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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 September 30, 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 October 31, 2003, the registrant had 75,819,784 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 September 30,
2003 and December 31, 2002 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 22
CERTIFICATIONS 24
2
Genta Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In thousands, except par value data) 2003 2002
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 19,035 $ 32,700
Short-term investments (Note 2) .................................... 68,362 81,016
Accounts receivable (Note 3) ....................................... 11,760 14,574
Notes receivable ................................................... 200 200
Other current assets ............................................... 1,941 1,458
Unallocated purchase price (Note 5) ................................ 13,627 --
--------- ---------
Total current assets .................................................. 114,925 129,948
Property and equipment, net ........................................... 4,636 3,256
Notes receivable (Note 6) ............................................. 3,213 --
Intangibles, net ...................................................... 1,007 1,440
Other assets .......................................................... 1,717 1,775
--------- ---------
Total assets .......................................................... $ 125,498 $ 136,419
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............................. $ 15,936 $ 32,423
Note payable ....................................................... -- 490
Deferred revenues, current portion ................................. 5,237 5,237
Other current liabilities .......................................... -- 212
--------- ---------
Total current liabilities ............................................. 21,173 38,362
Deferred revenues (Note 7) ......................................... 37,426 41,354
Convertible debt (Note 8) .......................................... 10,000 10,000
Line of credit (Note 9) ............................................ 25,000 --
--------- ---------
Total liabilities ..................................................... 93,599 89,716
--------- ---------
Commitments and contingencies ......................................
Stockholders' equity:
Preferred stock, 5,000 shares authorized,
Series A convertible, $.001 par value; 600 shares authorized
261 shares issued and outstanding at September 30, 2003 and
December 31, 2002, respectively; liquidation value of $13,025 .... -- --
Common stock, $.001 par value; 120,000 shares authorized,
75,819 and 74,168 shares issued and 75,819 and 73,775 outstanding
at September 30, 2003 and December 31, 2002, respectively ....... 76 74
Additional paid-in capital ......................................... 335,511 322,997
Accumulated deficit ................................................ (303,376) (273,190)
Deferred compensation .............................................. (335) (697)
Accumulated other comprehensive income ............................. 23 25
--------- ---------
Total stockholders' equity ............................................ 31,899 49,209
Cost of treasury stock: 0 and 393 shares at September 30, 2003
and December 31, 2002, respectively ............................. -- (2,506)
--------- ---------
Total stockholders' equity ............................................ 31,899 46,703
--------- ---------
Total liabilities and stockholders' equity ............................ $ 125,498 $ 136,419
========= =========
See accompanying notes to condensed consolidated financial statements.
3
Genta Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
License fees and royalties (Note 7) ........... $ 253 $ 282 $ 795 $ 501
Development funding (Note 7) .................. 1,043 1,043 3,130 1,739
-------- -------- -------- --------
1,296 1,325 3,925 2,240
Costs and expenses:
Research and development (Note 4) ............. 9,249 13,044 14,226 32,574
Selling, general and administrative (Note 4) .. 9,287 3,602 20,198 14,651
Compensation expense related to stock options . 74 239 362 716
-------- -------- -------- --------
18,610 16,885 34,786 47,941
-------- -------- -------- --------
Loss from operations ............................. (17,314) (15,560) (30,861) (45,701)
Other income (expense):
Other income, principally net interest income . 393 557 1,279 1,102
Interest expense ............................. (244) (142) (604) (242)
Equity in net income of joint venture ........ -- 33 -- 33
-------- -------- -------- --------
149 448 675 893
-------- -------- -------- --------
Net loss applicable to common shares ............. $(17,165) $(15,112) $(30,186) $(44,808)
======== ======== ======== ========
Net loss per common share ........................ $ (0.23) $ (0.21) $ (0.40) $ (0.64)
======== ======== ======== ========
Shares used in computing net loss per common share 75,409 73,410 74,699 69,732
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
Genta Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(In thousands) 2003 2002
--------- ---------
Operating activities
Net loss ................................................................ $ (30,186) $ (44,808)
Items reflected in net loss not requiring cash:
Depreciation, amortization and loss on disposal of fixed assets ...... 1,668 1,190
Compensation expense related to stock options ........................ 362 716
Changes in operating assets and liabilities:
Accounts and notes receivable (Note 3) ......................... (399) (6,878)
Prepaids and other assets ...................................... (425) (2,446)
Accounts payable, accrued expenses and other current liabilities (21,760) 45,509
--------- ---------
Net cash used in operating activities ................................... (50,740) (6,717)
--------- ---------
Investing activities
Purchase of available-for-sale short-term investments ................. (48,400) --
Maturities and sales of available-for-sale short-term investments ..... 61,052 16,055
Purchase of property and equipment .................................... (2,615) (1,793)
Payment to stockholders in conjunction with Salus Acquisition (Note 5) (56) --
--------- ---------
Net cash provided by investing activities ............................... 9,981 14,262
--------- ---------
Financing activities
Issuance of common stock from private placement, net .................. -- 71,035
Issuance of convertible debt (Note 8) ................................. -- 10,000
Proceeds from line of credit (Note 9) ................................. 25,000 --
Purchase of treasury stock (Note 10) .................................. (303) (1,679)
Issuance of common stock upon exercise of warrants and options ........ 2,397 1,758
--------- ---------
Net cash provided by financing activities ............................... 27,094 81,114
--------- ---------
(Decrease) increase in cash and cash equivalents ........................ (13,665) 88,659
Cash and cash equivalents at beginning of period ........................ 32,700 38,098
--------- ---------
Cash and cash equivalents at end of period .............................. $ 19,035 $ 126,757
========= =========
See accompanying notes to condensed consolidated financial statements.
5
Genta Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
(1) Basis of Presentation
The unaudited condensed consolidated financial statements of Genta
Incorporated, a Delaware corporation ("Genta" or the "Company"), presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and note disclosures required to be presented for complete financial
statements. The accompanying financial statements reflect all adjustments
(consisting only of normal recurring accruals), which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented.
The unaudited condensed consolidated financial statements and related
disclosures have been prepared with the presumption that users of the interim
financial information have read or have access to the audited financial
statements for the preceding fiscal year. Accordingly, these financial
statements should be read in conjunction with the audited consolidated financial
statements and the related notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 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 series of development and
commercialization agreements (collectively, 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 Genasense(TM) 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
substantially all other development, marketing, and sales costs incurred
worldwide in connection with Genasense(TM). 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 (Notes 4
and 7) are being recognized over the estimated 115 months of useful life of the
related first-to-expire patent.
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 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
6
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 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 September 30, 2003
follows ($ in thousands):
Amortization
Expense
------------
2003 ...................................... $144
2004 ...................................... 577
2005 ...................................... 286
------
Total ............................ $1,007
======
Stock Options
The Company accounts for stock-based compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation expense is based on the difference, if any, on the date of grant,
between the fair value of the Company's stock and the exercise price. The
Company accounts for stock options issued to non-employees in accordance with
the provisions of SFAS No. 123, and Emerging Issues Task Force Consensus on
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The Company is amortizing deferred stock compensation using the
graded vesting method, in accordance with Financial Accounting Standards Board
Interpretation No. 28, over the vesting period of each respective option, which
is generally four years.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - Amendment of FASB Statement No. 123," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation:
($ in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss applicable to common shares, as
reported ................................. $(17,165) $(15,112) $(30,186) $(44,808)
Equity related employee compensation expense
included in reported net income, net of
related tax effects ...................... 74 239 362 716
Total stock-based employee compensation
expense determined under fair values based
method for all awards, net of related tax
effects .................................. (2,119) (1,788) (5,508) (5,364)
-------- -------- -------- --------
Pro forma net loss applicable to common
shares ................................... $(19,210) $(16,661) $(35,332) $(49,456)
======== ======== ======== ========
Net loss per common share:
As reported: Basic and diluted .............. $ (0.23) $ (0.21) $ (0.40) $ (0.64)
Pro forma: Basic and diluted ................ $ (0.25) $ (0.23) $ (0.47) $ (0.71)
7
Pro Forma Disclosure
The fair value of options for the three months ended September 30, 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 September 30,
--------------------------------
2003 2002
------------ -----------
Risk-free interest rate .......... 2.9% 2.8%
Dividend yield ................... -- --
Expected life (years) ............ 4.0 5.0
Volatility ....................... 64.2% 65.0%
All of the options issued during the three-month periods September 30,
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 $11.47 per share and $6.81 per share for the three-month periods
ended September 30, 2003 and 2002, respectively.
Net Loss Per Common Share
Basic and diluted loss per common share are identical for the three months
and nine month periods ended September 30, 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 May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Liabilities, Equity, or Both. This
limited scope statement prescribes changes to the classification of certain
financial instruments including preferred securities issued in the form of
shares that are mandatory redeemable; that embody an unconditional obligation
requiring the issuer to redeem them by transferring its assets at a specified or
determinable date (or dates) or upon an event that is certain to occur. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this statement did not
have any impact on the Company's results of operations, financial position or
cash flows.
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. 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. 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. The adoption of
this statement did not have any impact on the Company's results of operations,
financial position or cash flows.
In January 2003, the FASB issued Interpretation No. ("FIN") 46,
Consolidation of Variable Interest Entities. The Company has no arrangements
that would be subject to this interpretation.
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 September 30, 2003 is as follows ($
in thousands):
Amortized costs ................... $ 68,339
Gross unrealized gains ............ 68
Gross unrealized losses ........... (45)
--------
Estimated fair value .............. $ 68,362
========
The estimated fair value of each marketable security has been compared to
its cost, and therefore, an unrealized gain of $0.023 million has been
recognized in accumulated other comprehensive income at September 30, 2003.
(3) Accounts Receivable
Included in accounts receivable and netted against operating expenses in
the condensed consolidated statement of operations for the three months ended
September 30, 2003, is $11.760 million in net expense reimbursements due from
Aventis for various third-party costs, internal costs of scientific and
technical personnel ("Full-time Equivalents" or "FTE's") and Genasense(TM) drug
supply costs. Information with respect to the cost reimbursement for the three
months ended September 30, 2003 is presented below ($ in thousands):
Reimbursement to Genta:
Third-party costs ................ $ 8,491
Drug supply costs ................ 1,759
FTE's ............................ 1,942
--------
Amount due to Genta .............. 12,192
Reimbursement to Aventis:
FTE's ............................ (432)
--------
Net amount due to Genta ............ $ 11,760
========
(4) Collaborative Agreement
In April 2002, the Company entered into a Collaborative Agreement with
Aventis. Under the terms of the Collaborative Agreement, the Company and Aventis
will jointly develop and commercialize Genasense(TM) in the U.S., and Aventis
will have exclusive development and marketing rights to Genasense(TM) 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
substantially all other development, marketing, and sales costs incurred
worldwide in connection with Genasense(TM). An analysis of expenses reimbursable
under the Collaborative Agreement (Note 1) follows:
($ in thousands) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Research and development expenses, gross . $ 21,009 $ 19,608 $ 54,576 $ 45,886
Less net expense reimbursement ........... (11,760) (6,564) (40,350) (13,312)
-------- -------- -------- --------
Research and development expenses, net ... $ 9,249 $ 13,044 $ 14,226 $ 32,574
======== ======== ======== ========
Selling, general and administrative, gross $ 9,287 $ 3,763 $ 20,198 $ 15,236
Less expense reimbursement ............... -- (161) -- (585)
-------- -------- -------- --------
Selling, general and administrative, net . $ 9,287 $ 3,602 $ 20,198 $ 14,651
======== ======== ======== ========
9
As of September 30, 2003, the Company has received a total of $214.0
million in initial and near-term funding, which included a $10.0 million
licensing fee and $40.0 million in development funding (Note 7), $10.0 million
in convertible debt proceeds (Note 8), $71.9 million pursuant to an at-market
equity investment in the Company's common stock, $57.1 million in paid expense
reimbursements and $25.0 million in line of credit proceeds (Note 9). A further
$11.8 million in accrued expense reimbursement is due for payment during the
fourth 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) Salus Therapeutics, Inc. Acquisition
In August 2003, the Company acquired Salus Therapeutics, Inc. ("Salus"), a
privately held company located in Salt Lake City, Utah. Salus specializes in the
identification and development of drugs that are based on DNA or RNA, including
antisense, small interfering RNAs (siRNA), and delivery systems for
DNA/RNA-based drugs. Under the terms of the merger agreement, Genta issued 1.03
million shares of common stock with a fair value of approximately $13.0 million
to Salus stockholders in exchange for all of the outstanding shares of Salus
common stock, including those issued pursuant to the conversion of Salus'
preferred stock. Approximately thirty-five percent of the initial payment (0.36
million shares) is held in escrow and will be released on the first anniversary
of the acquisition, assuming no event of default occurs as described in the
merger agreement. Contingent upon the achievement of certain preclinical and
clinical milestones, an additional $17.0 million may be paid in stock or cash at
Genta's option.
The following unaudited condensed consolidated pro forma financial
information has been prepared to give effect to Genta's acquisition of Salus.
The pro forma adjustments are based upon available information and assumptions
that Genta believes are reasonable. The unaudited condensed consolidated pro
forma financial information do not purport to represent what the consolidated
results of operations or financial position of Genta would actually have been if
the acquisition had occurred on the dates referred to below, nor do they purport
to project the results of operations or financial position of Genta for any
future period.
The unaudited condensed consolidated pro forma statement of operations
data was prepared by combining Genta's statement of operations for the year
ended December 31, 2002 with Salus' statement of operations for the year ended
December 31, 2002, giving effect to the acquisition as though it occurred on
January 1, 2002.
The unaudited condensed consolidated pro forma statement of operations
data does not give effect to any restructuring costs or any potential cost
savings or other operating efficiencies that could result from the acquisition,
or any non-recurring charges or credits resulting from the transaction such as
in-process research and development charges.
The unaudited condensed consolidated pro forma financial information
should be read in conjunction with the historical financial statements of (i)
Genta included in its Annual Report on Form 10-K for the year ended December 31,
2002 (filed March 31, 2003) and in this Quarterly Report on Form 10-Q, and (ii)
Salus included in Genta's Form 8-K/A (filed November 4, 2003).
Condensed Consolidated Pro Forma Statement of Operations Data
(In thousands, except per share data)
For the year ended December 31, 2002
Genta Salus Adjustments F/N Pro Forma
------------------------------------------------------
Revenues ........................... $ 3,559 $ 386 $-- $ 3,945
Net loss ........................... $(74,528) $ (1,193) $-- $(75,721)
Net loss per basic and diluted share $ (1.05) $ (1.07)
For the three months ended September 30, 2003
Genta Salus Adjustments F/N Pro Forma
-----------------------------------------------------
Revenues ........................... $ 1,296 $20 $ -- $ 1,316
Net loss ........................... $(17,165) $ (782) $ 231 1 $(17,716)
Net loss per basic and diluted share $ (0.23) $ (0.23)
For the three months ended September 30, 2002
Genta Salus Adjustments F/N Pro Forma
------------------------------------------------------
Revenues ........................... $ 1,325 $ 90 $-- $ 1,415
Net loss ........................... $(15,112) $ (272) $-- $(15,384)
Net loss per basic and diluted share $ (0.21) $ (0.21)
For the nine months ended September 30, 2003
Genta Salus Adjustments F/N Pro Forma
------------------------------------------------------
Revenues ........................... $ 3,925 $ 194 $ -- $ 4,119
Net loss ........................... $(30,186) $ (1,471) $ 231 1 $(31,426)
Net loss per basic and diluted share $ (0.40) $ (0.42)
For the nine months ended September 30, 2002
Genta Salus Adjustments F/N Pro Forma
------------------------------------------------------
Revenues ............................ $ 2,240 $ 300 $-- $ 2,540
Net loss ............................ $(44,808) $ (785) $-- $(45,593)
Net loss per basic and diluted share $ (0.64) $ (0.65)
(1) An adjustment was made to eliminate the revenues and net losses recorded
twice in the table above during the period from August 21, 2003, the date Genta
purchased Salus, through September 30, 2003 ("Consolidation Period"). During
that period, Salus' financial information was consolidated into Genta; however,
to accurately depict the financial position of both entities for the three and
nine months ended September 30, 2003, both revenues and net loss were shown on a
'stand alone' basis, and properly adjusted for by backing out the amounts during
the Consolidation Period to determine the pro forma information.
Since the estimated fair value of the assets acquired is not readily
determinable at September 30, 2003, the aggregate purchase price is being shown
as unallocated purchase price. Management believes that a large portion of the
unallocated purchase price will be valued as in-process research and development
and will be written off. Information with respect to the unallocated purchase
price at September 30, 2003 is presented below ($ in thousands):
Market value of 1.03 million shares of common
stock issued ................................... $12,985
Legal and accounting fees directly associated with
the acquisition ................................ 642
-------
$13,627
=======
(6) Note Receivable
At September 30, 2003, the Company had recorded $3.2 million as a note
receivable relating to advance financing provided to Avecia Biotechnology, Inc.
("Avecia") for facility expansion, which will be recovered with interest through
future payments determined as a function of drug substance purchases to be made
by the Company in the future. Final repayment terms of this note receivable are
pursuant to the Supply Agreement (Note 13). Information with respect to the note
receivable at September 30, 2003 is presented below ($ in thousands):
Advance funding for facility expansion $ 3,274
Interest recorded ............................... 44
Payments received ............................... (105)
-------
$ 3,213
=======
10
(7) Deferred Revenues
As of September 30, 2003, the Company had recorded $42.6 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 $37.4 million is
classified as long-term deferred revenues. These revenues are being recognized
over the estimated 115 months of useful life of the related first-to-expire
patent. 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.
(8) Convertible Debt
At September 30, 2003, the Company had $10.0 million outstanding in a
convertible promissory note ("Aventis Note") that was issued in connection with
the Collaborative Agreement (Note 4). 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.
(9) Aventis Line of Credit
At September 30, 2003, the Company had $25.0 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 an up to $40.0 million
line of credit related to the development, manufacturing and commercialization
of Genasense(TM) ("Aventis Line of Credit"). 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 Line of Credit provide for a favorable interest rate,
which is set two days prior to the first day of each calendar quarter. The
Aventis Line of Credit terminates upon the earlier of (i) the receipt of
Genasense(TM) NDA approval in the U.S., ii) notice given by either Genta or
Aventis of the termination of the Collaborative Agreement (Note 4), (iii) notice
given by Genta of the termination of the Aventis Line of Credit, (iv) various
default provisions or (v) December 31, 2004. Depending upon the circumstances,
repayment is due immediately or up to six months after the termination of the
Aventis Line of Credit.
(10) 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 September 30, 2003, the Company
had repurchased 444,200 shares of common stock in open-market transactions as
follows:
Shares Average price
Repurchased per share
----------- -------------
At December 31, 2002 ......................... 392,700 $6.3807
Nine Months Ended September 30, 2003 ......... 51,500 5.8927
------- -------
444,200 $6.3242
======= =======
11
In September 2003, the Company retired the 444,200 shares of treasury
stock.
(11) Comprehensive Loss
An analysis of comprehensive loss is presented below:
Three Months Ended Nine Months Ended
($ in thousands) September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss ...................... $(17,165) $(15,112) $(30,186) $(44,808)
Change in market value on
available-for-sale short-term
investments ................. 42 6 (2) 66
-------- -------- -------- --------
Total comprehensive loss ...... $(17,123) $(15,106) $(30,188) $(44,742)
======== ======== ======== ========
(12) Supplemental Disclosure of Cash Flows Information and Non-cash Investing
and Financing Activities
No interest was paid for the nine months ended September 30, 2003 and
2002.
The market value of common stock issued for the purchase of Salus (Note 5)
was $12.985 million.
The value of treasury stock (Note 10) retired was $2.809 million.
(13) 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. During the quarter ended September
30, 2003, the Company reversed the accrued net liability of $0.212 million
related to this matter, as management no longer believes that a loss is
probable.
12
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 7) the Company received from Aventis pursuant to the Collaborative
Agreement (Note 4). In October 2003, the Company reached a settlement with UPenn
with respect to this claim. Under the terms of the settlement agreement, in
exchange for an agreement by UPenn to forego any and all claims in the future to
any portion of any milestone and other payments (other than royalty payments on
sales) made to Genta pursuant to the Collaborative Agreement (Note 4), Genta has
agreed to make the following payments to UPenn: (i) $0.750 million on November
5, 2003, (ii) $0.250 million on February 2, 2004, (iii) $1.5 million upon the
first NDA or foreign equivalent approval of Genasense(TM), and (iv) provided
that the first NDA or foreign equivalent approval of Genasense(TM) has been
received by Genta, $0.750 million on the earlier of (a) the second NDA or
foreign equivalent approval of Genasense(TM) or (b) December 30, 2004. As of
September 30, 2003, the Company has reserved for the royalty payments that are
due to UPenn per the settlement agreement.
Purchase Commitments
Per an agreement entered into with Avecia in December 2002 (the "Supply
Agreement") the Company is obligated to purchase up to $27.5 million in drug
substance each year in 2003 and 2004. The Company expects the 2003 obligation
and purchases to be below that level. Pursuant to the Collaborative Agreement
(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. No
drug substance purchases were made in the first half of 2003, primarily due to
the significant amount of drug substance purchased in the fourth quarter of
2002. For the three months ended September 30, 2003, the Company purchased
approximately $2.5 million of drug substance. 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 the Company
in the future (Note 6).
(14) Subsequent Event
On November 4, 2003 the Company filed a Form S-1 registration statement
with the SEC to register the 0.67 million shares issued to former Salus
stockholders in connection with the Company's acquisition of Salus. Upon the
registration statement being declared effective, the former Salus stockholders
will have the option to retain their shares or sell them during quarterly window
periods.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain Factors Affecting Forward-Looking Statements - Safe Harbor Statement
We have made statements in this quarterly report on Form 10-Q that 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.
We intend that all forward-looking statements be subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. In some
cases, you can identify these statements by forward-looking words such as "may",
"might", "will", "should", "expects", "plans", "anticipates", "believes",
"estimates", "predicts", "potential" or "continue", the negative of these terms
and other comparable terminology.
These forward-looking statements reflect our 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. Factors that may cause actual results to differ materially from
those contemplated by the forward-looking statements include, among others,
those listed under the caption entitled "Risk Factors" and the following:
o U.S. Food and Drug Administration, ("FDA") approval or failure to approve
Genasense(TM);
o our ability to develop, manufacture and sell our products or to enter into
collaborative arrangements with third parties to manufacture or sell our
products;
o the safety and efficacy of our products;
o the commencement and completion of pre-clinical and clinical trials;
o our ability to obtain necessary regulatory approvals;
o our contractual collaborative arrangements;
o the adequacy of our capital resources;
o the ability to obtain sufficient financing to maintain our planned
operations;
o the possibility and effect of patent infringement claims; and
o the impact of competitive products and market conditions.
Although we believe the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, level of activity,
performance or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of any of these forward-looking
statements. We are under no duty to update any of these forward-looking
statements after the date of this prospectus to conform our prior statements to
actual results or revised expectations.
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. 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, research and development
programs and products is set forth in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002 and Form S-1 Statement filed on
November 4, 2003.
14
On October 6, 2003, the Company began marketing its first commercial
product, Ganite(TM), which was approved by the FDA, for the treatment of
cancer-related hypercalcemia. The drug is being marketed and sold exclusively by
Genta in the United States by a dedicated sales force that currently consists of
18 regional representatives. Ganite(TM) is currently undergoing clinical testing
for use as a cancer chemotherapy drug, especially in patients with non-Hodgkin's
lymphoma, or NHL.
In September 2003, Genta reported Phase 3 clinical data for Genasense(TM)
in patients with advanced malignant melanoma. The Company plans to include these
data in its NDA for Genasense(TM), which was initiated on a rolling basis (i.e.
in several sections) in August 2003. Management expects that the NDA filing for
the use of Genasense(TM) in combination with chemotherapy for patients with
advanced malignant melanoma will be completed in 2003.
In August 2003, the Company acquired Salus (Note 5), a privately held
company located in Salt Lake City, Utah. Salus specializes in the identification
and development of drugs that are based on DNA or RNA, including antisense,
small interfering RNAs (siRNA), and delivery systems for DNA/RNA-based drugs.
Genasense(TM) is being tested as a drug that can increase the
effectiveness of current types of cancer therapy. Patient enrollment has been
completed in two additional randomized Phase 3 trials that test the efficacy of
Genasense(TM) in patients with multiple myeloma and chronic lymphocytic
leukemia, or CLL. Genasense(TM) is also being tested in earlier stage clinical
trials for treating more than ten other cancer types. Genasense(TM) has received
designations as "Fast Track" and "Orphan Drug" from the FDA in the advanced
malignant melanoma, multiple myeloma and CLL indications.
Results of Operations for the Three Months Ended September 30, 2003 and 2002
Summary Operating Results
($ in thousands) For the Three Months Ended September 30,
Increase (Decrease)
------------------------
2003 $ % 2002
-------- -------- -------- --------
Revenues:
Licensing fees and royalties ...... $ 253 $ (29) (10)% $ 282
Development funding ............... 1,043 -- -- 1,043
-------- -------- -------- --------
1,296 (29) (2)% 1,325
Costs and expenses:
Research and development .......... 21,009 1,401 7% 19,608
Selling, general and administrative 9,287 5,524 147% 3,763
Compensation expense related to
stock options .................... 74 (165) (69)% 239
Less: Aventis reimbursement ....... 11,760 5,035 75% 6,725
-------- -------- -------- --------
18,610 1,725 10% 16,885
-------- -------- -------- --------
Loss from operations .................. (17,314) 1,754 11% (15,560)
Other income, principally net interest
income ............................. 393 (197) (33)% 590
Less: Interest expense ................ 244 102 72% 142
-------- -------- -------- --------
Net loss applicable to common shares .. $(17,165) $ 2,053 14% $(15,112)
======== ======== ======== ========
Revenues. Licensing fees, development funding and royalties for the three
months ended September 30, 2003 decreased $0.029 million over the comparable
period in 2002, reflecting the final annual installments of licensing fees
recorded in 2002 that were not required in 2003.
Research and development expenses. Research and development expenses
before reimbursement for the three months ended September 30, 2003 increased
$1.401 million or 7% over the comparable period in 2002. The increase in
15
research and development expenses is primarily attributable to the costs of the
Genasense(TM) Phase 3 clinical trials and NDA preparation activities for
Genasense(TM), offset by lower drug substance purchases in the quarter. Of the
$21.009 million in research and development expenses for the three months ended
September 30, 2003, $13.340 million and $1.755 million were reimbursable at 75%
and 100%, respectively, pursuant to the Collaborative Agreement (Note 4), of
which the net amount of $11.760 million is expected to be reimbursed in the
fourth quarter of 2003.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended September 30, 2003 increased
$5.524 million or 147% over the comparable period in 2002. The increase in
selling, general and administrative expenses is primarily attributable to costs
associated with Ganite(TM) pre-launch activities, royalty payments due to UPenn
per the settlement agreement (Note 13) and general corporate expenses driven by
business growth. There were no sales and marketing related expenses reimbursable
at 100% pursuant to the Collaborative Agreement (Note 4) for the three months
ended September 30, 2003, as sales and marketing related expenses related to
Genasense(TM) are mainly being billed to, and paid for, directly by Aventis.
Expense reimbursement. Expense reimbursement for the three months ended
September 30, 2003 relate to various third-party, FTE and drug supply costs that
Aventis is required to reimburse under the Collaborative Agreement (Note 4), as
follows ($ in thousands):
Reimbursement to Genta:
Third-party costs .......................... $ 8,491
Drug supply costs .......................... 1,759
FTE's ...................................... 1,942
--------
Amount due to Genta ........................ 12,192
Reimbursement to Aventis:
FTE's ...................................... (432)
--------
Net amount due to Genta ...................... $ 11,760
========
Other income less interest expense. Net other income for the three months
ended September 30, 2003 decreased $0.299 million or 67% from the comparable
period in 2002, as a result of both lower interest income, resulting from a
lower aggregate balance for cash, cash equivalents and short-term investments
and interest expense on the $10.0 million Aventis Note (Note 8) and $25.0
million borrowed from Aventis under the Aventis Line of Credit (Note 9).
Net Loss. Genta incurred a net loss of $17.165 million, or $0.23 per
share, for the three months ended September 30, 2003, compared with a net loss
of $15.112 million, or $0.21 per share, for the three months ended September 30,
2002. The increase in net loss, and per share net loss to common shareholders,
was primarily due to increased expenses primarily related to third-party costs
for current Genasense(TM) on-going clinical studies, expenses attributable to
the NDA preparation for Genasense(TM), general corporate legal fees, personnel
costs and Ganite(TM) marketing-related spending, offset by an increase of the
expense reimbursement pursuant to the Collaborative Agreement (Note 4).
16
Results of Operations for the Nine Months Ended September 30, 2003 and 2002
Summary Operating Results
($ in thousands) For the Nine Months Ended September 30,
Increase (Decrease)
------------------------
2003 $ % 2002
-------- -------- -------- --------
Revenues:
Licensing fees and royalties ...... $ 795 $ 294 59% $ 501
Development funding ............... 3,130 1,391 80% 1,739
-------- -------- -------- --------
3,925 1,685 75% 2,240
Costs and expenses:
Research and development .......... 54,576 8,690 19% 45,886
Selling, general and administrative 20,198 4,962 33% 15,236
Compensation expense related to
stock options .................... 362 (354) (49)% 716
Less: Aventis reimbursement ....... 40,350 26,453 190% 13,897
-------- -------- -------- --------
34,786 (13,155) (27)% 47,941
-------- -------- -------- --------
Loss from operations .................. (30,861) (14,840) (32)% (45,701)
Other income, principally net interest
income ............................. 1,279 144 13% 1,135
Less: Interest expense ................ 604 362 150% 242
-------- -------- -------- --------
Net loss applicable to common shares .. $(30,186) $(14,622) (33)% $(44,808)
======== ======== ======== ========
Revenues. Licensing fees, development funding and royalties for the nine
months ended September 30, 2003 increased $1.685 million over the comparable
period in 2002. This increase reflects the amortization, for nine months in 2003
compared to five months in 2002, of the up-front licensing fee and development
funding received from Aventis (Note 7), which are being recognized over the
estimated 115 months of useful life of the related first-to-expire patent.
Research and development expenses. Research and development expenses
before reimbursement for the nine months ended September 30, 2003 increased
$8.690 million or 19% 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 for
Genasense(TM), offset by lower drug substance purchases in the nine months. Of
the $54.576 million in research and development expenses for the nine months
ended September 30, 2003, $48.641 million and $3.869 million were reimbursable
at 75% and 100%, respectively, pursuant to the Collaborative Agreement (Note 4),
of which the net amount of $11,760 million related to the three months ended
September 30, 2003, is expected to be reimbursed in the fourth quarter of 2003.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended September 30, 2003 increased
$4.962 million or 33% over the comparable period in 2002. The increase is
primarily related to costs associated with Ganite(TM) pre-launch activities,
royalty payments due to UPenn per the settlement agreement (Note 13) and general
corporate expenses driven by business growth. There were no sales and marketing
related expenses reimbursable at 100% pursuant to the Collaborative Agreement
(Note 4) for the nine months ended September 30, 2003, as sales and marketing
related expenses related to Genasense(TM) are mainly being billed to, and paid
for, directly by Aventis.
Expense reimbursement. Expense reimbursement for the nine months ended
September 30, 2003 relate to various third-party, FTE and drug supply costs that
Aventis is required to reimburse under the Collaborative Agreement (Note 4), as
follows ($ in thousands):
17
Reimbursement to Genta:
Third-party costs ........................... $ 23,361
Drug supply costs ........................... 12,999
FTE's ....................................... 5,275
--------
Reimbursement to Genta ...................... 41,635
Reimbursement to Aventis:
FTE's ....................................... (1,285)
--------
Net reimbursement to Genta .................... $ 40,350
========
Other income less interest expense. Net other income for the nine months
ended September 30, 2003 decreased $0.218 million or 24% from the comparable
period in 2002, principally as a result of interest expense on the $10.0 million
Aventis Note (Note 8) and $25.0 million borrowed from Aventis under the Aventis
Line of Credit (Note 9).
Net Loss. Genta incurred a net loss of $30.186 million, or $0.40 per
share, for the nine months ended September 30, 2003, compared with a net loss of
$44.808 million, or $0.64 per share, for the nine months ended September 30,
2002. The increase in net loss, and per share net loss to common shareholders,
was primarily due to expenses 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
At September 30, 2003, the Company had cash, cash equivalents and
short-term investments totaling $87.4 million compared to $113.7 million at
December 31, 2002.
As reflected in Note 4 to the condensed consolidated financial statements,
contingent upon the achievement of certain research and development milestones,
the Company could still receive, pursuant to the Collaborative Agreement (Note
4), up to an additional $280.0 million in cash and up to $65.0 million in
convertible note proceeds. In March 2003, Genta and Aventis negotiated a line of
credit (Note 9) for an amount up to $40.0 million, which terminates with respect
to additional borrowings on the earlier to occur of FDA approval of
Genasense(TM) or December 31, 2004. Loans under the Aventis Line of Credit (Note
9) are subject to repayment six months after termination. As of November 14,
2003, up to $15.0 million remained available under the Aventis Line of Credit
(Note 9). FDA approval of Genasense(TM) would trigger a milestone payment from
Aventis of $75.0 million. Management believes that at the current rate of
spending, primarily in support of on-going and anticipated clinical trials, and
after considering expense reimbursement and the line of credit provided by
Aventis, we should have sufficient cash funds to maintain our present operations
to the end of 2004.
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 Collaborative
Agreement (Note 4). 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. Any 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.
18
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 financings 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 condensed 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
As required by Rules 13a-15(b) or 15d-15(b), Genta's Chief Executive
Officer and Chief Financial Officer conducted an evaluation as of the end of the
period covered by this report of the effectiveness of the Company's "disclosure
controls and procedures" (as defined in Exchange Act Rule 13a-15(e) or
15d-15(e)). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
As required by Rules 13a-15(d) or 15d-15(d), Genta's Chief Executive
Officer and Chief Financial Officer also conducted an evaluation of the
Company's internal control over financial reporting to determine whether any
changes occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. Based on that evaluation, there has been no
such change during the quarter covered by this report.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
During the quarter ended September 30, 2003, the Company reversed the accrued
net liability of $0.212 million related to this matter, as management no longer
believes that a loss is probable.
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 7) the Company received from Aventis pursuant to the Collaborative
Agreement (Note 4). In October 2003, the Company reached a settlement with UPenn
with respect to this claim. Under the terms of the settlement agreement, in
exchange for an agreement by UPenn to forego any and all claims in the future to
any portion of any milestone and other payments (other than royalty payments on
sales) made to Genta pursuant to the Collaborative Agreement (Note 4), Genta has
agreed to make the following payments to UPenn: (i) $0.750 million on November
5, 2003, (ii) $0.250 million on February 2, 2004, (iii) $1.5 million upon the
first NDA or foreign equivalent approval of Genasense(TM), and (iv) provided
that the first NDA or foreign equivalent approval of Genasense(TM) has been
received by Genta, $0.750 million on the earlier of (a) the second NDA or
foreign equivalent approval of Genasense(TM) or (b) December 30, 2004. As of
September 30, 2003, the Company has reserved for the royalty payments that are
due to UPenn per the settlement agreement.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1.a Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3(i).1 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, Commission File No. 0-19635)
3.1.b Certificate of Designations of Series D Convertible
Preferred Stock of the Company (incorporated by
reference to Exhibit 3(i) to the Company's Current
Report on Form 8-K filed on February 28, 1997,
Commission File No. 0-19635)
3.1.c Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by
reference to Exhibit 3(i).3 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1999, Commission File No. 0-19635)
3.1.d Amended Certificate of Designations of Series D
Convertible Preferred Stock of the Company
(incorporated by reference to Exhibit 3(i).4 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1999, Commission File No. 0-19635)
20
3.1.e Certificate of Increase of Series D Convertible Preferred
Stock of the Company (incorporated by reference to
Exhibit 3(i).5 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999, Commission
File No. 0-19635)
3.1.f Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by
reference to Exhibit 3(i).4 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1998, Commission File No. 0-19635)
3.1.g Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by
reference to Exhibit 3(i).3 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1998, Commission File No. 0-19635)
3.1.h Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by
reference to Exhibit 3(i).8 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1999, Commission File No. 0-19635)
3.1.i Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by
reference to Exhibit 3.1.i to the Company's
Registration Statement on Form S-1 filed on November
4, 2003, Reg. No. 333-110238)
3.1.j Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by
reference to Exhibit 3.1.j to the Company's
Registration Statement on Form S-1 filed on November
4, 2003, Reg. No. 333-110238)
3.2 Amended and Restated Bylaws of the Company (incorporated
by reference to Exhibit 3(ii).1 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1998, Commission File No. 0-19635)
31.1 Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On August 18, 2003, the Company filed a Current Report on Form 8-K
under Item 5 disclosing a press release issued on August 14, 2003,
regarding the Company's agreement to acquire Salus Therapeutics, Inc. On
November 4, 2003, the Company filed a Current Report on Form 8-K /A to
amend its Form 8-K Report dated August 14, 2003, to provide financial
statements and pro forma financial information of business acquired,
regarding the Company's acquisition of Salus Therapeutics, Inc.
On September 15, 2003, the Company filed a Current Report on Form
8-K under Item 5 disclosing a press release issued on September 10, 2003,
regarding the Company's results from their Phase 3 clinical study of
Genasense(TM) plus chemotherapy in patients with malignant melanoma and
the submission of the first portion of the NDA to the FDA for
Genasense(TM) in this indication.
On September 18, 2003, the Company filed a Current Report on Form
8-K under Item 5 disclosing a press release issued on September 18, 2003,
regarding the Company's approval from the FDA to market Ganite(TM) for the
treatment of cancer-related hypercalcemia that is resistant to hydration
and the initiation of an assistance program to facilitate patient access
to Ganite(TM) treatment.
21
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
Corporate Secretary
Date: November 14, 2003
22
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
3.1.a Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3(i).1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, Commission
File No. 0-19635)
3.1.b Certificate of Designations of Series D Convertible Preferred Stock
of the Company (incorporated by reference to Exhibit 3(i) to
the Company's Current Report on Form 8-K filed on February 28,
1997, Commission File No. 0-19635)
3.1.c Certificate of Amendment of Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 3(i).3 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, Commission File No. 0-19635)
3.1.d Amended Certificate of Designations of Series D Convertible
Preferred Stock of the Company (incorporated by reference to
Exhibit 3(i).4 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, Commission File No. 0-19635)
3.1.e Certificate of Increase of Series D Convertible Preferred Stock of
the Company (incorporated by reference to Exhibit 3(i).5 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, Commission File No. 0-19635)
3.1.f Certificate of Amendment of Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 3(i).4 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, Commission File No. 0-19635)
3.1.g Certificate of Amendment of Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 3(i).3 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, Commission File No. 0-19635)
3.1.h Certificate of Amendment of Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 3(i).8 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, Commission File No. 0-19635)
3.1.i Certificate of Amendment of Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 3.1.i to
the Company's Registration Statement on Form S-1 filed on
November 4, 2003, Reg. No. 333-110238)
3.1.j Certificate of Amendment of Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 3.1.j to
the Company's Registration Statement on Form S-1 filed on
November 4, 2003, Reg. No. 333-110238)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3(ii).1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, Commission
File No. 0-19635)
31.1 Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
23