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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, 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 November 1, 2002, the registrant had 73,148,133
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, 2002
(Unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
CERTIFICATIONS 22
2
Genta Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
($ in thousands, except per share data) 2002 2001
---------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 126,757 $ 38,098
Short-term investments ................................................... -- 15,988
Accounts receivable (Note 3) ............................................. 6,914 36
Notes receivable ......................................................... 200 200
Prepaid expenses (Note 4) ................................................ 3,013 707
-----------------------
Total current assets ........................................................ 136,884 55,029
Property and equipment, net ................................................. 2,986 1,848
Intangibles, net ............................................................ 1,584 2,120
Other assets ................................................................ 1,773 1,633
-----------------------
Total assets ................................................................ $ 143,227 $ 60,630
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 2,251 $ 9,571
Accrued expenses ......................................................... 7,465 2,309
Deferred revenues, current portion ....................................... 5,237 --
Other current liabilities ................................................ 212 440
-----------------------
Total current liabilities ................................................... 15,165 12,320
Deferred revenues (Note 6) ............................................... 42,664 --
Convertible debt (Note 7) ................................................ 10,000 --
-----------------------
Total liabilities ........................................................... 67,829 12,320
-----------------------
Commitments and contingencies ............................................
Stockholders' equity:
Preferred stock, Series A convertible preferred stock, $.001
par value; 5,000,000 shares authorized, 260,500 and 261,000 shares
issued and outstanding at September 30, 2002 and December 31, 2001,
respectively, liquidation value of $13,025 and $13,050, respectively ... -- --
Common stock, $.001 par value; 120,000,000 shares authorized,
74,540,833 and 66,000,210 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively ................ 74 66
Additional paid-in capital ............................................... 321,470 248,685
Accumulated deficit ...................................................... (243,470) (198,662)
Deferred compensation .................................................... (997) (1,713)
Accumulated other comprehensive loss ..................................... -- (66)
-----------------------
77,077 48,310
Less cost of treasury stock; 249,200 shares at September 30, 2002 (Note 8) (1,679) --
-----------------------
Total stockholders' equity .................................................. 75,398 48,310
-----------------------
Total liabilities and stockholders' equity .................................. $ 143,227 $ 60,630
=======================
See accompanying notes to condensed consolidated financial statements.
3
Genta Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except per share data) 2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Licensing fees (Note 6) ......................... $ 282 $ 22 $ 465 $ 92
Development funding (Note 6) .................... 1,043 -- 1,739 --
Royalties ....................................... -- 1 36 13
-------- -------- -------- --------
1,325 23 2,240 105
-------- -------- -------- --------
Costs and expenses:
Research and development, net (Note 5) ......... 13,044 9,150 32,574 23,786
General and administrative, net (Note 5) ........ 3,602 2,060 14,651 5,582
Promega settlement (Note 11) .................... -- -- -- 1,000
Compensation expense related to stock options ... 239 186 716 580
-------- -------- -------- --------
16,885 11,396 47,941 30,948
-------- -------- -------- --------
Loss from operations ............................... (15,560) (11,373) (45,701) (30,843)
Other income (expense):
Equity in net income of joint venture .............. 33 -- 33 --
Other income, principally net interest income ...... 557 953 1,102 2,061
Interest expense ................................... (142) -- (242) --
-------- -------- -------- --------
448 953 893 2,061
-------- -------- -------- --------
Net loss applicable to common shares ............... $(15,112) $(10,420) $(44,808) $(28,782)
======== ======== ======== ========
Net loss per common share .......................... $ (0.21) $ (0.19) $ (0.64) $ (0.54)
======== ======== ======== ========
Shares used in computing net loss per common share . 73,410 54,735 69,732 52,988
======== ======== ======== ========
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) 2002 2001
--------- ---------
Operating activities
Net loss .......................................................... $ (44,808) $ (28,782)
Items reflected in net loss not requiring cash:
Depreciation and amortization .................................. 1,180 802
Loss on disposal of fixed assets ............................... 10 15
Loss on Promega settlement (Note 11) ........................... -- 1,000
Compensation expense related to stock options .................. 716 580
Changes in operating assets and liabilities:
Accounts and notes receivable (Note 3) ................... (6,878) (601)
Prepaids and other assets ................................ (2,446) (333)
Accounts payable, accrued and other current liabilities .. (2,392) 4,457
Deferred revenue (Note 6) ................................ 47,901 --
--------- ---------
Net cash used in operating activities ............................. (6,717) (22,862)
--------- ---------
Investing activities
Purchase of available-for-sale short-term investments ........... -- (11,304)
Maturities and sales of available-for-sale short-term investments 16,055 26,792
Purchase of property and equipment .............................. (1,793) (690)
--------- ---------
Net cash provided by investing activities ......................... 14,262 14,798
--------- ---------
Financing activities
Issuance of common stock from private placement, net ............ 71,035 --
Issuance of convertible debt (Note 7) ........................... 10,000 --
Purchase of treasury stock (Note 8) ............................. (1,679) --
Issuance of common stock upon exercise of warrants and options .. 1,758 7,422
--------- ---------
Net cash provided by financing activities ......................... 81,114 7,422
--------- ---------
Increase (decrease) in cash and cash equivalents .................. 88,659 (642)
Cash and cash equivalents at beginning of period .................. 38,098 19,025
--------- ---------
Cash and cash equivalents at end of period ........................ $ 126,757 $ 18,383
========= =========
See accompanying notes to condensed consolidated financial statements.
5
Genta Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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.
Results for the interim periods are not necessarily indicative of results
for the full years. 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 U.S.
NDA-directed development costs incurred by either Genta or Aventis, subsequent
to the execution of the Collaborative Agreement, and 100% of all other
development, marketing, and sales costs incurred within the U.S. and elsewhere
(Note 5). 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.
Consistent with SAB 101, initial and future funding of ongoing development
received from Aventis after the achievement of certain research and development
milestones (Note 5) will be recognized over the estimated useful life of the
first-to-expire related patent of 115 months.
Research and Development
Research and development costs are expensed as incurred, including raw
material costs required to manufacture products for clinical trials.
Reimbursements for applicable Genasense(TM)-related costs, under the
Collaborative Agreement, 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 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.
6
Net Loss Per Common Share
The calculation of basic and diluted loss per common share is identical
for the three and nine-month periods ended September 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 October 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 147 ("SFAS 147"), "Acquisitions of
Certain Financial Institutions". The provisions of SFAS 147 do not apply to the
Company.
In June 2002, the FASB issued Statement of Financial Accounting Standards
146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities". The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not expect SFAS 146 to have a material effect on
the Company's financial position or results of operations.
In April 2002, the 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". 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 are 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
There were no corporate debt securities held as short-term investments at
September 30, 2002.
(3) Accounts Receivable
Included in accounts receivable and netted against operating expenses in
the condensed consolidated statements of operations at September 30, 2002, is
$6.725 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 for the
7
three month period ended September 30, 2002. Information with respect to this
cost reimbursement is presented below (in thousands):
Reimbursement to Genta:
Third-party costs ........................ $ 4,152
Drug supply costs ........................ 2,061
FTE's .................................... 1,220
Adjustment for June 30, 2002 billing ..... (708)
-------
Amount due Genta $ 6,725
=======
The amount included in accounts receivable at June 30, 2002, of $7.172
million, was paid in full by Aventis in August 2002, as required under the terms
of the Collaborative Agreement (Note 5), and $0.708 million has been deducted
from the September 30, 2002 billing amount as an adjustment to the June 30, 2002
billing.
(4) Prepaid Expenses
Included in prepaid expenses at September 30, 2002 are deposits remaining
of $2.6 million in connection with purchase commitments for clinical drug
supplies of Genasense(TM), which are scheduled for delivery during the fourth
quarter of 2002. Pursuant to the Collaborative Agreement (Note 5), Aventis has
agreed to reimburse the Company for at least 75% of these deposits after 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 Institutes of Health ("NIH") based on
net worldwide sales. Furthermore, under the Collaborative Agreement, Aventis
will pay 75% of U.S. NDA-directed development costs incurred by either Genta or
Aventis subsequent to the execution of the Collaborative Agreement, and 100% of
all other development, marketing, and sales costs incurred within the U.S. and
elsewhere. An analysis of expenses reimbursed under the Collaborative Agreement
follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Research and development
expenses, gross .................. $ 19,608 $ 9,150 $ 45,886 $ 23,786
Less expense reimbursement ....... (6,564) -- (13,312) --
-------- -------- -------- --------
Research and development
expenses, net .................... $ 13,044 $ 9,150 $ 32,574 $ 23,786
======== ======== ======== ========
General and administrative, gross $ 3,763 $ 2,060 $ 15,236 $ 5,582
Less expense reimbursement ....... (161) -- (585) --
-------- -------- -------- --------
General and administrative, net .. $ 3,602 $ 2,060 $ 14,651 $ 5,582
======== ======== ======== ========
8
As of September 30, 2002, the Company has received a total of $131.9
million in initial and near-term funding, which included a $10.0 million
licensing fee and $40.0 million in development funding (Note 6), $10.0 million
in convertible debt proceeds (Note 7), and $71.9 million pursuant to an
at-market equity investment in the Company's common stock priced 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 research and
development 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 is entitled to any portion of future research and development
milestone payments that Genta may receive.
(6) Deferred Revenues
As of September 30, 2002, the Company had recorded $47.9 million in
deferred revenues relating to the initial $10.0 million licensing fee and $40.0
million development funding received from Aventis under the Collaborative
Agreement (Note 5), of which $5.2 million is included in current liabilities and
$42.7 million is classified as long-term deferred revenues, which will be
recognized over the estimated useful life of the first-to-expire related patent
of 115 months, 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 first-to-expire related patent.
(7) Convertible Debt
At September 30, 2002, the Company had $10.0 million in convertible debt
that was issued in connection with the Collaborative Agreement (Note 5). The
Company received $10 million in debt proceeds from Aventis, and issued a $10.0
million convertible promissory note to Aventis ("Aventis Note"). Interest
accrues at the rate of 5.63% per annum until April 26, 2009 (the "Maturity
Date") and compounds annually on each anniversary date of the Aventis Note
through the Maturity Date. The Company may redeem the Aventis Note for cash in
whole or in part (together with any accrued and unpaid interest with respect to
such principal amount) in amounts of not less than $0.5 million (and in $0.1
million increments thereafter). In addition, the Company may convert the Aventis
Note on or prior to the Maturity Date in whole or in part (together with any
accrued and unpaid interest with respect to such principal amount) in amounts of
not less than $5.0 million (and in $1.0 million increments thereafter), into
fully paid and non-assessable shares of common stock (calculated as to the
nearest 1/1000 of a share). As of any date, the number of shares of common stock
into which the Aventis Note may be converted shall be determined by a formula
based on the then market value of the common stock (the "Conversion Price"),
subject to a minimum Conversion Price of $8.00 per share.
(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 September 30, 2002, the Company had
repurchased 249,200 shares of common stock in open-market transactions. Details
for the three-month period ended September 30, 2002 follow:
Average price per
Shares Repurchased share
------------------ -----------------
July 2002 129,300 $ 6.9582
September 2002 110,000 6.4132
------------------ -----------------
239,300 $ 6.7077
================== =================
In October 2002, the Company purchased an additional 143,500 shares at an
aggregate cost of $0.826 million, or $5.7584 per share. Since initiating the
stock repurchase program, the Company has repurchased a total of 392,700 shares
at an average cost of $6.3807 per share.
9
(9) Comprehensive Loss
An analysis of comprehensive loss is presented below (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net loss ......................... $(15,112) $(10,420) $(44,808) $(28,782)
Unrealized (loss) gain on market
value change on available-for-sale
short-term investments ........... 6 (139) 66 (48)
-------- -------- -------- --------
Total comprehensive loss ......... $(15,106) $(10,559) $(44,742) $(28,830)
======== ======== ======== ========
(10) Supplemental Disclosure of Cash Flows Information and Non-cash Investing
and Financing Activities
(In thousands) Nine Months Ended September 30,
-------------------------------
2002 2001
----------- -----------
Market value change of available-for-sale equity securities .... $ -- $ (3)
Market value change of available-for-sale short-term investments 66 (45)
Common stock issued in payment of hiring bonus ................. -- 50
No interest or income taxes were paid for the nine months ended September
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.
During May 2000, Promega notified Genta of 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.
10
(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 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 of the
completion of site investigation and remedial action for these sites and that no
further action related to this case is required.
JBL was notified 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 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 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$0.808 million at September 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$0.628 million at September 30,
2002) and subsequently notified Genta 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
11
receivables aggregating FF2.5 million (or approximately US$0.374 million at
September 30, 2002). On October 8, 2001, the Commercial Court of Marseilles
ordered Genta to pay an amount of FF1.9 million (or approximately US$0.284
million at September 30, 2002). The Company negotiated with Marseille
Amenagement and agreed to settle this matter for ECU0.140 million or $0.138
million, which was paid in September 2002. The settlement amount of $0.138
million was recorded as a reduction to the Company's accrued net liability.
At September 30, 2002, the Company has accrued a net liability of $0.212
million related to the liquidated subsidiary and related matters, which was
reduced by the settlement discussed above. Management believes that this net
amount is still adequate to provide for these contingencies.
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 6) the Company received from Aventis pursuant to the Collaborative
Agreement. The Company has disputed this claim and has filed a petition for
binding arbitration for this matter, as provided in the original licensing
agreement between the Company and UPenn. At the current time the Company cannot
reasonably estimate the outcome of this claim; however, the Company does not
believe that this claim will have a material adverse impact on the Company's
financial results and liquidity.
Purchase Commitments
At September 30, 2002, the Company was obligated for $27.3 million under
firm commitments for drug substance purchases during 2002, of which deposits in
an aggregate of $5.5 million have already been paid and $2.6 million of these
deposits still remain to be applied to future drug substance purchase invoices
(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 after the drug is shipped to the clinical sites. In
addition, the Company has committed up to $5.0 million of advance financing to
the drug substance manufacturer, for facility expansion, which has not yet been
paid, and if paid, would be recovered with interest through future payments
determined as a function of drug substance purchases to be made by Genta in the
future.
12
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 September 30, 2002, the Company has incurred a cumulative net loss
of approximately $243.5 million. The Company has experienced significant
quarterly fluctuations in operating results and it expects that these
fluctuations in revenues, expenses and losses will continue.
Certain Factors Affecting Forward-Looking Statements - Safe Harbor Statement
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 of new products, receipt of necessary
regulatory approvals, and acceptance of new products; the successful application
of the Company's technology to produce new products and competitive techniques;
the obtaining of proprietary protection for any such technology and products;
the impact of competitive products and pricing and reimbursement policies,
changing market conditions; and those other factors set forth in "Certain Risks
and Uncertainties Related to the Company's Business" in the Company's most
recent Form 10-K. 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.
Summary Statement of Cash Flows for the three months ended September 30, 2002 ($
thousands)
Operating activities:
Net loss .......................................................... $ (15,112)
Items reflected in net loss not requiring cash:
Depreciation and amortization .................................. 412
Compensation expense related to stock options .................. 239
Changes in operating assets and liabilities ....................... (95)
---------
Net cash used in operating activities ............................. (14,556)
---------
Investing activities:
Maturities and sales of available-for-sale short-term investments 489
Purchase of property and equipment .............................. (614)
---------
Net cash used in investing activities ............................. (125)
---------
Financing activities:
Purchase of treasury stock ...................................... (1,605)
---------
Net cash used in financing activities ............................. (1,605)
---------
Decrease in cash and cash equivalents ............................. (16,286)
Cash and cash equivalents at June 30, 2002 ........................ 143,043
---------
Cash and cash equivalents at September 30, 2002 ................... $ 126,757
=========
13
Results of Operations for the three months ended September 30, 2002 and 2001
Summary Operating Results
($ thousands) For the three months ended September 30,
Increase (Decrease)
----------------------
2002 $ % 2001
-------- -------- -------- --------
Revenues:
Licensing fees ...................... $ 282 $ 260 1,182% $ 22
Development funding ................. 1,043 1,043 N/A --
Royalties ........................... -- (1) (100)% 1
-------- -------- -------- --------
1,325 1,302 23
Costs and expenses:
Research and development ............ 19,608 10,458 114% 9,150
General and administrative .......... 3,763 1,703 83% 2,060
Compensation expense related to stock
options ................................. 239 53 28% 186
Less: Expense reimbursement ......... 6,725 6,725 N/A --
-------- -------- -------- --------
16,885 5,489 48% 11,396
-------- -------- -------- --------
Loss from operations .................... (15,560) 4,187 37% (11,373)
Other income, principally net interest
income ............................... 590 (363) (38)% 953
Less: Interest expense .................. 142 142 N/A --
======== ======== ======== ========
Net loss applicable to common shares .... $(15,112) $ 4,692 45% $(10,420)
======== ======== ======== ========
Revenues. Licensing fees and development funding for the three months
ended September 30, 2002 increased $0.260 million and $1.043 million,
respectively, over the comparable period in 2001. These increases in 2002
reflect the amortization of the up-front licensing fee and development funding
received from Aventis (Note 5), which are being recognized over the estimated
useful life of the first-to-expire related patent of 115 months.
Research and development expenses. Research and development expenses for
the three months ended September 30, 2002 increased $10.458 million or 114% over
the comparable period in 2001. The increase in research and development expenses
is primarily attributable to investigator, monitor fees and drug supply costs
for current Genasense(TM) on-going clinical studies, FDA required pre-clinical
studies for Genasense(TM), development costs relating to Ganite(R) and other
compounds, and increased personnel costs. Of the $19.608 million in research and
development expenses for the three months ended September 30, 2002, $6.183
million and $0.878 million were reimbursable at 75% and 100%, respectively,
pursuant to the Collaborative Agreement (Note 5), of which the net amount of
$6.564 million after adjustment for June 30, 2002 billing, will be reimbursed.
Certain of the research and development expenses relating to drug manufacturing
not currently reimbursable, will be at least 75% reimbursed after the drug is
shipped to the clinical sites.
General and administrative expenses. General and administrative expenses
for the three months ended September 30, 2002 increased $1.703 million or 83%
over the comparable period in 2001. The increase is primarily related to legal
fees incurred in connection with the Collaborative Agreement (Note 5), personnel
costs and increased marketing-related spending. Of the $3.763 million in general
and administrative expenses for the three months ended September 30, 2002, sales
and marketing related expenses of $0.372 million were reimbursable at 100%
pursuant to the Collaborative Agreement, of which the net amount of
$0.161million after adjustment for June 30, 2002 billing, will be reimbursed.
14
Expense reimbursement. Expense reimbursement for the three months ended
September 30, 2002 relate to various third-party, FTE and drug supply costs that
Aventis is required to reimburse under the Collaborative Agreement (Note 3), as
follows (in thousands):
Third-party costs ........................ $ 4,152
Drug supply costs ........................ 2,061
FTE's .................................... 1,220
Adjustment for June 30, 2002 billing ..... (708)
-------
Amount due Genta ......................... $ 6,725
=======
Other Income. Net other income for the three months ended September 30,
2002 decreased $0.363 million or 38% 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 yet 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). Included in other income for the three months ended
September 30, 2002 was $0.033 million, which represents the equity in net income
of joint venture for the period ending June 30, 2002, after deducting Genta's
share of administrative expenses of $0.033 million.
Net Loss. Genta incurred a net loss of $15.112 million, or $0.21 per
share, for the three months ended September 30, 2002, compared with a net loss
of $10.420 million, or $0.19 per share, for the three months ended September 30,
2001. The increase in net loss, and per share net loss to common shareholders,
was due to increased expenses primarily related to third-party costs and drug
supply costs for current Genasense(TM) on-going clinical studies, FDA required
pre-clinical studies for Genasense(TM), legal fees incurred in connection with
the Collaborative Agreement (Note 5), personnel costs and increased
marketing-related spending.
Results of Operations for the nine months ended September 30, 2002 and 2001
Summary Operating Results
($ thousands) For the nine months ended September 30,
Increase (Decrease)
----------------------
2002 $ % 2001
-------- -------- -------- --------
Revenues:
Licensing fees ...................... $ 465 $ 373 405% $ 92
Development funding ................. 1,739 1,739 N/A --
Royalties ........................... 36 23 177% 13
-------- -------- -------- --------
2,240 2,135 105
Costs and expenses:
Research and development ............ 45,886 22,100 93% 23,786
General and administrative .......... 15,236 9,654 173% 5,582
Promega settlement .................. -- (1,000) (100)% 1,000
Compensation expense related to stock
options ................................. 716 136 23% 580
Less: Expense reimbursement ......... 13,897 13,897 N/A --
-------- -------- -------- --------
47,941 16,993 55% 30,948
-------- -------- -------- --------
Loss from operations .................... (45,701) 14,858 48% (30,843)
Other income, principally net interest
income ............................... 1,135 (926) (45)% 2,061
Less: Interest expense .................. 242 242 N/A --
-------- -------- -------- --------
Net loss applicable to common shares .... $(44,808) $ 16,026 56% $(28,782)
======== ======== ======== ========
15
Revenues. Licensing fees and development funding for the nine months ended
September 30, 2002 increased $.373 million and $1.739 million, respectively,
over the comparable period in 2001. These increases in 2002 reflect the
amortization of the up-front licensing fee and development funding received from
Aventis (Note 5), which are being recognized over the estimated useful life of
the first-to-expire related patent of 115 months.
Research and development expenses. Research and development expenses for
the nine months ended September 30, 2002 increased $22.100 million or 93% over
the comparable period in 2001. The increase in research and development expenses
is primarily attributable to investigator, monitor fees and drug supply costs
for current Genasense(TM) on-going clinical studies, FDA required pre-clinical
studies for Genasense(TM), development costs relating to Ganite(R) and other
compounds, and increased personnel costs. Of the $45.886 million in research and
development expenses for the nine months ended September 30, 2002, only those
expenses incurred subsequent to the Collaborative Agreement (Note 5) were
subject to reimbursement, of which $11.971 million and $1.342 million were
reimbursable at 75% and 100%, respectively. Certain of the research and
development expenses relating to drug manufacturing not currently reimbursable
and incurred subsequent to the Collaborative Agreement (Note 5), will be at
least 75% reimbursed after the drug is shipped to the clinical sites.
General and administrative expenses. General and administrative expenses
for the nine months ended September 30, 2002 increased $9.654 million or 173%
over the comparable period in 2001. The increase is primarily related to
financial advisory services and sublicense fees relating to and legal fees
incurred in connection with the Collaborative Agreement (Note 5), personnel
costs and increased marketing-related spending. Of the $15.236 million in
general and administrative expenses for the nine months ended September 30,
2002, only those expenses subsequent to the Collaborative Agreement were subject
to reimbursement, of which sales and marketing related expenses of $0.584
million were reimbursable at 100%.
Expense reimbursement. Expense reimbursement for the nine months ended
September 30, 2002 relate to various third-party, FTE and drug supply costs that
Aventis is required to reimburse under the Collaborative Agreement (Note 3), as
follows (in thousands):
Third-party costs ...................... $ 7,232
Drug supply costs ...................... 4,624
FTE's .................................. 2,041
-------
Amount billed by Genta ................. $13,897
=======
Other Income. Net other income for the nine months ended September 30,
2002 decreased $0.926 million or 45% 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 yet 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). Included in other income for the nine months ended
September 30, 2002 was $0.033 million, which represents the equity in net income
of joint venture for the period ending June 30, 2002, after deducting Genta's
share of administrative expenses of $0.033 million.
Net Loss. Genta incurred a net loss of $44.808 million, or $0.64 per
share, for the nine months ended September 30, 2002, compared with a net loss of
$28.782 million, or $0.54 per share, for the nine months ended September 30,
2001. The increase in net loss, and per share net loss to common shareholders,
was due to increased expenses that were primarily related to third-party costs
and drug supply costs for current Genasense(TM) on-going clinical studies, FDA
required pre-clinical studies for Genasense(TM), financial advisory services and
sublicense fees relating to and legal fees incurred in connection with the
Collaborative Agreement (Note 5), personnel costs and increased
marketing-related spending.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations primarily
from private placements and public offerings of its equity securities, and more
recently from licensing its products and intellectual property. Cash
16
received from these equity offerings totaled approximately $279.7 million
through September 30, 2002, including net proceeds of $71.0 million received in
2002 and $32.2 million received in 2001. At September 30, 2002, the Company had
cash, cash equivalents and short-term investments totaling $126.757 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, at a rental cost of $1.764
million per year. The Company has retained significant existing improvements to
that space, including furniture and other furnishings. A security deposit of
approximately $1.4 million will be paid in January 2003, and rent payments for
portions of this new space will begin as the Company occupies each portion of
the space. All the Company's other leases for office space have been amended so
that the expiration dates coincide with the new lease. At the end of the initial
lease term, the Company has the option to renew these leases for five more 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 investment banking fees of $0.899 million and
related expenses.
As reflected in Note 5 to the condensed consolidated financial statements,
in April 2002, Genta entered into a Collaborative Agreement with Aventis. Under
the terms of the Collaborative Agreement, Genta 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, the Company is entitled to
royalties on worldwide sales of Genasense(TM) from which the Company is required
to pay third-party pass through royalties to UPenn and the NIH based on net
worldwide sales of Genasense(TM). Furthermore, under the Collaborative
Agreement, Aventis will pay 75% of U.S. NDA-directed development costs incurred
by either Genta or Aventis subsequent to the execution of the Collaborative
Agreement, and 100% of all other development, marketing, and sales costs
incurred within the U.S. and elsewhere. Genta has received a total of $131.9
million in initial and near-term funding, which included a $10.0 million
licensing fee and $40.0 million in development funding (Note 6), $10.0 million
in convertible debt proceeds (Note 7), and $71.9 million pursuant to an
at-market equity investment in the Company's common stock.
Contingent upon the achievement of certain research and development
milestones, and included in the Collaborative Agreement's collective amount of
$476.9 million, the Company could receive up to $280.0 million in cash, and up
to $65.0 million in convertible note proceeds.
The Company's principal expenditures relate to its research and
development activities, which include the Company's on-going and future clinical
trials. The Company expects these expenditures to continue. The Company expects
increased total expenditures, prior to expense reimbursement, for clinical
trials and drug supply related to Genasense(TM) as a result of the Collaboration
Agreement with Aventis. In addition, expenditures associated with other products
under development by the Company may increase as research and development
activities become more focused and as other clinical trials are initiated.
The Company anticipates seeking additional product development
opportunities from external sources. Such acquisitions may consume cash reserves
or require additional cash or equity. The Company's working capital and
additional funding requirements will depend upon numerous factors, including:
(i) the progress of the Company's research and development programs; (ii) the
timing and results of pre-clinical testing and clinical trials; (iii) the level
of resources that the Company devotes to sales and marketing capabilities; (iv)
technological advances; (v) the activities of competitors; and (vi) the ability
of the Company to establish and maintain collaborative arrangements with others
to fund certain research and development efforts, to conduct clinical trials, to
obtain regulatory approvals and, if such approvals are obtained, to manufacture
and market products.
If the Company successfully secures sufficient levels of collaborative
revenues and other sources of
17
financing, it expects to use such revenues and the proceeds of any such
financing to continue and expand its ongoing research and development
activities, preclinical and clinical testing activities, manufacturing and/or
market introduction of potential products and expansion of its administrative
activities.
Recent Accounting Pronouncements
See Note 1 to the 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
Explanation of disclosure controls and procedures. Genta's Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the
Company's "disclosure controls and procedures" (as defined in Exchange Act Rules
13a-14(c) and 15-d and 14(c)) as of a date (the "Evaluation Date") within 90
days of the filing of this quarterly report, have concluded that as of the
Evaluation Date, our disclosure controls and procedures were adequate and
designed to ensure that material information relating to the Company would be
made known to them by others within the Company.
Changes in internal controls. There were no significant changes in our
internal controls or, to our knowledge, in other factors that could
significantly affect the Company's disclosure controls and procedures subsequent
to the Evaluation Date.
18
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 of the
completion of site investigation and remedial action for these sites and that no
further action related to this case is required.
JBL was notified 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 paid
the $0.033 million as an offer to settle this matter. T here can be no
assurance, however, that the EPA will not reject our settlement offer 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$0.808 million at September 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$0.628 million at September 30,
2002) and subsequently notified Genta 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
19
receivables aggregating FF2.5 million (or approximately US$0.374 million at
September 30, 2002). On October 8, 2001, the Commercial Court of Marseilles
ordered Genta to pay an amount of FF1.9 million (or approximately US$0.284
million at September 30, 2002). The Company negotiated with Marseille
Amenagement and agreed to settle this matter for ECU0.140 million or $0.138
million, which was paid in September 2002. The settlement amount of $0.138
million was recorded as a reduction to the Company's accrued net liability.
At September 30, 2002, the Company has accrued a net liability of $0.212,
million related to the liquidated subsidiary and related matters, which was
reduced by the settlement discussed above. Management believes that this net
amount is still adequate to provide for these contingencies.
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 6) the Company received from Aventis pursuant to the Collaborative
Agreement. The Company has disputed this claim and has filed a petition for
binding arbitration for this matter, as provided in the original licensing
agreement between the Company and UPenn. At the current time the Company cannot
reasonably estimate the outcome of this claim; however, the Company does not
believe that this claim will have a material adverse impact on the Company's
financial results and liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certification by the Chief Executive Officer Relating to
a Periodic Report Containing Financial Statements
99.2 Certification by the Chief Financial Officer Relating to
a Periodic Report Containing Financial Statements
(b) Reports on Form 8-K.
None.
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/ WILLIAM P. KEANE
---------------------------------------
Name: William P. Keane
Title: Vice President, Chief Financial Officer
and Principal Accounting Officer
Date: November 13, 2002
21
I, Raymond P. Warrell, Jr., M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Genta Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
/s/ Raymond P. Warrell, Jr., M.D.
------------------------------------
Name: Raymond P. Warrell, Jr., M.D.
Title: Chief Executive Officer
22
I, William P. Keane, certify that:
7. I have reviewed this quarterly report on Form 10-Q of Genta Incorporated;
8. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
9. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
10. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
11. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
12. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
/s/ WILLIAM P. KEANE
------------------------------
Name: William P. Keane
Title: Chief Financial Officer
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