================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19635
GENTA INCORPORATED
(Exact name of Registrant as specified in its certificate of incorporation)
Delaware 33-0326866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Two Connell Drive
Berkeley Heights, NJ 07922
(Address of principal executive offices) (Zip Code)
(908) 286-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of May 13, 2003, the registrant had 73,933,964 shares of common stock
outstanding.
================================================================================
Genta Incorporated
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 2003
and December 31, 2002 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20
2
Genta Incorporated
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In thousands, except par value data) 2003 2002
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 51,953 $ 32,700
Short-term investments (Note 2) .................................... 51,354 81,016
Accounts receivable (Note 3) ....................................... 9,300 14,574
Notes receivable ................................................... 200 200
Other current assets ............................................... 2,472 1,458
--------- ---------
Total current assets .................................................. 115,279 129,948
Property and equipment, net ........................................... 3,251 3,256
Notes receivable ...................................................... 832 --
Intangibles, net ...................................................... 1,295 1,440
Other assets .......................................................... 1,778 1,775
--------- ---------
Total assets .......................................................... $ 122,435 $ 136,419
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 7,039 $ 27,683
Note payable ....................................................... 245 490
Accrued expenses ................................................... 5,135 4,740
Deferred revenues, current portion ................................. 5,237 5,237
Other current liabilities .......................................... 212 212
--------- ---------
Total current liabilities ............................................. 17,868 38,362
Deferred revenues (Note 5) ......................................... 40,045 41,354
Convertible debt (Note 6) .......................................... 10,000 10,000
Line of Credit (Note 7) ............................................ 17,500 --
--------- ---------
Total liabilities ..................................................... 85,413 89,716
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A convertible preferred stock, $.001
par value; 5,000 shares authorized, 261 shares issued and
outstanding at March 31, 2003 and December 31, 2002,
respectively; liquidation value of $13,025 ....................... -- --
Common stock, $.001 par value; 120,000 shares authorized,
74,255 and 74,168 shares issued and 73,811 and 73,775 outstanding
at March 31, 2003 and December 31, 2002, respectively ........... 74 74
Additional paid-in capital ......................................... 323,094 322,997
Accumulated deficit ................................................ (282,793) (273,190)
Deferred compensation .............................................. (553) (697)
Accumulated other comprehensive income ............................. 9 25
--------- ---------
Total stockholders' equity ............................................ 39,831 49,209
Cost of treasury stock: 444 and 393 shares at March 31, 2003
and December 31, 2002, respectively ............................. (2,809) (2,506)
--------- ---------
Total stockholders' equity ............................................ 37,022 46,703
--------- ---------
Total liabilities and stockholders' equity ............................ $ 122,435 $ 136,419
========= =========
See accompanying notes to consolidated financial statements.
3
Genta Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
----------------------------
(In thousands, except per share data) 2003 2002
-------- --------
Revenues:
License fees (Note 5) ......................... $ 266 $ 5
Development funding (Note 5) .................. 1,043 --
-------- --------
1,309 5
-------- --------
Costs and expenses:
Research and development (Note 4) ............. 6,300 9,837
General and administrative (Note 4) ........... 4,780 2,802
Compensation expense related to stock options . 144 238
-------- --------
11,224 12,877
-------- --------
Loss from operations ............................. (9,915) (12,872)
-------- --------
Other income (expense):
Other income, principally interest income ..... 452 246
Interest expense .............................. (140) --
-------- --------
312 246
-------- --------
Net loss applicable to common shares ............. $ (9,603) $(12,626)
======== ========
Net loss per common share ........................ $ (0.13) $ (0.19)
======== ========
Shares used in computing net loss per common share 74,233 66,525
======== ========
See accompanying notes to consolidated financial statements.
4
Genta Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
-----------------------------
(In thousands) 2003 2002
-------- --------
Operating activities
Net loss ................................................................ $ (9,603) $(12,626)
Items reflected in net loss not requiring cash:
Depreciation and amortization ........................................ 495 362
Loss on disposition of patents and equipment ......................... -- 10
Compensation expense related to stock options ........................ 144 238
Changes in operating assets and liabilities:
Accounts and notes receivable (Note 3) ......................... 4,442 32
Prepaids and other assets ...................................... (1,017) (2,849)
Accounts payable, accrued expenses and other current liabilities (20,494) (6,410)
Deferred revenue (Note 5) ...................................... (1,309) (5)
-------- --------
Net cash used in operating activities ................................... (27,342) (21,248)
-------- --------
Investing activities
Purchase of available-for-sale short-term investments ................... (24,178) --
Maturities and sales of available-for-sale short-term investments ....... 53,824 7,158
Purchase of property and equipment ...................................... (345) (413)
-------- --------
Net cash provided by investing activities ............................... 29,301 6,745
-------- --------
Financing activities
Proceeds from line of credit (Note 7) ................................... 17,500 --
Purchase of treasury stock (Note 8) ..................................... (303) --
Proceeds from exercise of warrants and options .......................... 97 1,143
-------- --------
Net cash provided by financing activities ............................... 17,294 1,143
-------- --------
Increase (decrease) in cash and cash equivalents ........................ 19,253 (13,360)
Cash and cash equivalents at beginning of period ........................ 32,700 38,098
-------- --------
Cash and cash equivalents at end of period .............................. $ 51,953 $ 24,738
======== ========
See accompanying notes to consolidated financial statements.
5
Genta Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
(1) Basis of Presentation
The unaudited consolidated financial statements of Genta Incorporated, a
Delaware corporation ("Genta" or the "Company"), presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and note disclosures required to be presented for complete financial
statements. The accompanying financial statements reflect all adjustments
(consisting only of normal recurring accruals), which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented.
The unaudited consolidated financial statements and related disclosures
have been prepared with the presumption that users of the interim financial
information have read or have access to the audited financial statements for the
preceding fiscal year. Accordingly, these financial statements should be read in
conjunction with the audited consolidated financial statements and the related
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002. Results for the interim periods are not
necessarily indicative of results for the full years.
The Company has experienced significant quarterly fluctuations in
operating results and it expects that these fluctuations will continue.
Revenue Recognition
In April 2002, the Company entered into a development and
commercialization agreement (the "Collaborative Agreement") with Aventis
Pharmaceuticals Inc. ("Aventis"). Under the terms of the Collaborative
Agreement, the Company and Aventis will jointly develop and commercialize
Genasense(TM) in the U.S. ("the Alliance"), and Aventis will have exclusive
development and marketing rights to the compound in all countries outside of the
U.S. Under the Collaborative Agreement, Aventis will pay 75% of U.S. New Drug
Application ("NDA")-directed development costs incurred by either Genta or
Aventis, subsequent to the execution of the Collaborative Agreement, and 100% of
all other development, marketing, and sales costs incurred within the U.S. and
elsewhere. Reimbursements are to be made pursuant to a single net payment from
one party to the other. Such payments are due and payable 60 days following the
end of the quarter in which such expenses are incurred.
Initial and future funding of ongoing development received from Aventis
after the achievement of certain research and development milestones (Note 4)
will be recognized over the estimated useful life of the first-to-expire related
patent of 115 months.
Research and Development
Research and development costs are expensed as incurred, including raw
material costs required to manufacture products for clinical trials.
Reimbursements for applicable Genasense(TM)-related costs, under the
Collaborative Agreement (Note 4), have been recorded as a reduction to expenses
in the consolidated statements of operations.
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 of five years. 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
6
future cash flows (undiscounted) and other factors. If such evaluation were to
indicate an impairment of these assets, such impairment would be recognized by a
write-down of the applicable assets. The Company evaluates the continuing value
of patents and patent applications in each financial reporting period. Through
this evaluation, the Company may elect to continue to maintain these patents,
seek to out-license them, or abandon them.
Future amortization expense related to intangibles at March 31, 2003
follows ($ thousands):
Amortization
Expense
-------
2003 .................................................. $ 432
2004 .................................................. 577
2005 .................................................. 286
2006 .................................................. --
2007 .................................................. --
Thereafter ............................................ --
------
Total ............................................ $1,295
======
Stock Options
The Company accounts for stock-based compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees"" and complies with the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation expense is based on the difference, if any, on the date of grant,
between the fair value of the Company's stock and the exercise price. The
Company accounts for stock options issued to non-employees in accordance with
the provisions of SFAS No. 123, and Emerging Issues Task Force Consensus on
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The Company is amortizing deferred stock compensation using the
graded vesting method, in accordance with Financial Accounting Standards Board
Interpretation No. 28, over the vesting period of each respective option, which
is generally four years.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - Amendment of FASB Statement No. 123," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation:
($ thousands, except per share data) Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Net loss applicable to common shares, as reported .............. $ (9,603) $(12,626)
Equity related compensation expense included in reported net
income, net of related tax effects ........................... 144 238
Total stock-based employee compensation expense determined under
fair values based method for all awards, net of related tax
effects ...................................................... (1,548) (1,667)
-------- --------
Pro forma net loss ............................................. $(11,007) $(14,055)
======== ========
Net loss per share attributable to common shareholders:
As reported: Basic and diluted ................................. $ (0.13) $ (0.19)
Pro forma: Basic and diluted ................................... $ (0.15) $ (0.21)
7
Pro Forma Disclosure
The fair value of options for the three months ended March 31, 2003 and
2002, has been estimated at the date of grant using the minimum value option
pricing model with the following assumptions:
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Risk-free interest rate ...................... 2.8% 4.9%
Dividend yield ............................... -- --
Expected life (years) ........................ 4.0 4.5
Volatility ................................... 65.0% 62.8%
All of the options issued during the three-month periods ended March 31,
2003 and 2002, were issued with an exercise price equal to market value on the
date of grant. The weighted-average estimated fair value of stock options
granted was $7.62 per share and $14.27 per share for the three-month periods
ended ended March 31, 2003 and 2002, respectively.
Net Loss Per Common Share
Basic and diluted loss per common share are identical for the three months
ended March 31, 2003 and 2002 as potentially dilutive securities, including
options, warrants and convertible preferred stock have been excluded in the
calculation of the net loss per common share due to their anti-dilutive effect.
Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The changes in SFAS No. 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, SFAS No. 149 (1)
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No.
133, (2) clarifies when a derivative contains a financing component, (3) amends
the definition of an underlying to conform it to language used in FIN 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and (4) amends certain other
existing pronouncements. Those changes will result in more consistent reporting
of contracts as either derivatives or hybrid instruments. SFAS No. 149 is to be
applied prospectively to contracts entered into or modified after June 30, 2003,
with certain exceptions, and for hedging relationships designated after June 30,
2003. Management believes that adopting this statement will not have a material
impact on the Company's results of operations, financial position or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The Company adopted SFAS No. 143
effective January 1, 2003. The adoption did not have a material impact on the
Company's results of operations, financial position or cash flows.
8
(2) Short-Term Investments
The carrying amounts of short-term investments approximate fair value due
to the short-term nature of these instruments. The fair value of
available-for-sale marketable securities at March 31, 2003 is as follows ($
thousands):
Amortized costs ........................................ $ 51,345
Gross unrealized gains ................................. 41
Gross unrealized losses ................................ (32)
--------
Estimated fair value ................................... $ 51,354
========
The estimated fair value of each marketable security has been compared to
its cost, and therefore, an unrealized gain of approximately $0.009 million has
been recognized in accumulated other comprehensive income at March 31, 2003.
(3) Accounts Receivable
Included in accounts receivable and netted against operating expenses in
the consolidated statement of operations for the three months ended March 31,
2003, is $9.157 million in net expense reimbursements due from Aventis for
various third-party costs, internal costs of scientific and technical personnel
("Full-time Equivalents" or "FTE's") and Genasense(TM) drug supply costs.
Information with respect to this cost reimbursement is presented below ($
thousands):
Three Months Ended Three Months Ended Total Due To
March 31, 2003 December 31, 2002 Genta
-------------- ----------------- -----
Reimbursement to Genta:
Third-party costs .......... $ 6,048 $ 134 $ 6,182
Drug supply costs .......... 2,048 -- 2,048
FTE's ...................... 1,540 -- 1,540
------- ------- -------
Amount due to Genta ........ $ 9,636 $ 134 $ 9,770
======= ======= =======
Reimbursement to Aventis:
FTE's ...................... (479) -- (479)
------- ------- -------
Net amount due to Genta ...... $ 9,157 $ 134 $ 9,291
======= ======= =======
(4) Collaborative Agreement
In April 2002, the Company entered into a Collaborative Agreement with
Aventis. Under the terms of the Collaborative Agreement, the Alliance will
jointly develop and commercialize Genasense(TM) in the U.S., and Aventis will
have exclusive development and marketing rights to the compound in all countries
outside of the U.S. Under the Collaborative Agreement, Aventis will pay 75% of
U.S. NDA-directed development costs incurred by either Genta or Aventis,
subsequent to the execution of the Collaborative Agreement, and 100% of all
other development, marketing, and sales costs incurred within the U.S. and
elsewhere. An analysis of expenses reimbursable under the Collaborative
Agreement (Note 1) follows:
($ thousands) Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Research and development expenses, gross .... $ 15,457 $ 9,837
Less net expense reimbursement .............. (9,157) --
-------- --------
Research and development expenses, net ...... $ 6,300 $ 9,837
======== ========
General and administrative, gross ........... $ 4,780 $ 2,802
Less expense reimbursement .................. -- --
-------- --------
General and administrative, net ............. $ 4,780 $ 2,802
======== ========
9
As of March 31, 2003, the Company has received a total of $177.7 million
in initial and near-term funding, which included a $10.0 million licensing fee
and $40.0 million in development funding (Note 5), $10.0 million in convertible
debt proceeds (Note 6), $71.9 million pursuant to an at-market equity investment
in the Company's common stock, $28.3 million in paid expense reimbursements and
$17.5 million in line of credit proceeds (Note 7). A further $9.3 million in
accrued expense reimbursement is due for payment during the second quarter of
2003 (Note 3). The remaining amounts that could be received under the
Collaborative Agreement, $280.0 million in cash and $65.0 million in convertible
note proceeds, are contingent upon the achievement of certain research and
development milestones.
(5) Deferred Revenues
As of March 31, 2003, the Company had recorded $45.3 million in deferred
revenues relating to the initial $10.0 million licensing fee and $40.0 million
development funding received under the Collaborative Agreement (Note 4), of
which $5.2 million is included in current liabilities and $40.1 million is
classified as long-term deferred revenues, which will be recognized over the
estimated useful life of the first-to-expire related patent of 115 months. Any
subsequent milestone payments that may be received from Aventis will also be
recognized over the then, remaining estimated useful life of the first-to-expire
related patent.
(6) Convertible Debt
At March 31, 2003, the Company had $10.0 million in convertible debt that
was issued in connection with the Collaborative Agreement (Note 4). The Company
received $10.0 million in debt proceeds from Aventis, and issued a $10.0 million
convertible promissory note to Aventis ("Aventis Note"). Interest accrues at the
rate of 5.63% per annum until April 26, 2009 (the "Maturity Date") and compounds
annually on each anniversary date of the Aventis Note through the Maturity Date.
The Company may redeem the Aventis Note for cash in whole or in part (together
with any accrued and unpaid interest with respect to such principal amount) in
amounts of not less than $0.5 million (and in $0.1 million increments
thereafter). In addition, the Company may convert the Aventis Note on or prior
to the Maturity Date in whole or in part (together with any accrued and unpaid
interest with respect to such principal amount) in amounts of not less than $5.0
million (and in $1.0 million increments thereafter), into fully paid and
non-assessable shares of common stock (calculated as to the nearest 1/1000 of a
share). As of any date, the number of shares of common stock into which the
Aventis Note may be converted shall be determined by a formula based on the then
market value of the common stock (the "Conversion Price"), subject to a minimum
Conversion Price of $8.00 per share.
(7) Aventis Line of Credit
At March 31, 2003, the Company had $17.5 million outstanding on a line of
credit that was issued in connection with an amendment, dated March 14, 2003, to
the Collaborative Agreement (Note 4) that established a $40.0 million line of
credit related to the development, manufacturing and commercialization of
Genasense(TM) ("Aventis Credit Line"). The amendment provides Genta the
immediate availability of up to $40.0 million in cash. This revolving debt will
be considered an advance against both past and future costs and will be secured
by reimbursable development expenses from Aventis, as well as drug inventory. At
the time of Genasense(TM) NDA approval in the U.S., any outstanding balance will
be offset against the first milestone payment that is due to Genta from Aventis.
The terms of the Aventis Credit Line provide for a favorable interest rate,
which is set two days prior to the first day of each calendar quarter. The
Aventis Credit Line terminates upon the earlier of (1) the receipt of
Genasense(TM) NDA approval in the U.S., (2) notice given by either Genta or
Aventis of the termination of the Collaborative Agreement, (3) notice given by
Genta of the termination of the Aventis Credit Line, (4) various default
provisions or (5) December 31, 2004. Depending upon the circumstances, repayment
is due immediately or up to six months after the termination of the Aventis
Credit Line.
(8) Treasury Stock
In June 2002 the Company commenced a stock repurchase program, whereby up
to 5.0 million shares of its common stock may be repurchased by the Company at
prices deemed desirable by the Company. As of March 31, 2003, the Company had
repurchased 444,200 shares of common stock in open-market transactions as
follows:
10
Shares Average price
Repurchased per share
----------- ---------
At December 31, 2002 392,700 $6.3807
Three Months Ended March 31, 2003 51,500 5.8927
------- -------
444,200 $6.3242
======= =======
(9) Comprehensive Loss
An analysis of comprehensive loss is presented below:
($ thousands) Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Net loss ..................................................... $ (9,603) $(12,626)
Change in market value change on available-for-sale short-term
investments ................................................ (16) (56)
-------- --------
Total comprehensive loss ..................................... $ (9,619) $(12,682)
======== ========
(10) Supplemental Disclosure of Cash Flows Information and Non-cash Investing
and Financing Activities
($ thousands) Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Market value change on available-for-sale Short-term investments... $(16) $(56)
No interest was paid for the three months ended March 31, 2003 and 2002.
(11) Commitments and Contingencies
Litigation and Potential Claims
JBL
The sale of JBL Scientific, Inc. ("JBL"), the Company's manufacturing
subsidiary, was completed on May 10, 1999. JBL was notified on October 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. In December 2001, Genta received a revised
settlement proposal from the EPA in the amount of $0.033 million, the terms of
the settlement with the EPA containing standard contribution protection and
release language. In January 2002, the Company accepted the proposal and paid
the $0.033 million as an offer to settle this matter. There can be no assurance,
however, that the EPA will not reject our settlement offer if there is not a
sufficient number of PRPs settling with the EPA.
Genta Europe
During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe"), a
wholly-owned subsidiary of Genta, received funding in the form of a loan from
ANVAR, a French government agency, of which the proceeds were intended to fund
research and development activities. In October 1996, in connection with a
restructuring of Genta's operations, Genta terminated all scientific personnel
of Genta Europe. In 1998, ANVAR asserted that Genta Europe was not in compliance
with the ANVAR Agreement, notified Genta Europe of its demand for accelerated
repayment of the loan and notified Genta that it was liable as a guarantor on
the note. Based on the advice of French counsel, Genta does not believe that
ANVAR is entitled to payment under the terms of the ANVAR Agreement and also
believes it to be unlikely that Genta will incur any liability in this matter,
although there can be no assurance thereof. At March 31, 2003, the Company has
accrued a net liability of $0.212 million related to this matter, which
management believes is adequate to provide for this contingency.
11
University of Pennsylvania
In October 2002, a licensing officer from the University of Pennsylvania
("UPenn") asserted a claim to a portion of the initial $40.0 million development
funding (Note 5) the Company received from Aventis pursuant to the Collaborative
Agreement. The Company has disputed this claim and has filed a petition for
binding arbitration for this matter, as provided in the original licensing
agreement between the Company and UPenn. At the current time the Company cannot
reasonably estimate the outcome of this claim; however, the Company does not
believe that this claim will have a material adverse impact on the Company's
financial results and liquidity. As such, the Company has not reserved any
amount for royalty payments that could be due to UPenn as a result of binding
arbitration.
Purchase Commitments
Per an agreement entered into with Avecia Biotechnology, Inc. ("Avecia")
in December 2002 (the "Supply Agreement") the Company is obligated for up to
$27.5 million in drug substance purchases during 2003. Pursuant to the
Collaborative Agreement with Aventis (Note 4), the Company anticipates that it
will be reimbursed for at least 75% of these purchase commitments after the drug
is shipped to the clinical sites. As of March 31, 2003, no 2003 purchases of
drug substance have been made, primarily due to the significant amount of drug
substance purchased in the fourth quarter of 2002. In addition, the Company has
committed up to $5.0 million of advance financing to Avecia for facility
expansion, which would be recovered with interest through future payments
determined as a function of drug substance purchases to be made by Genta in the
future. As of April 2003, the Company paid $0.829 million in advance financing.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain Factors Affecting Forward-Looking Statements - Safe Harbor Statement
The statements contained in this Quarterly Report on Form 10-Q that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect the Company's views as of the date they are
made with respect to future events and financial performance, but are subject to
many risks and uncertainties which could cause actual results to differ
materially from any future results expressed or implied by such forward-looking
statements. Forward-looking statements include, without limitation, statements
about:
o the Company's ability to develop, manufacture and sell its products;
o the potential efficacy of the Company's products;
o the commencement and completion of pre-clinical and clinical trials;
o the Company's ability to obtain necessary regulatory approvals;
o the Company's contractual collaborative arrangements;
o the adequacy of the Company's capital resources;
o the ability to obtain sufficient financing to maintain the Company's
planned operations;
o the possibility and effect of patent infringement claims;
o the impact of competitive products and market conditions; and
o other risks described under Certain Risks and Uncertainties Related
to the Company's Business in the Company's annual report on Form
10-K for the year ended December 31, 2002.
The Company does not undertake to update any forward-looking statements.
Although the Company believes that the forward-looking statements contained
herein are reasonable, it can give no assurances that the Company's expectations
are correct.
Overview
Since its inception in February 1988, the Company has devoted its
principal efforts toward drug discovery and research and development. The
Company has been unprofitable to date and expects to incur substantial operating
losses for the next several years due to continued requirements for ongoing
research and development activities, preclinical and clinical testing
activities, regulatory activities, possible establishment of manufacturing
activities and a sales and marketing organization. From the period since its
inception to March 31, 2003, the Company has incurred a cumulative net loss of
approximately $282.8 million. The Company has experienced significant quarterly
fluctuations in operating results and it expects that these fluctuations in
revenues, expenses and losses will continue.
A full description of the Company's business, R&D programs and products
can be seen the Annual Report on Form 10K for the period ended December 31,
2002.
13
Results of Operations
Summary Operating Results
For the three months ended March 31,
($ thousands) Increase (Decrease)
-------------------
2003 $ % 2002
------- ------- ------ --------
Revenues:
License fees $ 266 $ 261 5,220% $ 5
Development funding 1,043 1,043 N/A --
------- ------- ------ --------
1,309 1,304 5
Costs and expenses:
Research and development 15,457 5,620 57% 9,837
General and administrative 4,780 1,978 71% 2,802
Compensation expense related to
stock options 144 (94) (39)% 238
Less: Expense reimbursement 9,157 9,157 N/A --
------- ------- ------ --------
11,224 (1,653) (13)% 12,877
------- ------- ------ --------
Loss from operations (9,915) (2,957) (23)% (12,872)
Other income, principally net interest
income.................... 452 206 84% 246
Less: Interest expense 140 140 N/A --
------- ------- ------ --------
Net loss from continuing operations $(9,603) $(3,023) (24)% $(12,626)
======= ======= ====== ========
Revenues. Licensing fees and development funding for the three months
ended March 31, 2003 increased $1.304 million over the comparable period in
2002. This increase reflects the amortization of the up-front licensing fee and
development funding received from Aventis (Note 5), which are being recognized
over the estimated useful life of the first-to-expire related patent of 115
months.
Research and development expenses. Research and development expenses
before reimbursement for the three months ended March 31, 2003 increased $5.620
million or 57% over the comparable period in 2002. The increase in research and
development expenses is primarily attributable to the costs of the Genasense(TM)
Phase 3 clinical trials and NDA preparation activities, offset by lower drug
substance purchases in the quarter. Of the $15.457 million in research and
development expenses for the three months ended March 31, 2003, $11.062 million
and $1.340 million were reimbursable at 75% and 100%, respectively, pursuant to
the Collaborative Agreement (Note 4), of which the net amount of $9.636 million
will be reimbursed. Certain of the research and development expenses relating to
drug manufacturing not currently reimbursable will be at least 75% reimbursed
after the drug is shipped to the clinical sites.
General and administrative expenses. General and administrative expenses
for the three months ended March 31, 2003 increased $1.978 million or 71% over
the comparable period in 2002. The increase is primarily related to costs
associated with Ganite(TM) pre-launch activities and general corporate expenses
driven by business growth. There were no sales and marketing related expenses
reimbursable at 100% pursuant to the Collaborative Agreement for the three
months ended March 31, 2003, as sales and marketing related expenses related to
Genasense(TM) are mainly being billed to and paid for directly by Aventis.
Expense reimbursement. Expense reimbursement for the three months ended
March 31, 2003 relate to various third-party, FTE and drug supply costs that
Aventis is required to reimburse under the Collaborative Agreement (Note 4), as
follows ($ thousands):
14
Reimbursement to Genta:
Third-party costs .......................... $ 6,048
Drug supply costs .......................... 2,048
FTE's ...................................... 1,540
-------
Amount due to Genta ........................ $ 9,636
=======
Reimbursement to Aventis:
FTE's ...................................... (479)
-------
Net amount due to Genta ...................... $ 9,157
=======
Other Income. Net other income for the three months ended March 31, 2003
increased $0.066 million or 27% over the comparable period in 2002, principally
as a result of higher investment balances on investments. Interest expense is
attributable to interest being accrued on the $10.0 million Aventis Note (Note
6) and $17.5 million Aventis Credit Line (Note 7).
Net Loss. Genta incurred a net loss of $9.603 million, or $0.13 per share,
for the three months ended March 31, 2003, compared with a net loss of $12.626
million, or $0.19 per share, for the three months ended March 31, 2002. The
decrease in net loss, and per share net loss to common shareholders, was
primarily due to the expense reimbursement pursuant to the Collaborative
Agreement (Note 4) of $9.157 million or $0.12 per share, offset by increased
expenses primarily related to third-party costs for current Genasense(TM)
on-going clinical studies, expenses attributable to the NDA preparation, general
corporate legal fees, personnel costs and Ganite(TM) marketing-related spending.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations primarily
from private placements and public offerings of its equity securities. Cash
received from these equity offerings totaled approximately $279.7 million
through March 31, 2003, including net proceeds of $71.0 million received in
2002. At March 31, 2003, the Company had cash, cash equivalents and short-term
investments totaling $103.3 million compared to $113.7 million at December 31,
2002.
As reflected in Note 4 to the consolidated financial statements, in April
2002, Genta entered into a Collaborative Agreement with Aventis. Under the terms
of the Collaborative Agreement, the Alliance will jointly develop and
commercialize Genasense(TM) in the U.S., and Aventis will have exclusive
development and marketing rights to the compound in all countries outside of the
U.S. The Company will retain responsibility for global manufacturing and for
regulatory filings within the U.S., while Aventis will assume all regulatory
responsibilities outside the U.S. Joint management teams, including
representatives from both Genta and Aventis, will oversee the Alliance.
Collectively, this Collaborative Agreement could provide up to $476.9 million in
cash, equity and convertible debt proceeds to the Company. In addition, under
the Collaborative Agreement, the Company is entitled to royalties on worldwide
sales of Genasense(TM) from which the Company is required to pay third-party
pass-through royalties to UPenn and The National Institutes of Health ("NIH")
based on net worldwide sales of Genasense(TM). Furthermore, under the
Collaborative Agreement, Aventis will pay 75% of U.S. NDA-directed development
costs incurred by either Genta or Aventis subsequent to the execution of the
Collaborative Agreement, and 100% of all other development, marketing, and sales
costs incurred within the U.S. and elsewhere. Genta has received a total of
$177.7 million in initial and near-term funding, which included a $10.0 million
licensing fee and $40.0 million in development funding (Note 5), $10.0 million
in convertible debt proceeds (Note 6), $71.9 million pursuant to an at-market
equity investment in the Company's common stock, $28.3 million in paid expense
reimbursements and $17.5 million in line of credit proceeds (Note 7). A further
$9.3 million in accrued expense reimbursement is due for payment during the
second quarter of 2003 (Note 3).
Contingent upon the achievement of certain research and development
milestones, and included in the Collaborative Agreement's collective amount of
$476.9 million, the Company could receive up to $280.0 million in cash and up to
$65.0 million in convertible note proceeds.
15
The Company's principal expenditures relate to its research and
development activities, which include the Company's on-going and future clinical
trials. The Company expects these expenditures to continue. The Company expects
increased total expenditures, prior to expense reimbursement, for clinical
trials and drug supply related to Genasense(TM) as a result of the Collaboration
Agreement with Aventis. In addition, expenditures associated with other products
under development by the Company may increase as research and development
activities become more focused and as other clinical trials are initiated.
The Company 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 pre-clinical 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 revenues and the
proceeds of any such financing to continue and expand its ongoing research and
development activities, preclinical and clinical testing activities,
manufacturing and/or market introduction of potential products and expansion of
its administrative activities.
Recent Accounting Pronouncements
See Note 1 to the consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not utilize financial instruments for trading purposes
and holds no derivative financial instruments, which could expose the Company to
significant market risk. The Company's primary market risk exposure with regard
to financial instruments is to changes in interest rates, which would impact
interest income earned on such instruments.
Item 4. Controls and Procedures
Explanation of disclosure controls and procedures. Genta's Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the
Company's "disclosure controls and procedures" (as defined in Exchange Act Rules
13a-14(c) and 15-d and 14(c)) as of a date (the "Evaluation Date") within 90
days of the filing of this quarterly report, have concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were adequate
and designed to ensure that material information relating to the Company would
be made known to them by others within the Company.
Changes in internal controls. There were no significant changes in our
internal controls or, to our knowledge, in other factors that could
significantly affect the Company's disclosure controls and procedures subsequent
to the Evaluation Date.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
JBL
The sale of JBL, the Company's manufacturing subsidiary, was completed on
May 10, 1999. JBL was notified on October 1998 from Region IX of the EPA that it
had been identified as a 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. In December 2001, Genta received a revised settlement proposal from the EPA
in the amount of $0.033 million, the terms of the settlement with the EPA
containing standard contribution protection and release language. In January
2002, the Company accepted the proposal and paid the $0.033 million as an offer
to settle this matter. There can be no assurance, however, that the EPA will not
reject our settlement offer if there is not a sufficient number of PRPs settling
with the EPA.
Genta Europe
During 1995, Genta Europe, a wholly-owned subsidiary of Genta, received
funding in the form of a loan from ANVAR, a French government agency, of which
the proceeds were intended to fund research and development activities. In
October 1996, in connection with a restructuring of Genta's operations, Genta
terminated all scientific personnel of Genta Europe. In 1998, ANVAR asserted
that Genta Europe was not in compliance with the ANVAR Agreement, notified Genta
Europe of its demand for accelerated repayment of the loan and notified Genta
that it was liable as a guarantor on the note. Based on the advice of French
counsel, Genta does not believe that ANVAR is entitled to payment under the
terms of the ANVAR Agreement and also believes it to be unlikely that Genta will
incur any liability in this matter, although there can be no assurance thereof.
At March 31, 2003, the Company has accrued a net liability of $0.212 million
related to this matter, which management believes is adequate to provide for
this contingency.
University of Pennsylvania
In October 2002, a licensing officer from the UPenn asserted a claim to a
portion of the initial $40.0 million development funding (Note 5) the Company
received from Aventis pursuant to the Collaborative Agreement. The Company has
disputed this claim and has filed a petition for binding arbitration for this
matter, as provided in the original licensing agreement between the Company and
UPenn. At the current time the Company cannot reasonably estimate the outcome of
this claim; however, the Company does not believe that this claim will have a
material adverse impact on the Company's financial results and liquidity. As
such, the Company has not reserved any amount for royalty payments that could be
due to UPenn as a result of binding arbitration.
Item 4. Submission of Matters to a Vote of Security Holders
None.
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1(1) Amendment to U.S. Commercialization Agreement dated
March 14, 2003, by and between Genta Incorporated and
Aventis Pharmaceuticals Inc.
99.1 Certification by the Chief Executive Officer Relating
to a Periodic Report Containing Financial Statements.
99.2 Certification by the Chief Financial Officer Relating
to a Periodic Report Containing Financial Statements.
(1) Confidential treatment has been requested for portions
of such exhibit.
(b) Reports on Form 8-K.
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENTA INCORPORATED
(Registrant)
By: /s/ RAYMOND P. WARRELL, JR., M.D.
--------------------------------------------
Name: Raymond P. Warrell, Jr., M.D.
Title: Chairman, President, Chief Executive Officer
and Principal Executive Officer
By: /s/ WILLIAM P. KEANE
--------------------------------------------
Name: William P. Keane
Title: Vice President, Chief Financial Officer and
Principal Accounting Officer
Date: May 15, 2003
19
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Raymond P. Warrell, Jr., M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Genta Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ RAYMOND P. WARRELL, JR., M.D.
------------------------------------
Name: Raymond P. Warrell, Jr., M.D.
Title: Chief Executive Officer
20
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William P. Keane, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Genta Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ WILLIAM P. KEANE
------------------------------
Name: William P. Keane
Title: Chief Financial Officer
21