
Balance at January 1, 1998 .............. 10,000 $ 512,000 $ 3,741,950 $(23,868,479) $(19,614,529)
Net Loss ................................. -- -- -- (1,264,384) (1,264,384)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 ............. 10,000 $ 512,000 $ 3,741,950 $(25,132,863) $(20,878,913)
============ ============ ============ ============ ============
See accompanying notes.
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GENTA JAGO TECHNOLOGIES B.V.
STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
1998
------------
Operating Activities
Net loss $ (1,264,384)
Items reflected in net loss not
requiring cash:
Depreciation and amortization 1,300
Changes in operating assets and
liabilities:
Receivables under collaboration agreements (1,948,324)
Other current assets (11,358)
Accounts payable and accrued expenses (1,351,835)
Payable to related parties 4,565,354
------------
Net cash used in operating activities (9,247)
Investing Activities
Purchase of property and equipment and other --
------------
Net cash provided by investing --
activities
Financing Activities
Proceeds from issuance of common stock
and capital contributions --
------------
Net cash provided by financing activities --
Decrease in cash and cash equivalents (9,247)
Cash and cash equivalents at beginning of period 9,247
------------
Cash and cash equivalents at end of period $ --
============
See accompanying notes.
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GENTA JAGO TECHNOLOGIES B.V.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Genta Jago Technologies B.V. ("Genta Jago") was incorporated in December
1992 under the laws of the Netherlands. Genta Jago is a joint venture owned and
controlled 50% by Genta Incorporated ("Genta") and 50% by Jagotec AG
("Jagotec"), a subsidiary of Jago Holding AG which was acquired by SkyePharma in
May 1996. Genta Jago was formed to develop and commercialize pharmaceuticals in
six major therapeutic areas and commenced research and development activities in
January 1993. Genta Jago is managed under the direction of a Board of Managing
Directors consisting of two members appointed from each of Genta and Jagotec and
one outside member.
In connection with the formation of the joint venture in 1992, Genta Jago
obtained from Jagotec an exclusive license to GEOMATRIX oral controlled-release
technology for the development and commercialization of approximately 25
specified products. In May 1995, Genta and Jagotec entered into an agreement to
expand Genta Jago by adding the rights to develop and commercialize an
additional 35 products (see note 2, "Expansion of Genta Jago"). Genta Jago
maintains the rights to develop and to commercialize controlled-release
formulations of approximately 60 products using Jagotec's GEOMATRIX technology.
Genta Jago is dependent on future funding from Genta (see Note 2 "Capital
Contributions and Working Capital Agreement") and corporate partners and is
considered a development stage company. Genta has incurred significant operating
losses since inception and expects that they will continue for the next several
years. These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into an interim agreement pursuant to which the parties to
the joint venture released each other from all liability relating to unpaid
development costs and funding obligations and 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 such interim agreement.
REVENUE RECOGNITION
Collaborative research and development revenues are recorded as earned as
research and development activities are performed under the terms of the
contracts, with such revenues generally approximating costs incurred on the
programs. Payments received in excess of amounts earned are deferred.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
DEPRECIATION
The costs of furniture and equipment are depreciated over the estimated
useful lives of the assets using the straight-line method.
USE OF ESTIMATES
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The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109 the Company records valuation allowances against net deferred tax assets. If
based upon the available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized. In assessing the realizability
of deferred assets, management considers whether it is more likely than not that
some or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income and when temporary differences become deductible. The Company
considers, among other available information, uncertainties surrounding the
recoverability of deferred tax assets, scheduled reversals of deferred tax
liabilities, projected future taxable income, and other matters in making this
assessment.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS No.
130") and SFAS No. 131, Segment Information. Both of these standards are
effective for fiscal years beginning after December 15, 1997 and have been
adopted by the Company in 1998. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Genta Jago had no
material component of comprehensive income other than net loss. SFAS No. 131
amends the requirements for public enterprises to report financial and
descriptive information about their enterprises for which separate financial
information is available and is evaluated regularly by the Company in deciding
how to allocate resources and in assessing performance. The financial
information is required to be reported, as disclosed in Note 17, on the basis
that is used internally for evaluating the segment performance. Genta Jago
operates in only one business segment.
In June 16, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
standard is effective for fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
instruments at fair value. The Company is currently evaluating the impact of
this pronouncement and does not believe adoption of SFAS No. 133 will have a
material impact on the Company's financial statements.
2. RELATED PARTY TRANSACTIONS
LICENSE AGREEMENTS
Genta Jago entered into license agreements with Genta in connection with
the planned development and commercialization of antisense oligonucleotide
products and with Jagotec in connection with the planned development and
commercialization of GEOMATRIX oral controlled-release products. Genta Jago's
license with Genta in relation to the antisense oligonucleotide products was
terminated in 1995; however, the license in relation to the GEOMATRIX oral
controlled-release products with Jagotec was not terminated. No expense was
incurred pursuant to such agreements during the year ended December 31, 1998.
RESEARCH AND DEVELOPMENT AND SERVICE AGREEMENTS
Genta Jago has contracted with Genta and Jagotec to conduct research and
development and provide certain other services. Under terms of such agreements,
Genta Jago generally is required to reimburse the parties for their respective
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costs incurred plus a specified mark-up. Payments for research and development
services are generally made in advance and are refundable if the services are
not performed. For the year ended December 31, 1998, Genta Jago incurred
expenditures of $1.9 million pursuant to such research and development and
service agreements.
CAPITAL CONTRIBUTIONS AND WORKING CAPITAL AGREEMENT
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into an interim agreement pursuant to which the parties to
the joint venture released each other from all liability relating to unpaid
development costs and funding obligations and 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 such interim agreement. However,
historically and in connection with the formation of the joint venture, Genta
contributed $4 million in cash to Genta Jago as well as the rights to apply its
antisense oligonucleotide technology to six products. Genta issued 120,000
shares of common stock valued at $7.2 million to Jagotec and its affiliates in
1992, for its interest in Genta Jago, to induce Jagotec to license to Genta
Jago, for what the parties believed was a substantial discount from the
underlying value of such license, Jagotec's GEOMATRIX technology with respect to
approximately 25 products (the "Initial License") and to license to Genta
Jagotec's GEOMATRIX technology for use in Genta's antisense oligonucleotide
development programs. In addition, Genta Jago entered into a working capital
agreement with Genta, which expired in October 1998. Pursuant to this agreement,
Genta was required to make working capital loans to Genta Jago up to a mutually
agreed upon maximum principal amount, which amount is established by Genta and
Genta Jago not less than once each calendar quarter, if necessary, based upon
the review and consideration by the parties of mutually-acceptable budgets,
expense reports, forecasts and work plans for research and development of the
products by Genta Jago. Genta was not required to fund amounts in excess of the
agreed-upon commitment amount. Working capital loans consist of cash advances to
Genta Jago from Genta and research expenses incurred by Genta on behalf of Genta
Jago. As of December 31, 1998, Genta had advanced working capital loans of
approximately $15.8 million to Genta Jago, net of principal repayments and the
loan credit discussed below. Such loans bore interest at rates per annum ranging
from 5.81% to 7.5%, and were payable in full on October 20, 1998, but payment
has not been received. As a result of the March 4, 1999 agreement, it is not
expected that the working capital loans will be paid.
EXPANSION OF GENTA JAGO
In 1995, Genta Jago obtained from Jagotec the rights to develop and
commercialize an additional 35 products (the "Additional Products") using
Jagotec's GEOMATRIX technology. With these Additional Products, Genta Jago now
maintains the rights to develop controlled-release formulations of approximately
60 products using Jagotec's GEOMATRIX technology. Genta Jago is required to pay
certain additional fees to Jagotec upon Genta Jago's receipt of revenues from
third parties, and pay manufacturing royalties to Jagotec.
RETURN OF ANTISENSE LICENSE
Also in 1995, the parties elected to focus Genta Jago's activities
exclusively on GEOMATRIX oral-controlled release products. As a result, Genta
Jago returned to Genta the rights to develop six antisense oligonucleotide
products originally licensed from Genta in connection with the formation of
Genta Jago in 1992. In connection with the return of the antisense
oligonucleotide license rights to Genta in May 1995, Genta Jago's note payable
to Genta was credited with a principal reduction of approximately $4.4 million
and accrued interest payable to Genta was reduced by approximately $300,000.
Genta Jago recorded the loan credit and related accrued interest as a gain on
waiver of debt in exchange for return of license rights to Genta, based on the
legal structure of the transaction.
3. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Genta Jago/Gensia/Brightstone. In January 1993, Genta Jago entered into a
collaboration agreement with Gensia for the development and commercialization of
certain oral controlled-release pharmaceutical products for treatment of
cardiovascular disease. Under the agreement, Gensia provides funding for
formulation and preclinical development to be conducted by Genta Jago and is
responsible for clinical development, regulatory submissions and marketing.
Terms of the agreement provide Gensia exclusive rights to market and distribute
the products in North America, Europe and certain other countries. The agreement
has a term of the longer of twelve years and the patent term in the respective
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countries within the territory. Genta Jago received $1.0 million of funding in
1998 pursuant to the agreement. Collaborative revenues of $2.2 million were
recognized under the agreement during the year ended December 31, 1998.
Effective October 1996, Gensia and SkyePharma reached an agreement whereby a
SkyePharma subsidiary, Brightstone Pharma, Inc. ("Brightstone"), was assigned
Gensia's rights (and those of Gensia's partner, Boehringer Mannheim) to develop
and co-promote the potentially bioequivalent nifedipine product under the
collaboration agreement with Genta Jago. The assignment was accepted by Genta
Jago and has no impact on the terms of the original agreement. Genta Jago is
still entitled to receive additional milestone payments from Brightstone
triggered upon regulatory submissions and approvals, as well as royalties or
profit sharing ranging from 10% to 21% of product sales, if any.
Genta Jago/Apothecon. In March 1996, Genta Jago entered into a
collaborative licensing and development agreement (the "Genta Jago/Apothecon
Agreement") with Apothecon, Inc. ("Apothecon"). Under the terms of the Genta
Jago/Apothecon Agreement, Apothecon will provide funding to Genta Jago up to a
specified maximum amount for the formulation of Q-CR ketoprofen (Oruvail(R)).
The Genta Jago/ Apothecon Agreement expires upon the expiration of the relevant
patents in each covered country subject to certain early termination rights. The
agreement also provides for Genta Jago to receive potential milestone payments
and royalties on product sales. Terms of the agreement provide Apothecon
exclusive rights to market and distribute the products on a worldwide basis.
Genta Jago/Krypton. In October 1996, Genta Jago entered into five
collaborative licensing and development agreements (the "Genta Jago/Krypton
Agreements") with Krypton, Ltd. ("Krypton"), a subsidiary of SkyePharma, whereby
Genta Jago would sublicense to Krypton rights to develop and commercialize
potentially bioequivalent GEOMATRIX(R) versions of five currently marketed
products, as well as another agreement granting Krypton an option to sublicense
rights to develop and commercialize an improved version of a sixth product. The
Genta Jago/Krypton Agreements have terms of the shorter of fifteen years from
first commercial sale and the expiration of the patent term on a
territory-by-territory basis. During 1997, Genta Jago received funding of $1.9
million under the Genta Jago/Krypton Agreements.
4. INCOME TAXES
Significant components of Genta Jago's deferred tax assets as of December
31, 1997 and 1998 are shown below. A valuation allowance has been recognized to
offset the deferred tax assets as it is more likely than not that the net
deferred tax assets will not be realized.
DECEMBER 31,
--------------
1998
----
Deferred tax assets:
Net operating loss carryforwards $ 2,513,000
Valuation allowance for deferred tax assets (2,513,000)
-----------
Net deferred tax assets $ --
===========
At December 31, 1998, Genta Jago has foreign net operating loss
carryforwards of approximately $25,133,000. The foreign tax loss carryforwards
will begin expiring in 2000, unless previously utilized.
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PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Changes in Accountants
On November 3, 1998, the Company filed a Form 8-K disclosing that Ernst &
Young LLP had resigned as the Company's principal independent accountant on
October 28, 1998.
On February 10, 1999, the Company engaged Deloitte & Touche LLP as the
principal independent accountant to audit the Company's financial statements for
the fiscal year ended December 31, 1998.
Disagreements with Accountants
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in this item is incorporated by reference from the
Company's definitive proxy statement to be filed not later than April 30, 2001
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1034, as amended ("Regulation 14A")
ITEM 11. EXECUTIVE COMPENSATION
The information required in this item is incorporated by reference from the
Company's definitive proxy statement to be filed not later than April 30, 2001
pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in this item is incorporated by reference from the
Company's definitive proxy statement to be filed not later than April 30, 2001
pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in this item is incorporated by reference from the
Company's definitive proxy statement to be filed not later than April 30, 2001
pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements
(1) Reference is made to the Index to Financial Statements under Item 8 of
this report on Form 10-K.
(2) All schedules are omitted because they are not required, are not
applicable, or the required information is included in the consolidated
financial statements or notes thereto.
(3) Reference is made to Paragraph (c) below for Exhibits required by Item
601 of Regulation S-K, including management contracts and compensatory plans and
arrangements.
(b) Reports on Form 8-K. The Company filed the following reports on Forms
8-K:
On November 12, 1999, the Company filed a Current Report on Form 8-K
disclosing the appointment of a new Chief Executive Officer and a new Chairman
of the Board of Directors.
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(c) Exhibits required by Item 601 of Regulation S-K with each management
contract, compensatory plan or arrangement required to be filed identified.
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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3(i).1(7) Restated Certificate of Incorporation of the Company.
3(i).2(9) Certificate of Designations of Series D Convertible Preferred Stock of the Company.
3(i).3(15) Certificate of Amendment of Restated Certificate of Incorporation of the Company.
3(i).4(15) Amended Certificate of Designations of Series D Convertible Preferred Stock of the Company.
3(i).5(15) Certificate of Increase of Series D Convertible Preferred Stock of the Company.
3(i).6(13) Certificate of Amendment of Restated Certificate of Incorporation of the Company.
3(i).7(13) Certificate of Amendment of Restated Certificate of Incorporation of the Company.
3(i).8(15) Certificate of Amendment of Restated Certificate of Incorporation of the Company.
3(ii).1(13) Amended and Restated Bylaws of the Company.
4.1(1) Specimen Common Stock Certificate.
4.2(4) Specimen Series A Convertible Preferred Stock Certificate.
4.3* Specimen Series D Convertible Preferred Stock Certificate.
4.4(4) Form of Unit Purchase Agreement dated as of September 23, 1993 by and between the Company
and the Purchasers of the Series A Convertible Preferred Stock.
10.1(2) Amended and Restated 1991 Stock Plan of Genta Incorporated.
10(iii)(A).1(13) Non-Employee Directors' 1998 Stock Option Plan.
10(iii)(A).2(13) 1998 Stock Incentive Plan.
10.2(1) Form of Indemnification Agreement entered into between the Company and its directors and
officers.
10.3(1) Preferred Stock Purchase Agreement dated September 30, 1991 and Amendment Agreement dated
October 2, 1991.
10.4(1)H Development, License and Supply Agreement dated February 2, 1989 between the Company and
Gen-Probe Incorporated.
10.5(3)H Common Stock Transfer Agreement dated as of December 15, 1992, between the Company and Dr.
Jacques Gonella.
10.6(3) Consulting Agreement dated as of December 15, 1992, between the Company and Dr. Jacques
Gonella.
10.7(3)H Common Stock Transfer Agreement dated as of December 15, 1992, between the Company and
Jagotec AG.
10.8(3)H Collaboration Agreement dated as of January 22, 1993, between Jobewol Investments B.V. (now
known as Genta Jago Technologies B.V.) and Gensia, Inc.
10.9(5) Form of Purchase Agreement between the Company and certain purchasers of Common Stock.
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10.10(5) Common Stock Purchase Warrant dated May 8, 1995 between the Company and Index Securities S.A.
10.11(6)H Restated Joint Venture and Shareholders Agreement dated as of May 12, 1995 between the
Company, Jagotec AG, Jago Holding AG, Jago Pharma AG and Genta Jago Technologies B.V.
10.12(6)H Limited Liability Company Agreement of Genta Jago Delaware LLC dated as of May 12, 1995
between GPM Generic Pharmaceuticals Manufacturing Inc. and the Company.
10.13(6)H Restated Transfer Restriction Agreement dated as of May 12, 1995 between the Company and
Jagotec AG.
10.14(6)H Transfer Restriction Agreement dated as of May 12, 1995 between the Company, GPM Generic
Pharmaceuticals Manufacturing Inc. and Jago Holding AG.
10.15(6)H Common Stock Transfer Agreement dated as of May 30, 1995 between the Company and Jago
Finance Limited.
10.16(6)H Stockholders' Agreement dated as of May 30, 1995 between the Company, Jagotec AG, Dr.
Jacques Gonella and Jago Finance Limited.
10.17(6)H Restated GEOMATRIX Research and Development Agreement dated as of May 12, 1995 between
Jago Pharma AG, the Company, Genta Jago Delaware, L.L.C. and Genta Jago Technologies B.V.
10.18(6)H Restated Services Agreement dated as of May 12, 1995 between Jago Pharma AG, the Company,
Genta Jago Delaware, L.L.C. and Genta Jago Technologies B.V.
10.19(6)H Restated Working Capital Agreement dated as of May 12, 1995 and Amendment No. 1 to Restated
Working Capital Agreement dated as of July 11, 1995 between the Company and Genta Jago
Technologies B.V.
10.20(6)H Restated Promissory Note dated as of January 1, 1994 between Genta Jago Technologies B.V. and
the Company.
10.21(6)H Restated License Agreement dated as of May 12, 1995 between Jagotec AG and the Company.
10.22(6)H Restated GEOMATRIX License Agreement dated as of May 12, 1995 between Jagotec AG and
Genta Jago Technologies B.V.
10.23(6)H GEOMATRIX Manufacturing License Agreement dated as of May 12, 1995 between Jagotec AG
and Genta Jago Technologies B.V.
10.24(6)H Restated GEOMATRIX Supply Agreement dated as of May 12, 1995 between Jago Pharma AG
and Genta Jago Technologies B.V.
10.25(7) Common Stock Purchase Warrant dated December 14, 1995 between the Company and Lease
Management Services, Inc.
10.26(8) Common Stock Purchase Warrant for 375,123 shares of Common Stock issued to Lyon & Lyon.
10.27(8) Common Stock Purchase Warrant for 100,000 shares of Common Stock issued to Michael
Arnouse.
10.28(9) Note and Warrant Purchase Agreement dated as of January 28, 1997 among the Company, The
Aries Fund and The Aries Domestic Fund, L.P.
10.29(9) Letter Agreement dated January 28, 1997 from the Company to The Aries Fund and The Aries
Domestic Fund, L.P.
10.30(9) Senior Secured Convertible Bridge Note of the Company dated January 28, 1997 for $1,050,000
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issued to The Aries Domestic Fund, L.P.
10.31(9) Senior Secured Convertible Bridge Note of the Company dated January 28, 1997 for $1,950,000
issued to The Aries Trust.
10.32(9) Class A Bridge Warrant for the Purchase of 2,730,000 shares of Common Stock issued to The Aries
Domestic Fund, L.P.
10.33(9) Class A Bridge Warrant for the Purchase of 5,070,000 shares of Common Stock issued to The Aries
Trust.
10.34(9) Class B Bridge Warrant for the Purchase of 4,270,000 shares of Common Stock issued to The Aries
Domestic Fund, L.P.
10.35(9) Class B Bridge Warrant for the Purchase of 7,930,000 shares of Common Stock issued to the Aries
Trust.
10.36(9) Security Agreement dated as of January 28, 1997 between the Company and Paramount Capital,
Inc., as agent for the holders of the Company's Senior Secured Convertible Bridge Notes
10.37(9) Letter Agreement dated January 28, 1997 among the Company, Paramount Capital, Inc., The Aries
Domestic Fund, L.P. and The Aries Trust.
10.38(10) Executive Compensation Agreement dated as of January 1, 1996 between the Company and
Howard Sampson.
10.39(10) Collaboration Agreement dated December 26, 1995 between the Company and Johnson & Johnson
Consumer Products, Inc.
10.40(10) Assignment Agreement (of Gensia Inc.'s rights in the Collaboration Agreement between Genta
Jago and Gensia, Inc., dated January 23, 1993) to Brightstone Pharma, Inc., dated October 1, 1996
among Gensia, Inc., Genta Jago Technologies B.V., Brightstone Pharma, Inc., and SkyePharma
PLC.
10.41(10)H Development and Marketing Agreement effective February 28, 1996 between Apothecon, Inc. and
Genta Jago Technologies B.V.
10.42(10)H License Agreement effective February 28, 1996 between Apothecon, Inc. and Genta Jago
Technologies B.V.
10.43(10)H Option, Development & Sub-License Agreement (the Company has requested confidential
treatment for the name of this element) dated as of October 31, 1996 between Genta Jago
Technologies B.V. and Krypton Ltd.
10.44(10)H Development and Sub-License Agreement (the Company has requested confidential treatment for
the name of this element) dated as of October 31, 1996 between Genta Jago Technologies B.V. and
Krypton Ltd.
10.45(10)H Development and Sub-License Agreement (the Company has requested confidential treatment for
the name of this element) dated as of October 31, 1996 between Genta Jago Technologies B.V. and
Krypton Ltd.
10.46(10)H Development and Sub-License Agreement/Diclofenac dated as of October 31, 1996 between Genta
Jago Technologies B.V. and Krypton Ltd.
10.47(10)H Development and Sub-License Agreement/Naproxen dated as of October 31, 1996 between Genta Jago
Technologies B.V. and Krypton Ltd.
10.48(10)H Development and Sub-License Agreement/Verapamil dated as of October 31, 1996 between Genta
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Jago Technologies B.V. and Krypton Ltd.
10.49(10)" License Termination Agreement dated December 2, 1996 between the Company and Wilton
Licensing AG and the Company.
10.50(10) Contract for Regional Aid for Innovation, effective July 1, 1993, between L'Agence Nationale de
Valorisation de la Recherche, Genta Pharmaceuticals Europe S.A. and the Company.
10.51(11) Warrant for the Purchase of 32,500 shares of Common Stock of the Company, issued to The Aries
Fund.
10.52(11) Warrant for the Purchase of 17,500 shares of Common Stock of the Company, issued to The Aries
Domestic Fund, L.P.
10.53(11) Amended and Restated Amendment Agreement dated June 23, 1997 among the Company and The
Aries Fund and The Aries Domestic Fund L.P.
10.54(11) Amended and Restated Senior Secured Convertible Bridge Note for $1,050,000 issued to The Aries
Domestic Fund, L.P.
10.55(11) Amended and Restated Senior Secured Convertible Bridge Note for $1,950,000 issued to The Aries
Trust.
10.56(11) New Class A Bridge Warrant for the Purchase of 350,000 shares of Common Stock issued to The
Aries Domestic Fund, L.P.
10.57(11) New Class A Bridge Warrant for the Purchase of 650,000 shares of Common Stock issued to The
Aries Trust.
10.58(11) New Class B Bridge Warrant for the Purchase of 350,000 shares of Common Stock issued to The
Aries Domestic Fund, L.P.
10.59(11) New Class B Bridge Warrant for the Purchase of 650,000 shares of Common Stock issued to The
Aries Trust.
10.60(11) Consulting Agreement dated as of August 27, 1997 by and between the Company and Paul O.P.
Ts'o, Ph.D.
10.61(11) Consulting Agreement dated as of August 27, 1997 by and between the Company and Sharon B.
Webster, Ph.D.
10.62(15) Warrant Agreement, dated as of May 20, 1997, among the Company, ChaseMellon Shareholder
Services, L.L.C., as warrant agent, and Paramount Capital, Inc.
10.63(12) Severance Agreement, Release and Covenant Not to Sue dated May 5, 1998 between Thomas H.
Adams, Ph.D. and the Company.
10.64(12) Consulting Agreement dated May 5, 1998 between the Company and Thomas H. Adams, Ph.D.
10.65(14) Asset Purchase Agreement, dated as of March 19, 1999, among JBL Acquisition Corp., JBL
Scientific Incorporated and the Company.
10.66(14) Agreement of Sublease dated March 31, 1999 between Interneuron Pharmaceuticals, Inc. and the
Company
10.67(15) Warrant Agreement, dated as of December 23, 1999, among the Company, ChaseMellon
Shareholder Services, L.L.C., as warrant agent, and Paramount Capital, Inc.
10.68(15) Separation Letter Agreement dated December 1, 1999 from the Company to Kenneth G. Kasses,
Ph.D.
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10.69(15) Amendment No. 1 to Stock Option Agreement, dated as of December 1, 1999, to the Stock Option
Agreement, dated as of May 28, 1998, between the Company and Kenneth G. Kasses, Ph.D.
10.70(15) Employment Letter Agreement, dated as of October 28, 1999, from the Company to Raymond P.
Warrell, Jr., M.D.
10.71(15) Stock Option Agreement, dated as of October 28, 1999, between the Company and Raymond P.
Warrell, Jr., M.D.
10.72(15) Letter Agreement, dated March 4, 1999, from SkyePharma Plc to the Company.
22.1(10) Subsidiaries of the Registrant.
23.1(16) Consent of Deloitte & Touche LLP, Independent Auditors.
23.2(16) Consent of Deloitte & Touche Experta Ltd., Independent Auditors.
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H The Company has been granted confidential treatment of certain portions of
this exhibit.
* Filed supplementally.
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1, Registration No. 33-43642.
(2) Exhibit 10.1 is incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-8, Registration No. 33-85887.
(3) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-3, Registration No. 33-58362.
(4) Incorporated by reference to the exhibits to the Company's Current Report
on Form 8-K dated as of September 24, 1993, Commission File No. 0-19635.
(5) Incorporated by reference to the exhibits of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995, Commission File No. 0-19635.
(6) Incorporated by reference to the exhibits to the Company's Quarterly Report
on Form 10-Q/A for the quarter ended June 30, 1995, Commission File No.
0-19635.
(7) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, Commission File
No. 0-19635.
(8) Exhibits 10.26 and 10.27 are incorporated herein by reference to Exhibits
4.1 and 4.2, respectively, to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, Commission File No. 0-19635.
(9) Exhibits 3(i).2, 10.28, 10.29, 10.30, 10.31, 10.32, 10.33, 10.34, 10.35,
10.36 and 10.37 are incorporated herein by reference to Exhibits 3(i),
10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9 and 10.10,
respectively, to the Company's Current Report on Form 8-K filed on February
28, 1997, Commission File No. 0-19635.
(10) Exhibits 10.38, 10.39, 10.40, 10.41, 10.42, 10.43, 10.44, 10.45, 10.46,
10.47, 10.48, 10.49, 10.50 and 22.1 are incorporated herein by reference to
Exhibits 10.86, 10.87, 10.88, 10.89, 10.90, 10.91, 10.92, 10.93, 10.94,
10.95,
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10.96, 10.97, 10.98 and 22.1, respectively, the Company's Annual Report on
Form 10-K (Amendment No. 1) for the year ended December 31, 1996,
Commission File No. 0-19635.
(11) Exhibits 10.51, 10.52, 10.53, 10.54, 10.55, 10.56, 10.57, 10.58, 10.59,
10.60 and 10.61 are incorporated herein by reference to Exhibits 10.99,
10.100, 10.101, 10.102, 10.103, 10.104, 10.105, 10.106, 10.107, 10.108 and
10.109, respectively, to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, Commission File No. 0-19635.
(12) Exhibits 10.63 and 10.64 are incorporated herein by reference to Exhibits
10.1 and 10.2, respectively, to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, Commission File No. 0-19635.
(13) Exhibits 3(i).6, 3(i).7, 3(ii).1, 10(iii)(A).1 and 10(iii)(A).2 are
incorporated herein by reference to Exhibits 3(i).4, 3(i).3, 3(ii).1,
10(iii)(A).1 and 10(iii)(A).2, respectively, to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998, Commission File No.
0-19635.
(14) Exhibits 10.65 and 10.66 are incorporated herein by reference to Exhibits
10.2 and 10.1, respectively, to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, Commission File No. 0-19635.
(15) Exhibits 3(i).3, 3(i).4, 3(i).5, 3(i).8, 10.62, 10.67, 10.68, 10.69, 10.70,
10.71 and 10.72 are incorporated herein by reference to Exhibits 3(i).3,
3(i).4, 3(i).5, 3(i).8, 10.62, 10.67, 10.68, 10.69, 10.70, 10.71 and 10.72
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, Commission File No. 0-19635.
(16) Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
27th day of March, 2001.
Genta Incorporated
/s/ RAYMOND P. WARRELL, JR., M.D.
---------------------------------
Raymond P. Warrell, Jr., M.D.
Chairman, President, Chief
Executive Officer and Principal
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ RAYMOND P. WARRELL, JR., M.D. Chairman, President, Chief Executive March 27, 2001
- --------------------------------- Officer and Principal Executive Officer
Raymond P. Warrell, Jr., M.D.
/s/ GERALD M. SCHIMMOELLER Principal Accounting Officer, Principal March 27, 2001
- --------------------------------- Financial Officer, Vice President
Gerald M. Schimmoeller
/s/ DONALD G. DRAPKIN Director March 27, 2001
- ---------------------------------
Donald G. Drapkin
/s/ MARK C. ROGERS, M.D. Director March 27, 2001
- ---------------------------------
Mark C. Rogers, M.D.
/s/ RALPH SNYDERMAN, M.D. Director March 27, 2001
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Ralph Snyderman, M.D.
/s/ DANIEL D. VON HOFF, M.D. Director March 27, 2001
- ---------------------------------
Daniel D. Von Hoff, M.D.
/s/ HARLAN J. WAKOFF Director March 27, 2001
- ---------------------------------
Harlan J. Wakoff
/s/ MICHAEL S. WEISS Director March 27, 2001
- ---------------------------------
Michael S. Weiss
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