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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 August 5, 2002, the registrant
had 73,540,833 shares of common stock outstanding.
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Genta Incorporated
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002
(Unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 21
2
Genta Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
($ in thousands, except per share data) 2002 2001
-------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 143,043 $ 38,098
Short-term investments ............................................. 483 15,988
Accounts receivable ................................................ 7,211 36
Notes receivable ................................................... 200 200
Prepaid expenses ................................................... 6,177 707
------------------------
Total current assets .................................................. 157,114 55,029
Property and equipment, net ........................................... 2,641 1,848
Intangibles, net ...................................................... 1,728 2,120
Other assets .......................................................... 1,692 1,633
------------------------
Total assets .......................................................... $ 163,175 $ 60,630
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 9,994 $ 9,571
Accrued expenses ................................................... 1,750 2,309
Other current liabilities .......................................... 5,587 440
------------------------
Total current liabilities ............................................. 17,331 12,320
Deferred revenues .................................................. 43,973 --
Convertible debt ................................................... 10,000 --
------------------------
Total liabilities ..................................................... 71,304 12,320
------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A convertible preferred stock, $.001
par value; 5,000,000 shares authorized, 261,000 shares issued and
outstanding at June 30, 2002 and December 31, 2001, respectively;
liquidation value of $13,050 ..................................... -- --
Common stock, $.001 par value; 120,000,000 shares authorized,
73,535,918 and 66,000,210 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively ............... 74 66
Additional paid-in capital ......................................... 321,470 248,685
Accumulated deficit ................................................ (228,358) (198,662)
Deferred compensation .............................................. (1,235) (1,713)
Accumulated other comprehensive loss ............................... (6) (66)
------------------------
91,945 48,310
Less cost of treasury stock; 9,900 shares at June 30, 2002 ......... (74) --
------------------------
Total stockholders' equity ............................................ 91,871 48,310
------------------------
Total liabilities and stockholders' equity ............................ $ 163,175 $ 60,630
========================
See accompanying notes to condensed consolidated financial statements.
3
Genta Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(In thousands, except per share data) 2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Licensing fees .................................................. $ 874 $ -- $ 879 $ 70
Royalties ....................................................... 36 12 36 12
-------- -------- -------- --------
910 12 915 82
Costs and expenses:
Research and development, net ................................... 9,693 9,318 19,530 14,974
General and administrative, net ................................. 8,247 1,811 11,049 3,184
Promega settlement .............................................. -- -- -- 1,000
Compensation expense related to stock options ................... 238 243 477 394
-------- -------- -------- --------
18,178 11,372 31,056 19,552
-------- -------- -------- --------
Loss from operations ............................................... (17,268) (11,360) (30,141) (19,470)
Other income (expense):
Other income, principally net interest income ...................... 299 457 545 1,108
Interest expense ................................................... (100) -- (100) --
-------- -------- -------- --------
199 457 445 1,108
-------- -------- -------- --------
Net loss applicable to common shares ............................... $(17,069) $(10,903) $(29,696) $(18,362)
======== ======== ======== ========
Net loss per common share, basic and diluted ....................... $ (0.25) $ (0.21) $ (0.44) $ (0.35)
======== ======== ======== ========
Shares used in computing net loss per common share ................. 69,184 52,924 67,862 52,100
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
Genta Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
(In thousands) 2002 2001
--------- ---------
Operating activities
Net loss .............................................................. $ (29,696) $ (18,362)
Items reflected in net loss not requiring cash:
Depreciation and amortization ....................................... 768 518
Loss on disposal of fixed assets .................................... 10 9
Loss on Promega settlement .......................................... -- 1,000
Compensation expense related to stock options ....................... 477 394
Changes in operating assets and liabilities:
Accounts and notes receivable ................................... (7,126) 471
Other assets .................................................... (5,579) (457)
Accounts payable, accrued, other current liabilities and
deferred revenue .............................................. 48,985 1,168
--------- ---------
Net cash provided by (used in) operating activities ................... 7,839 (15,259)
--------- ---------
Investing activities
Purchase of available-for-sale short-term investments ............... -- (11,304)
Maturities and sales of available-for-sale short-term investments ... 15,566 14,468
Purchase of property and equipment .................................. (1,179) (392)
--------- ---------
Net cash provided by investing activities ............................. 14,387 2,772
--------- ---------
Financing activities
Issuance of common stock from private placement, net ................ 71,035 --
Issuance of convertible debt ........................................ 10,000 --
Purchase of treasury stock .......................................... (74) --
Issuance of common stock upon exercise of warrants and options ...... 1,758 3,368
--------- ---------
Net cash provided by financing activities ............................. 82,719 3,368
--------- ---------
Increase (decrease) in cash and cash equivalents ...................... 104,945 (9,119)
Cash and cash equivalents at beginning of period ...................... 38,098 19,025
--------- ---------
Cash and cash equivalents at end of period ............................ $ 143,043 $ 9,906
========= =========
See accompanying notes to condensed consolidated financial statements.
5
Genta Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(1) Basis of Presentation
The unaudited condensed consolidated financial statements of Genta
Incorporated, a Delaware corporation ("Genta" or the "Company"), presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and 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.
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,
2001.
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 ("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 NDA-directed
development costs incurred, by either Genta or Aventis, subsequent to the
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 payment from one party to the other after reconciliation. Such
payments are due and payable 60 days following the end of the quarter in which
such expenses are incurred.
Consistent with SAB 101, initial and future consideration received from
Aventis for the achievement of certain clinical and regulatory milestones (Note
5) will be recognized over the estimated useful life of the 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, and
reimbursements under the Collaborative Agreement have been recorded as a
reduction to expenses in the condensed 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 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, 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.
6
Net Loss Per Common Share
Basic and diluted loss per common share are identical for the three and
six months ended June 30, 2002 and 2001. 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 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 145 ("SFAS 145"). Among other
things, SFAS 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The provisions of this statement related to the rescission FASB
Statement No. 4, will be effective for fiscal years beginning after May 15,
2002, while all other provisions are effective for transactions occurring after
May 15, 2002. The Company does not expect SFAS 145 to have a material effect on
the Company's financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting
Standards 144 ("SFAS 144"). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", for the disposal of a
segment of a business (as previously defined in that Opinion). SFAS 144 also
amends ARB No. 51, "Consolidated Financial Statements", to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The provisions of SFAS 144 were effective for financial statements
issued for fiscal years beginning after December 15, 2001, and the adoption of
SFAS 144 did not have a material impact on the Company's financial position or
results of operations.
Also in August 2001, the FASB issued Statement of Financial Accounting
Standards 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". SFAS
143 requires that the liability for an asset retirement obligation should be
recognized at its fair market value when these liabilities are incurred. SFAS
143 will be effective for fiscal years beginning after June 15, 2002 and the
Company intends to adopt the provisions of SFAS 143 as of the effective date but
does not expect SFAS 143 to have a material effect on the Company's financial
position or results of operations.
(2) Short-Term Investments
All corporate debt securities at June 30, 2002, mature within one year or
less. Information in the aggregate with respect to these investments is
presented below (in thousands):
Gross Gross
unrealized unrealized Estimated
Amortized costs gains losses fair value
--------------- ---------- ---------- ----------
$489 $ -- $6 $483
=============== ========== ========== ==========
(3) Accounts Receivable
Included in accounts receivable and netted against operating expenses in
the condensed consolidated statements of operations at June 30, 2002, is $7.172
million in cost reimbursements for various third-party, internal costs of
scientific and technical personnel ("Full-time Equivalents") ("FTE's") and drug
supply costs from the effective date of the Collaborative Agreement through June
30, 2002. Information with respect to this cost reimbursement is presented below
(in thousands):
7
Reimbursement to Genta:
Third-party costs ................................ $3,345
Drug supply costs ................................ 2,562
FTE's ............................................ 1,265
------
Amount due Genta ................................. $7,172
======
(4) Prepaid Expenses
Included in prepaid expenses at June 30, 2002, are deposits in the
aggregate of $5.5 million in connection with purchase commitments for clinical
drug supplies, scheduled for delivery during 2002. Pursuant to the Collaborative
Agreement with Aventis (Note 5), the Company anticipates that it will be
reimbursed for at least 75% of these deposits, at a later date, as the drug is
shipped to the clinical sites.
(5) Collaborative Agreement
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. 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, Genta is entitled
to royalties on any worldwide sales of Genasense(TM), from which Genta is
required to pay third-party pass-through royalties to The University of
Pennsylvania ("UPenn") and The National Institute of Health ("NIH") based on net
worldwide sales. Under the Collaborative Agreement, Aventis will pay 75% of
NDA-directed development costs incurred, by either Genta or Aventis, subsequent
to the agreement, and 100% of all other development, marketing, and sales costs
incurred within the U.S. and elsewhere.
As of June 30, 2002, the Company has received a total of $131.9 million in
initial and near-term consideration, which included $10.0 million as a licensing
fee and $40.0 million as development fees (Note 6), $10.0 million in convertible
debt proceeds (Note 7), and $71.9 million pursuant to an equity investment in
the Company's common stock at $10.792 per share. 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 clinical and regulatory milestones. In connection with this $131.9
million, the Company paid approximately $1.5 million for financial advisory
services and an aggregate of $3.5 million in one-time pass-through payments to
UPenn and the NIH. Neither UPenn nor the NIH are entitled to any portion of
future milestone payments that Genta could receive.
(6) Deferred Revenues
At June 30, 2002, the Company had $49.2 million in deferred revenues
relating to initial consideration received from Aventis (Note 5) of which $5.2
million is included in other current liabilities and $44.0 million is classified
as long-term deferred revenues, which will be recognized over the estimated
useful life of the related patent of 115 months, in accordance with SAB 101. Any
subsequent milestone payments that may be received from Aventis will also be
recognized over the then, remaining estimated useful life of the related patent.
(7) Convertible Debt
In connection with the Collaborative Agreement (Note 5), the Company
received $10 million in debt proceeds from and issued a $10.0 million
convertible promissory note to Aventis ("Aventis Note"). Interest will accrue at
the rate of 5.63% per annum until April 26, 2009 (the "Maturity Date") and will
compound annually on each anniversary date of the Aventis Note through the
Maturity Date. The Company may redeem the Aventis Note for cash in whole
8
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) (the "Company Conversion"). 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 (the "Conversion Price"), subject to a
minimum Conversion Price of $8.00 per share.
(8) Treasury Stock
In June 2002, the Company commenced a stock repurchase program, whereby up
to 5,000,000 shares of its common stock, may be repurchased by the Company at
prices deemed desirable by the Company. The Company uses the cost method to
account for treasury stock. As of June 30, 2002, the Company had repurchased
9,900 shares of common stock in open-market transactions at a prevailing price
of $7.4975 per share.
In July 2002, the Company purchased an additional 129,300 shares at an
aggregate cost of $0.9 million, or $6.9582 per share.
(9) Comprehensive Loss
An analysis of comprehensive loss is presented below (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net loss ........................................... $(17,069) $(10,903) $(29,696) $(18,362)
Unrealized (loss) gain on market
value change on available-for-sale
short-term investments ............................. (4) (35) 60 91
-------- -------- -------- --------
Total comprehensive loss ........................... $(17,073) $(10,938) $(29,636) $(18,271)
======== ======== ======== ========
(10) Supplemental Disclosure of Cash Flows Information and Non-cash Investing
and Financing Activities
(In thousands) Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Market value change of available-for-sale equity securities .... $ -- $ (3)
Market value change of available-for-sale short-term investments 60 94
Common stock issued in payment of hiring bonus ................. -- 50
No interest or income taxes were paid for the six months ended June 30,
2002 and 2001.
(11) Discontinued Operations
On March 19, 1999, the Company entered into an Asset Purchase Agreement
(the "JBL Agreement") with Promega Corporation ("Promega"), whereby a wholly
owned subsidiary of Promega acquired substantially all of the assets and assumed
certain liabilities of the Company's manufacturing subsidiary, JBL Scientific,
Inc. ("JBL"), for approximately $4.8 million in cash, a promissory note for $1.2
million, and certain pharmaceutical development services in support of the
Company's development activities. The sale of JBL was completed on May 10, 1999
and a gain on sale of approximately $1.6 million was recognized during the
quarter ended June 30, 1999.
9
During May 2000, Promega notified Genta regarding two claims against Genta
and its wholly-owned subsidiary, Genko Scientific, Inc. (f/k/a JBL Scientific,
Inc.) ("Genko"), for indemnifiable damages in the aggregate amount of $2.8
million under the JBL Agreement. Promega announced that it intended to offset
these damages against the principal amount due under its $1.2 million promissory
note issued as partial consideration for the Genko assets, which note provided
for payment of $0.7 million on June 30, 2000. Promega further demanded an
additional $1.6 million in settlement of this matter. On October 16, 2000, the
Company filed suit in the U.S. District Court of California for nonpayment on
the $1.2 million promissory note plus accrued interest. On November 6, 2000,
Promega filed a counter suit against the Company in the U.S. District Court of
California for the damages discussed above. During the first quarter of 2001,
the Company and Promega entered into a settlement agreement under which Promega
agreed to restructure its $1.2 million promissory note to a $0.2 million,
non-interest bearing note payable by Promega upon final resolution of certain
environmental issues related to JBL (Note 12). In addition, the Company agreed
to forgive all accrued interest. The transaction resulted in a non-recurring
charge of $1.0 million for the quarter ended March 31, 2001.
(12) Commitments and Contingencies
Litigation and Potential Claims
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 was
conducted, under the supervision of the California Regional Water Quality
Control Board, for purposes of determining whether the levels of chloroform and
PCEs had decreased over time. The results of the latest sampling conducted by
JBL indicated that Paces and chloroform had decreased in all but one of the
monitoring sites. Based on the information provided to the Company by the
Consulting Firm, the Company accrued $0.065 million relating to remedial costs
in 1999. Pursuant to the JBL agreement the Company has agreed to indemnify
Promega in respect of this matter. In November 2001, the Company received from
the California Regional Water Quality Control Board notification on the
completion of site investigation and remedial action for these sites and that no
further action related to this case is required.
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 $0.075 million
during 1998. In 1999, the EPA estimated that the Company would be required to
pay approximately $0.063 million to settle their potential liability. 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 and accordingly, reduced
the previous accrual. In January 2002, the Company accepted the proposal and
settled this matter, however, there can be no assurance that the EPA will not
reject our settlement if there is not a sufficient number of PRP's 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, in the amount of FF5.4 million (or
approximately US$0.816 million at June 30, 2002) with a scheduled maturity of
December 31, 2002. Pursuant to the loan agreement with ANVAR, the utilization of
the proceeds was 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 February 1998, ANVAR
asserted that Genta Europe was not in compliance with the ANVAR Agreement, and
that ANVAR might request immediate repayment of the loan. In July 1998, ANVAR
notified Genta Europe of its demand for accelerated repayment of the loan in the
amount of FF4.2 million (or approximately US$0.633 million at June 30, 2002) and
subsequently notified us that Genta was liable as a guarantor
10
on the note. Based on the advice of French counsel, we do not believe that ANVAR
is entitled to payment under the terms of the ANVAR Agreement and also believe
it to be unlikely that Genta will incur any liability in this matter, although
there can be no assurance thereof.
In June 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 operations and terminated
its only remaining 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 Genta in the
Commercial Court of Marseilles, alleging back rent and early termination
receivables aggregating FF2.5 million (or approximately US$0.380 million at June
30, 2002). On October 8, 2001, the Commercial Court of Marseilles ordered Genta
to pay an amount of FF1.9 million (or approximately US$0.287 million at June 30,
2002). The Company does not believe that Marseille Amenagement is entitled to
payment and it is currently considering whether to appeal this decision or
negotiate with Marseille Amenagement to achieve a mutually satisfactory
resolution.
At June 30, 2002, the Company has accrued a net liability of $0.350
million related to the liquidated subsidiary and related matters, which
management believes is adequate to provide for these contingencies.
Purchase Commitments
At June 30, 2002, the Company was obligated for $35.2 million under firm
commitments for drug substance purchases during 2002, of which deposits in an
aggregate of $5.5 million have already been paid (Note 4). Pursuant to the
Collaborative Agreement with Aventis (Note 5), the Company anticipates that it
will be reimbursed for at least 75% of these purchase commitments, at a later
date, as the drug is shipped to the clinical sites. In addition, the Company has
committed $5.0 million to the drug substance manufacturer, as capital
contributions for facility expansion, which has not yet been paid.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since its inception in February 1988, the Company has devoted its
principal efforts toward drug discovery and research and development. The
Company has been unprofitable to date and expects to incur substantial operating
losses for the next several years due to continued requirements for ongoing
research and development activities, preclinical and clinical testing
activities, regulatory activities, possible establishment of manufacturing
activities and a sales and marketing organization. From the period since its
inception to June 30, 2002, the Company has incurred a cumulative net loss of
approximately $228.4 million. The Company has experienced significant quarterly
fluctuations in operating results and it expects that these fluctuations in
revenues, expenses and losses will continue.
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding the expectations, beliefs, intentions or strategies
regarding the future. Without limiting the foregoing, the words "anticipates,"
"believes," "expects," "intends," "may" and "plans" and similar expressions are
intended to identify forward-looking statements. The Company intends that all
forward-looking statements be subject to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements reflect the Company's views as of the date they are made with respect
to future events, but are subject to many risks and uncertainties, which could
cause the actual results of the Company to differ materially from any future
results expressed or implied by such forward-looking statements. For example,
the results obtained in pre-clinical or clinical studies may not be indicative
of results that will be obtained in future clinical trials, and delays in the
initiation or completion of clinical trials may occur as a result of many
factors. Further examples of such risks and uncertainties also include, but are
not limited to: the obtaining of sufficient financing to maintain the Company's
planned operations; timely development, receipt of necessary regulatory
approvals, and acceptance of new products; the successful application of the
Company's technology to produce new products; the obtaining of proprietary
protection for any such technology and products; the impact of competitive
products and pricing and reimbursement policies; and changing market conditions.
The Company does not undertake to update forward-looking statements. Although
the Company believes that the forward-looking statements contained herein are
reasonable, it can give no assurances that the Company's expectations are
correct.
Results of Operations for the three months ended June 30, 2002 and 2001
Summary Operating Results
($ thousands) For the three months ended June 30,
Increase (Decrease)
-------------------
2002 $ % 2001
-------- -------- -------- --------
Revenues:
Licensing fees ................... $ 874 $ 874 100% $ --
Royalties ........................ 36 24 200% 12
-------- -------- -------- --------
910 898 12
Costs and expenses:
Research and development ......... 16,441 7,123 76% 9,318
General and administrative ....... 8,671 6,860 379% 1,811
Compensation expense related to
stock options .................. 238 (5) (2)% 243
Less: Aventis reimbursement ...... 7,172 7,172 100% --
-------- -------- -------- --------
18,178 6,806 60% 11,372
-------- -------- -------- --------
Loss from operations ................. (17,268) 5,908 52% (11,360)
Other income, principally net interest
income ............................ 299 (158) (35)% 457
Less: Interest expense ............... 100 100 100% --
======== ======== ======== ========
Net loss applicable to common shares $(17,069) $ 6,166 57% $(10,903)
======== ======== ======== ========
12
Revenues. Licensing fees for the three months ended June 30, 2002 were
$0.874 million. The Company had no licensing fees during the comparable period
in 2001. The licensing fees in 2002 primarily reflect the amortization of
up-front licensing fees received from Aventis (Note 5), which are being
recognized over the estimated useful life of the related patent of 115 months.
Research and development expenses. Research and development expenses for
the three months ended June 30, 2002 increased $7.123 million or 76% over the
comparable period in 2001. The increase in research and development expenses is
primarily attributable to investigator and monitor fees for current
Genasense(TM)on-going clinical studies, FDA required pre-clinical studies for
Genasense(TM), development costs relating to various compounds, and increased
personnel costs. Of the $16.441 million in research and development expenses for
the three months ended June 30, 2002, $8.379 million and $0.464 million were
reimbursable at 75% and 100%, respectively, pursuant to the Collaborative
Agreement.
General and administrative expenses. General and administrative expenses
for the three months ended June 30, 2002 increased $6.860 million or 379% over
the comparable period in 2001. The increase is primarily related to financial
advisory services, royalty payments and legal fees relating to the Collaborative
Agreement (Note 5), personnel costs and increased marketing-related spending. Of
the $8.671 million in general and administrative expenses for the three months
ended June 30, 2002, sales and marketing related expenses of $0.423 million were
reimbursable at 100%, pursuant to the Collaborative Agreement.
Aventis reimbursement. Aventis reimbursement for the three months ended
June 30, 2002 relate to various third-party, FTE's and drug supply costs that
Aventis is required to reimburse under the Collaborative Agreement (Note 3), as
follows (in thousands):
Third-party costs ................................ $3,345
Drug supply costs ................................ 2,562
FTE's ............................................ 1,265
------
Amount due Genta ................................. $7,172
======
Other Income. Net other income for the three months ended June 30, 2002
decreased $0.158 million or 35% over the comparable period in 2001, principally
as a result of significantly lower investment balances and decreased yields on
investments, as the proceeds received from Aventis had not been placed into any
investment instruments. Interest expense is attributable to interest being
accrued on the $10.0 million convertible promissory note issued to Aventis (Note
7).
13
Results of Operations for the six months ended June 30, 2002 and 2001
Summary Operating Results
($ thousands) For the six months ended June 30,
Increase (Decrease)
-------------------
2002 $ % 2001
-------- -------- -------- --------
Revenues:
Licensing fees ................... $ 879 $ 809 1,156% $ 70
Royalties ........................ 36 24 200% 12
-------- -------- -------- --------
915 833 82
Costs and expenses:
Research and development ......... 26,278 11,304 75% 14,974
General and administrative ....... 11,473 8,289 260% 3,184
Promega settlement ............... -- (1,000) (100)% 1,000
Compensation expense related to
stock options .................. 477 83 21% 394
Less: Aventis reimbursement ...... 7,172 7,172 100% --
-------- -------- -------- --------
31,056 11,504 59% 19,552
-------- -------- -------- --------
Loss from operations ................. (30,141) 10,671 55% (19,470)
Other income, principally net interest
income ............................ 545 (563) (51)% 1,108
Less: Interest expense ............... 100 100 100% --
-------- -------- -------- --------
Net loss applicable to common shares . $(29,696) $ 11,334 62% $(18,362)
======== ======== ======== ========
Revenues. Licensing fees for the six months ended June 30, 2002 increased
$0.809 million or 1,156% over the comparable period in 2001. The increase is
primarily due to amortization of up-front licensing fees received from Aventis
(Note 5), which are being recognized over the estimated useful life of the
related patent of nine years.
Research and development expenses. Research and development expenses for
the six months ended June 30, 2002 increased $11.304 million or 75% over the
comparable period in 2001. The increase in research and development expenses is
primarily attributable to investigator and monitor fees for current
Genasense(TM) on-going clinical studies, FDA required pre-clinical studies for
Genasense(TM), development costs relating to various compounds, and increased
personnel costs. Of the $26.278 million in research and development expenses for
the six months ended June 30, 2002, only those expenses incurred subsequent to
the Collaborative Agreement were subject to reimbursement, of which $8.379
million and $0.464 million were reimbursable at 75% and 100%, respectively.
General and administrative expenses. General and administrative expenses
for the six months ended June 30, 2002 increased $8,289 million or 260% over the
comparable period in 2001. The increase is primarily related to financial
advisory services, royalty payments and legal fees relating to the Collaborative
Agreement (Note 5), personnel costs and increased marketing-related spending. Of
the $11.473 million in general and administrative expenses for the six months
ended June 30, 2002, only those expenses subsequent to the Collaborative
Agreement were subject to reimbursement, of which sales and marketing related
expenses of $0.423 million were reimbursable at 100%.
Aventis reimbursement. Aventis reimbursement for the six months ended June
30, 2002 relate to various third-party, FTE's and drug supply costs that Aventis
is required to reimburse under the Collaborative Agreement (Note 3), as follows
(in thousands):
14
Third-party costs ................................ $3,345
Drug supply costs ................................ 2,562
FTE's ............................................ 1,265
------
Amount due Genta ................................. $7,172
======
Other Income. Net other income for the six months ended June 30, 2002
decreased $0.563 million or 51% over the comparable period in 2001, principally
as a result of significantly lower investment balances and decreased yields on
investments, as the proceeds received from Aventis had not been placed into any
investment instruments. Interest expense is attributable to interest being
accrued on the $10.0 million convertible promissory note issued to Aventis (Note
7).
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily from
private placements and public offerings of its equity securities, and more
recently from licensing of its products and intellectual property. Cash provided
from these offerings totaled approximately $279.7 million through June 30, 2002,
including net proceeds of $71.0 million received in 2002 and $32.2 million
received in 2001. At June 30, 2002, the Company had cash, cash equivalents and
short-term investments totaling $143.526 million compared to $54.086 million at
December 31, 2001.
In June 2002, the Company signed a new seven-year lease agreement for an
additional 69,000 square feet of office space, with a cost of $1.764 million per
year. The Company expects to retain significant existing improvements to that
space, including furniture and other furnishings. A security deposit in the
amount of $1.029 million will be paid in January 2003 and rent payments for
portions of this new space will begin as the Company begins to occupy each
portion of space. 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.
In May 2002, the Company sold 6,665,498 shares of common stock to Aventis,
in connection with the Collaborative Agreement (Note 5), and received net
proceeds of $71.0 million, net of commission of $0.899 million and related
expenses.
As reflected in Note 5, 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 partners, 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 as well as royalties
on worldwide sales of Genasense(TM). Under the agreement, Aventis will pay 75%
of NDA-directed development costs incurred in the U.S. subsequent to the
agreement, and 100% of all other development, marketing, and sales costs
incurred within the U.S. and elsewhere. Genta has received a total of $131.9
million in initial and near-term consideration, which included $10.0 million as
a licensing fee and $40.0 million as development fees (Note 6), $10.0 million in
convertible debt proceeds (Note 7), and $71.9 million pursuant to an equity
investment in the Company's common stock. .Contingent upon the achievement of
certain clinical and regulatory milestones, and included in the Collaborative
Agreement's collective amount of $476.9 million, the Company could receive
$280.0 million in cash, and $65.0 million in convertible note proceeds.
The Company's principal expenditures relate to its research and
development activities, which includes the Company's on-going and anticipated
clinical trials. The Company expects these expenditures to continue. The Company
expects increased expenditures 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 possible clinical trials are initiated.
15
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, the
manufacturing and/or market introduction of potential products and expansion of
its administrative activities.
Recent Accounting Pronouncements
See Note 1 to the condensed consolidated financials 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.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 was
conducted, under the supervision of the California Regional Water Quality
Control Board, for purposes of determining whether the levels of chloroform and
PCEs had decreased over time. The results of the latest sampling conducted by
JBL indicated that PCEs and chloroform had decreased in all but one of the
monitoring sites. Based on the information provided to the Company by the
Consulting Firm, the Company accrued $0.065 million relating to remedial costs
in 1999. Pursuant to the JBL agreement the Company has agreed to indemnify
Promega in respect of this matter. In November 2001, the Company received from
the California Regional Water Quality Control Board notification on the
completion of site investigation and remedial action for these sites and that no
further action related to this case is required.
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 $0.075 million
during 1998. In 1999, the EPA estimated that the Company would be required to
pay approximately $0.063 million to settle their potential liability. 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 and accordingly, reduced
the previous accrual. In January 2002, the Company accepted the proposal and
settled this matter, however, there can be no assurance that the EPA will not
reject our settlement if there is not a sufficient number of PRP's 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, in the amount of FF5.4 million (or
approximately US$0.816 million at June 30, 2002) with a scheduled maturity of
December 31, 2002. Pursuant to the loan agreement with ANVAR, the utilization of
the proceeds was 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 February 1998, ANVAR
asserted that Genta Europe was not in compliance with the ANVAR Agreement, and
that ANVAR might request immediate repayment of the loan. In July 1998, ANVAR
notified Genta Europe of its demand for accelerated repayment of the loan in the
amount of FF4.2 million (or approximately US$0.633 million at June 30, 2002) and
subsequently notified us that Genta was liable as a guarantor on the note. Based
on the advice of French counsel, we do not believe that ANVAR is entitled to
payment under the terms of the ANVAR Agreement and also believe it to be
unlikely that Genta will incur any liability in this matter, although there can
be no assurance thereof.
In June 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 operations and terminated
its only remaining 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 Genta in the
Commercial Court of Marseilles, alleging back rent and early termination
receivables aggregating FF2.5 million (or approximately US$0.380 million at June
30, 2002). On October 8, 2001,
17
the Commercial Court of Marseilles ordered Genta to pay an amount of FF1.9
million (or approximately US$0.287 million at June 30, 2002). The Company does
not believe that Marseille Amenagement is entitled to payment and it is
currently considering whether to appeal this decision or negotiate with
Marseille Amenagement to achieve a mutually satisfactory resolution.
At June 30, 2002, the Company has accrued a net liability of $0.350
million related to the liquidated subsidiary and related matters, which
management believes is adequate to provide for these contingencies.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders (the "Annual
Meeting") on June 20, 2002.
(b) Proxies for the meeting were solicited pursuant to Regulation 14A of
the Exchange Act. There was no solicitation in opposition to the
Board of Directors' nominees for directors listed in the definitive
proxy statement of the Company dated as of May 20, 2002. All of the
Board of Directors' nominees were elected.
(c) Briefly described below is each matter voted upon at the Annual
Meeting.
(i) Election of seven directors. Total combined voting power of
the shares of Common Stock voted and withheld for the election
of each director was as follows:
Directors Votes For Withheld
--------- --------- --------
Raymond P. Warrell, Jr., M.D. 56,691,440 2,430,084
Betsy McCaughey, Ph.D. 58,135,193 986,331
Daniel D. Von Hoff, M.D. 58,396,542 724,982
Harlan J. Wakoff 58,118,167 1,003,357
Douglas G. Watson 58,417,621 703,903
Michael S. Weiss 58,086,503 1,035,021
Patrick J. Zenner 58,415,696 705,828
(ii) Approval of an amendment to the Company's Certificate of
Incorporation to increase the number of shares available for
issuance thereunder, the result of the voting was as follows:
For: 56,581,664 votes
Against: 2,410,230 votes
Abstain: 129,630 votes
(iii) Approval of an amendment to the Company's 1998 Stock Incentive
Plan to increase the number of shares authorized for issuance
thereunder, the result of the voting was as follows:
For: 28,683,764 votes
Against: 4,317,166 votes
Abstain: 227,202 votes
Broker non-vote: 25,893,392 votes
(iv) Approval of an amendment to the Company's Non-Employee
Directors' 1998 Stock Option Plan to increase the number of
shares authorized for issuance thereunder, the result of the
voting was as follows:
18
For: 29,014,444 votes
Against: 4,031,113 votes
Abstain: 182,575 votes
Broker non-vote: 25,893,392 votes
(v) Approval of an amendment to the Company's Non-Employee
Directors' 1998 Stock Option Plan to change the amount and the
time when stock options are granted thereunder, the result of
the voting was as follows:
For: 55,880,874 votes
Against: 3,044,256 votes
Abstain: 196,394 votes
(vi) Ratification of the selection of Deloitte & Touche LLP as the
Company's independent auditors, the result of voting was as
follows:
For: 58,442,575 votes
Against: 547,080 votes
Abstain: 131,869 votes
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1(1) U.S. Commercialization Agreement dated April 26,
2002, by and between Genta Incorporated and Aventis
Pharmaceuticals Inc.
10.2(1) Ex- U.S. Commercialization Agreement, dated April 26,
2002, by and between Genta Incorporated and Garliston
Limited
10.3(1) Global Supply Agreement, dated April 26, 2002, by and
among Genta Incorporated, Aventis Pharmaceuticals
Inc. and Garliston Limited
10.4(1) Securities Purchase Agreement, dated April 26, 2002,
by and between Genta Incorporated and Garliston
Limited
10.5 Standstill and Voting Agreement, dated April 26,
2002, by and between Genta Incorporated and Garliston
Limited
10.6 Registration Rights Agreement, dated April 26, 2002,
by and between Genta Incorporated and Garliston
Limited
10.7 Convertible Note Purchase Agreement, dated April 26,
2002, by and between Genta Incorporated and Garliston
Limited
10.8(1) 5.63% Convertible Promissory Note, due April 26, 2009
10.9(1) Subordination Agreement, dated April 26, 2002, by and
between Genta Incorporated and Garliston Limited
10.10 Amendment of Lease, dated June 19, 2002 between The
Connell Company and the Company
19
99.1 Certification by the Chief Executive Officer and
Chief Financial Officer Relating to a Periodic Report
Containing Financial Statements
(1) Confidential treatment has been requested for
portions of such exhibits.
(b) Reports on Form 8-K.
On April 29, 2002, the Company filed a Current Report on Form
8-K disclosing a press release issued on April 29, 2002, regarding
an agreement the Company entered into with Aventis Pharmaceuticals
Inc. to jointly develop and commercialize Genasense(TM)(G3139), the
Company's lead antisense compound.
On June 12, 2002, the Company filed a Current Report on Form
8-K disclosing a press release issued on June 11, 2002, regarding
the Company's commencement of a stock repurchase program, whereby up
to 5,000,000 shares of its common stock may be repurchased by the
Company at prices deemed desirable by the Company.
20
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/ RAYMOND P. WARRELL, JR., M.D.
---------------------------------
Name: Raymond P. Warrell, Jr., M.D.
Title: Acting Chief Financial Officer and Principal
Accounting Officer
Date: August 12, 2002
21