UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





x   QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended September 30, 2009





OR


 ̈     TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For the
transition period from _______ to _______





Commission
File Number 0-19635





GENTA
INCORPORATED


(Exact
name of Registrant as specified in its charter)





Delaware
                33-0326866(State
      or other jurisdiction of
                (I.R.S.
      Employerincorporation
      or organization)
                Identification
      Number)200
      Connell DriveBerkeley
      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
               ̈





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).





Yes
               ̈
              
              No
               ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):


Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer (Do not check if a smaller reporting company)  ̈
              Smaller
      reporting company x





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).


Yes
                    o
                    
                    No
                    x





As of
November 6, 2009, the registrant had 181,676,924 shares of common stock
outstanding.










Genta
Incorporated


INDEX
TO FORM 10-Q





PagePART
      I.
                                FINANCIAL
      INFORMATIONItem
      1.
                                Consolidated
      Financial Statements:Consolidated
      Balance Sheets at September 30, 2009 (unaudited)and
      December 31, 2008
                                3Consolidated
      Statements of Operations for the Three and Nine MonthsEnded
      September 30, 2009 and 2008 (unaudited)
                                4Consolidated
      Statements of Cash Flows for the Nine MonthsEnded
      September 30, 2009 and 2008 (unaudited)
                                5Notes
      to Consolidated Financial Statements
                                6Item
      2.
                                Management's
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                                19Item
      3.
                                Quantitative
      and Qualitative Disclosures about Market Risk
                                30Item
      4T.
                                Controls
      and Procedures
                                30PART
      II.
                                OTHER
      INFORMATIONItem
      1.
                                Legal
      Proceedings
                                31Item
      1A.
                                Risk
      Factors
                                32Item
      2.
                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                46Item
      3.
                                Defaults
      Upon Senior Securities
                                46Item
      4.
                                Submission
      of Matters to a Vote of Security Holders
                                46Item
      5.
                                Other
      Information
                                46Item
      6.
                                Exhibits
                                47SIGNATURES
                                48CERTIFICATIONS


2





GENTA
INCORPORATED


CONSOLIDATED
BALANCE SHEETS





(In
thousands, except par value data)





September
      30,2009
                  
                  
                  December
      31,(unaudited)
                  
                  
                  2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  7,383
                  
                  
                  $
                  4,908Accounts
      receivable - net of allowances of $21at September 30, 2009 and $12 at
      December 31, 2008, respectively
                  
                  
                  1
                  
                  
                  
                  2Inventory
      (Note 4)
                  
                  
                  109
                  
                  
                  
                  121Prepaid
      expenses and other current assets
                  
                  
                  510
                  
                  
                  
                  973Total
      current assets
                  
                  
                  8,003
                  
                  
                  
                  6,004Property
      and equipment, net
                  
                  
                  239
                  
                  
                  
                  300Deferred
      financing costs (Note 6)
                  
                  
                  10,611
                  
                  
                  
                  6,389Total
      assets
                  
                  $
                  18,853
                  
                  
                  $
                  12,693LIABILITIES
      AND STOCKHOLDERS' EQUITY/(DEFICIT)Current
      liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  10,715
                  
                  
                  $
                  11,224Convertible
      notes due June 9, 2010, $2,186 outstanding, net of debt discount of ($888)
      (Note 6)
                  
                  
                  1,298
                  
                  
                  
                  -Total
      current liabilities
                  
                  
                  12,013
                  
                  
                  
                  11,224Long-term
      liabilities:Office
      lease settlement obligation (Note 5)
                  
                  
                  1,979
                  
                  
                  
                  1,979Convertible
      notes due June 9, 2010, $15,540 outstanding, net of debt discount of
      ($11,186) (Note 6)
                  
                  
                  -
                  
                  
                  
                  4,354Convertible
      notes due April 2, 2012, $5,375 outstanding, net of debt discount of
      ($4,347) (Note 6)
                  
                  
                  1,028
                  
                  
                  
                  -Convertible
      notes due July 7, 2011, $751 outstanding, net of debt discount of ($665)
      (Note 6)
                  
                  
                  86
                  
                  
                  
                  -Convertible
      notes due September 4, 2011, $7,000 outstanding, net of debt discount of
      ($6,747) (Note 6)
                  
                  
                  253Total
      long-term liabilities
                  
                  
                  3,346
                  
                  
                  
                  6,333Commitments
      and contingencies (Note 8)Stockholders'
      equity/(deficit):Preferred
      stock, 5,000 shares authorized:Series
      A convertible preferred stock, $.001 par value; 8 shares issued and
      outstanding, liquidation value of $385 at September 30, 2009 and December
      31, 2008, respectively
                  
                  
                  -
                  
                  
                  
                  -Series
      G participating cumulative preferred stock, $.001 par value; 0 shares
      issued and outstanding at September 30, 2009 and December 31, 2008,
      respectively
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $.001 par value; 6,000,000 and 6,000,000 shares authorized, 173,514
      and 9,734 shares issued and outstanding at September 30, 2009 and December
      31, 2008, respectively
                  
                  
                  174
                  
                  
                  
                  10Additional
      paid-in capital
                  
                  
                  1,022,026
                  
                  
                  
                  939,252Accumulated
      deficit
                  
                  
                  (1,018,706
                  )
                  
                  
                  (944,126
                  )Total
      stockholders' equity/(deficit)
                  
                  
                  3,494
                  
                  
                  
                  (4,864
                  )Total
      liabilities and stockholders' equity/(deficit)
                  
                  $
                  18,853
                  
                  
                  $
                  12,693





See
accompanying notes to consolidated financial statements.


3





GENTA
INCORPORATED


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





Three
      Months Ended
                  
                  
                  Nine
      Months EndedSeptember
      30,
                  
                  
                  September
      30,(In
      thousands, except per share data)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Product
      sales - net
                  
                  $
                  49
                  
                  
                  $
                  115
                  
                  
                  $
                  180
                  
                  
                  $
                  363Cost
      of goods sold
                  
                  
                  10
                  
                  
                  
                  26
                  
                  
                  
                  12
                  
                  
                  
                  79Gross
      margin
                  
                  
                  39
                  
                  
                  
                  89
                  
                  
                  
                  168
                  
                  
                  
                  284Operating
      expenses:Research
      and development
                  
                  
                  5,874
                  
                  
                  
                  5,255
                  
                  
                  
                  11,846
                  
                  
                  
                  16,146Selling,
      general and administrative
                  
                  
                  8,869
                  
                  
                  
                  2,308
                  
                  
                  
                  13,008
                  
                  
                  
                  8,534Settlement
      of office lease obligation (Note 5)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,307Reduction
      in liability for settlement of litigation, net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (340
                  )Total
      operating expenses
                  
                  
                  14,743
                  
                  
                  
                  7,563
                  
                  
                  
                  24,854
                  
                  
                  
                  27,647Other
      income/(expense):Interest
      income and other income/(expense), net
                  
                  
                  (12
                  )
                  
                  
                  56
                  
                  
                  
                  4
                  
                  
                  
                  188Interest
      expense
                  
                  
                  (265
                  )
                  
                  
                  (769
                  )
                  
                  
                  (841
                  )
                  
                  
                  (992
                  )Amortization
      of deferred financing costs and debt discount (Note 6)
                  
                  
                  (5,450
                  )
                  
                  
                  (3,600
                  )
                  
                  
                  (22,362
                  )
                  
                  
                  (4,441
                  )Fair
      value - conversion feature liability (Note 6)
                  
                  
                  -
                  
                  
                  
                  220,000
                  
                  
                  
                  (19,040
                  )
                  
                  
                  (500,000
                  )Fair
      value - warrant liability (Note 6)
                  
                  
                  -
                  
                  
                  
                  4,400
                  
                  
                  
                  (7,655
                  )
                  
                  
                  (2,800
                  )Total
      other income/(expense)
                  
                  
                  (5,727
                  )
                  
                  
                  220,087
                  
                  
                  
                  (49,894
                  )
                  
                  
                  (508,045
                  )Net
      (loss)/income
                  
                  $
                  (20,431
                  )
                  
                  $
                  212,613
                  
                  
                  $
                  (74,580
                  )
                  
                  $
                  (535,408
                  )Net
      (loss)/income per basic share
                  
                  $
                  (0.15
                  )
                  
                  $
                  289.23
                  
                  
                  $
                  (0.98
                  )
                  
                  $
                  (748.55
                  )Net
      (loss)/income per diluted share
                  
                  $
                  (0.15
                  )
                  
                  $
                  5.12
                  
                  
                  $
                  (0.98
                  )
                  
                  $
                  (748.55
                  )Shares
      used in computing net (loss)/income per diluted share
                  
                  
                  139,349
                  
                  
                  
                  735
                  
                  
                  
                  75,850
                  
                  
                  
                  715Shares
      used in computing net (loss)/income per basic share
                  
                  
                  139,349
                  
                  
                  
                  41,524
                  
                  
                  
                  75,850
                  
                  
                  
                  715





See
accompanying notes to consolidated financial statements.


4





GENTA
INCORPORATED


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine
      Months EndedSeptember
      30,(In
      thousands)
                
                2009
                
                
                2008Operating
      activities:Net
      loss
                
                $
                (74,580
                )
                
                $
                (535,408
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                112
                
                
                
                119Amortization
      of deferred financing costs and debt discount (Note 6)
                
                
                22,362
                
                
                
                4,441Share-based
      compensation (Note 7)
                
                
                9,624
                
                
                
                432Gain
      on maturity of marketable securities
                
                
                -
                
                
                
                (31
                )Reduction
      in liability for settlement of litigation, net (Note 5)
                
                
                -
                
                
                
                (340
                )Change
      in fair value - conversion feature liability (Note 6)
                
                
                19,040
                
                
                
                500,000Change
      in fair value - warrant liability (Note 6)
                
                
                7,655
                
                
                
                2,800Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                1
                
                
                
                (38
                )Inventory
                
                
                12
                
                
                
                80Prepaid
      expenses and other current assets
                
                
                463
                
                
                
                649Accounts
      payable and accrued expenses
                
                
                257
                
                
                
                5,317Net
      cash used in operating activities
                
                
                (15,054
                )
                
                
                (21,979
                )Investing
      activities:Maturities
      of marketable securities
                
                
                -
                
                
                
                2,000Elimination
      of restricted cash deposits
                
                
                -
                
                
                
                1,731Purchase
      of property and equipment
                
                
                (51
                )
                
                
                (11
                )Net
      cash provided by (used in) investing activities
                
                
                (51
                )
                
                
                3,720Financing
      activities:Repayments
      of note payable
                
                
                -
                
                
                
                (512
                )February
      2008 issuance of common stock, net of costs of $173
                
                
                -
                
                
                
                2,877June
      2008 issuance of notes, net of costs of $1,205 (Note 6)
                
                
                -
                
                
                
                18,795April
      2009 issuance of notes and warrants, net of costs of $660 (Note
      6)
                
                
                5,290
                
                
                
                -July
      2009 issuance of common stock, notes and warrants, net of costs of $105
      (Note 6)
                
                
                2,895
                
                
                
                -September
      2009 issuance of common stock, notes and warrants, net of costs of $605
      (Note 6)
                
                
                9,395
                
                
                
                -Net
      cash provided by financing activities
                
                
                17,580
                
                
                
                21,160Increase/(decrease)
      in cash and cash equivalents
                
                
                2,475
                
                
                
                2,901Cash
      and cash equivalents at beginning of period
                
                
                4,908
                
                
                
                5,814Cash
      and cash equivalents at end of period
                
                $
                7,383
                
                
                $
                8,715





See
accompanying notes to consolidated financial statements.


5


GENTA
INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2009


(Unaudited)





1.
            Reverse
      Stock Split





At a
Special Meeting of Stockholders of Genta Incorporated (“Genta” or the “Company”)
held on June 26, 2009, the Company’s stockholders authorized its Board of
Directors to effect a reverse stock split of all outstanding shares of common
stock, and the Board of Directors subsequently approved the implementation of a
reverse stock split on June 26, 2009 at a ratio of one for fifty shares. All
common share and per common share data in these consolidated financial
statements and related notes hereto have been retroactively adjusted to account
for the effect of the reverse stock split for all periods presented prior to
June 26, 2009.





2.
            Organization,
      Business and Liquidity





Genta is
a biopharmaceutical company engaged in pharmaceutical (drug) research and
development, its sole reportable segment. The Company is dedicated to the
identification, development and commercialization of novel drugs for the
treatment of cancer and related diseases.





The
Company has had recurring annual operating losses since its inception. The
Company has prepared its financial statements under the assumption that it is a
going concern. The Company’s recurring losses and negative cash flows from
operations raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.





Net cash
used in operating activities during the nine months ended September 30, 2009 was
$15.1 million. Presently, with no further financing, management projects that
the Company will run out of funds in the second quarter of 2010. The terms of
the April 2009 Notes enable those noteholders, at their option, to purchase up
to approximately $6 million of additional notes with similar terms. The Company
does not have any additional financing in place. There can be no assurance that
the Company can obtain financing, if at all, on terms acceptable to
it.





The
Company will require additional cash in order to maximize its commercial
opportunities and continue its clinical development opportunities. The Company
has had discussions with other companies regarding partnerships for the
development and commercialization of its product candidates. Additional
alternatives available to the Company to subsequently sustain its operations
include financing arrangements with potential corporate partners, debt
financing, asset sales, asset-based loans, royalty-based financings, equity
financing and other sources. However, there can be no assurance that any such
collaborative agreements or other sources of funding will be available on
favorable terms, if at all.





If the
Company is unable to raise additional funds, it could be required to reduce its
spending plans, reduce its workforce, license one or more of its products or
technologies that it would otherwise seek to commercialize itself, sell certain
assets, cease operations, or declare bankruptcy.




On June
9, 2008, the Company placed $20 million of senior secured convertible notes, or
the 2008 Notes, with certain institutional and accredited investors. The notes
bear interest at an annual rate of 15% payable at quarterly intervals in other
senior secured convertible promissory notes to the holder, and originally were
convertible into shares of Genta common stock at a conversion rate of 2,000
shares of common stock for every $1,000.00 of principal, (adjusted for the
reverse stock split). As a result of issuing convertible notes on April 2, 2009,
(see below), these notes are presently convertible into shares of Genta common
stock at a conversion rate of 10,000 shares of common stock for every $1,000.00
of principal. The 2008 Notes are secured by a first lien on all assets of
Genta.


6





On April
2, 2009, the Company placed approximately $6 million of senior secured
convertible notes, or the April 2009 Notes, and corresponding warrants to
purchase common stock. The April 2009 Notes bear interest at an annual rate of
8% payable semi-annually in other senior secured convertible promissory notes to
the holder, and are convertible into shares of the Company’s common stock at a
conversion rate of 10,000 shares of common stock for every $1,000.00 of
principal amount outstanding. The April 2009 Notes are also secured by a first
lien on all assets of Genta, which security interest is pari passu with the
security interest held by the holders of the 2008 Notes.





On July
7, 2009, the Company entered into a securities purchase agreement with certain
accredited institutional investors to place up to $10 million in aggregate
principal amount of units consisting of (i) 70% unsecured subordinated
convertible notes, or the July 2009 Notes, and (ii) 30% common
stock.  In connection with the sale of the units, the Company also
issued to the investors two-year warrants to purchase common stock in an amount
equal to 25% of the number of shares of common stock issuable upon conversion of
the July 2009 Notes purchased by each investor (“July 2009 Warrants”). The
Company closed on $3 million of such July 2009 Notes, common stock and July 2009
Warrants on July 7, 2009.





On
September 4, 2009, the Company closed on $7 million of additional July 2009
Notes, common stock and July 2009 Warrants. Also on September 4, 2009, the
Company entered into a securities purchase agreement with certain accredited
institutional investors, pursuant to which the Company issued $3 million of
units consisting of (i) 70% unsecured subordinated convertible promissory notes,
or the September 2009 Notes, and (ii) 30% common stock, or the September 2009
financing. The September 2009 Notes bear interest at an annual rate of 8%
payable semi-annually in other senior secured convertible promissory notes to
the holder, and are convertible into shares of the Company’s common stock at a
conversion rate of 10,000 shares of common stock for every $1,000.00 of
principal amount outstanding.  In connection with the sale of the units,
the Company also issued to the investors two-year warrants to purchase common
stock in an amount equal to 25% of the number of shares of common stock issuable
upon conversion of the September 2009 Notes purchased by each investor, or the
September 2009 Warrants.  Pursuant to the terms of the securities
purchase agreement, the investors had four business days from the date of the
agreement to sign the agreement and provide their respective investment to the
Company.





3.
            Summary
      of Significant Accounting Policies





Accounting
Standards Updates





In June
2009, the Financial Accounting Standards Board (“FASB”) issued its final
Statement of Financial Accounting Standards (“SFAS”) No. 168 – The FASB Accounting Standards
Codification and the Hierarchy ofGenerally Accepted Accounting
Principles a replacement of FASB Statement No. 162. SFAS No. 168
made the FASB Accounting Standards Codification (“the Codification”) the
single source of U.S. GAAP used by nongovernmental entities in the
preparation of financial statements, except for rules and interpretive
releases of the Securities & Exchange Commission (“SEC”) under
authority of federal securities laws, which are sources of authoritative
accounting guidance for SEC registrants. The Codification is meant to
simplify user access to all authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a
consistent structure; its purpose is not to create new accounting and
reporting guidance. The Codification supersedes all existing non-SEC
accounting and reporting standards and was effective for the Company beginning
July 1, 2009. Following SFAS No. 168, the FASB will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging Issues Task
Force Abstracts; instead, it will issue Accounting Standards Updates.
The FASB will not consider Accounting Standards Updates as authoritative in
their own right; these updates will serve only to update the Codification,
provide background information about the guidance and provide the bases for
conclusions on the change(s) in the Codification. In the description of
Accounting Standards Updates that follows, references in “italics” relate
to Codification Topics and Subtopics and their descriptive titles, as
appropriate. Adoption of the Codification does not have an impact on the
Company’s financial position or results of operations.


7


In May
2009, the FASB issued “Subsequent Events”. “Subsequent Events” incorporates into
authoritative accounting literature certain guidance that already existed within
generally accepted auditing standards, but the rules concerning recognition and
disclosure of subsequent events will remain essentially unchanged. Subsequent
events guidance addresses events which occur after the balance sheet date but
before the issuance of financial statements. Under “Subsequent Events”, an
entity must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. The Company adopted “Subsequent
Events” and it did not have an impact on the Company’s consolidated financial
statements. There were no recognized or nonrecognized subsequent events
occurring after September 30, 2009 that required accounting or disclosure in
accordance with “Subsequent Events”. Subsequent events were evaluated to
November 16, 2009, the date the financial statements of the Company were
issued.





Accounting
Standards Updates Not Yet Effective





In
October 2009, an update was made to “Revenue Recognition – Multiple
Deliverable RevenueArrangements.”This update
removes the objective-and-reliable-evidence-of-fair-value criterion from
the separation criteria used to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting, replaces
references to “fair value” with “selling price” to distinguish from the
fair value measurements required under the “Fair Value Measurements and
Disclosures”guidance, provides a hierarchy that entities must use
to estimate the selling price, eliminates the use of the residual method
for allocation, and expands the ongoing disclosure requirements. This
update is effective for the Company beginning January 1, 2011 and can be
applied prospectively or retrospectively. Management is
currently evaluating the effect that adoption of this update
will have, if any, on the Company’s consolidated financial position and
results of operations when it becomes effective in 2011.





Other
Accounting Standards Updates not effective until after September 30, 2009, are
not expected to have a significant effect on the Company’s consolidated
financial position or results of operations.




Basis
of Presentation





The
consolidated financial statements are presented on the basis of accounting
principles generally accepted in the United States of America. The accompanying
consolidated financial statements included herein have been prepared pursuant to
the rules and regulations of the SEC. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted from this report, as is permitted by such rules and regulations;
however, the Company believes that the disclosures are adequate to make the
information presented not misleading. The unaudited consolidated financial
statements and related disclosures have been prepared with the presumption that
users of the interim financial information have read or have access to the
audited financial statements for the preceding fiscal year. Accordingly, these
financial statements should be read in conjunction with the audited consolidated
financial statements and the related notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Results
for interim periods are not necessarily indicative of results for the full year.
In the opinion of management, the statements reflect all adjustments necessary
for fair presentation of the results of interim periods. The Company has
experienced significant quarterly fluctuations in operating results and it
expects those fluctuations will continue.





Use
of Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect reported earnings, financial position and various
disclosures. Actual results could differ from those estimates.


8


Cash
and Cash Equivalents





Cash and
cash equivalents consist of highly liquid instruments with maturities of three
months or less from the date acquired and are stated at cost that approximates
their fair market value. At September 30, 2009, the amounts on deposit that
exceeded the $250,000 federally insured limit was $6.7 million.




Revenue
Recognition





Genta
recognizes revenue from product sales when title to product and associated risk
of loss has passed to the customer and the Company is reasonably assured of
collecting payment for the sale. All revenue from product sales are recorded net
of applicable allowances for returns, rebates and other applicable discounts and
allowances. The Company allows return of its product for up to twelve months
after product expiration.




Research
and Development





Research
and development costs are expensed as incurred, including raw material costs
required to manufacture products for clinical trials.




Income
Taxes





The
Company uses the liability method of accounting for income taxes. Deferred
income taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws. Management records
valuation allowances against net deferred tax assets, if based upon the
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company generated additional net operating
losses during the nine months ended September 30, 2009, and continues to
maintain a full valuation allowance against its net deferred tax assets.
Utilization of the Company’s net operating loss (NOL) and research and
development (R&D) credit carryforwards may be subject to a substantial
annual limitation due to ownership change limitations that have occurred or that
could occur in the future, as required by Section 382 of the Internal Revenue
Code of 1986, as amended, or the Code, as well as similar state provisions.
These ownership changes may limit the amount of NOL and R&D credit
carryforwards that can be utilized annually to offset future taxable income and
tax, respectively. In general, an “ownership change” as defined by Section 382
of the Code results from a transaction or series of transactions over a
three-year period resulting in an ownership change of more than 50 percentage
points of the outstanding stock of a company by certain stockholders or public
groups.





The
Company’s Federal tax returns have never been audited. In January 2006, the
State of New Jersey concluded its fieldwork with respect to a tax audit for the
years 2000 through 2004. The State of New Jersey took the position that amounts
reimbursed to Genta by Aventis Pharmaceutical Inc. for co-development
expenditures during the audit period were subject to Alternative Minimum
Assessment (AMA), resulting in a liability at that time of approximately $533
thousand. Although the Company and its outside tax advisors believe the State’s
position on the AMA liability is unjustified, there is little case law on the
matter and it is probable that the Company will be required to ultimately pay
the liability. As of September 30, 2009, the Company had accrued a tax liability
of $533 thousand, penalties of $27 thousand and interest of $321 thousand
related to this assessment. The Company appealed this decision to the New Jersey
Division of Taxation, and in February 2008, the Division of Taxation notified
the Company that its appeal had not been granted. On April 25, 2008, the Company
filed a complaint with the Tax Court of the State of New Jersey to appeal the
assessment. A bench trial took place on September 18, 2009. The judge is
expected to render a decision in the case during the first six months of 2010,
after considering the evidence and reviewing the parties’ legal
briefs.


9


The
Company's policy for recording interest and penalties associated with audits is
that penalties and interest expense are recorded in interest expense in the
Company’s Consolidated Statements of Operations. The Company recorded $40
thousand and $50 thousand in interest expense related to the State of New Jersey
assessment during the nine months ended September 30, 2009 and 2008,
respectively.




Stock
Options and Restricted Stock Units




Stock
options and restricted stock units (“RSUs”) are recognized in the Consolidated
Statements of Operations based on their fair values. The amount of compensation
cost is measured based on the grant-date fair value of the equity instrument
issued. During 2009, with the implementation of two Equity Award Exchange
programs, outstanding stock option awards granted under the 1998 Non-Employee
Directors Plan, as amended, and 1998 Stock Incentive Plan, as amended, were
exchanged for grants of new RSUs under the Company’s 2009 Stock Incentive Plan.
Incremental compensation cost for the new RSUs was measured as the excess of the
fair value of the RSUs over the fair value of the exchanged stock option awards
on the date of exchange. The incremental compensation cost of the RSUs is being
recognized over the remaining amortization period of the exchanged stock option
awards. The Company utilizes a Black-Scholes option-pricing model to measure the
fair value of stock options granted to employees. See Note 7 to the Consolidated
Financial Statements for a further discussion on share-based
compensation.




Deferred
Financing Costs




In
conjunction with the issuance of the 2008 Notes, the April 2009 Notes, the July
2009 Notes and September 2009 Notes, the Company incurred certain costs,
including the issuance of warrants to purchase the Company’s common stock. This
additional consideration is being amortized over the term of the notes through
the earliest maturity date using the effective interest method. Under this
method, interest expense recognized each period will increase significantly as
the instrument approaches its maturity date. If the maturity of the notes is
accelerated because of conversions or defaults, then the amortization is
accelerated.  The fair value of the warrants issued as placement fees
in connection with these financings are calculated utilizing the Black-Scholes
option-pricing model.




Net
(Loss)/Income Per Common Share




Net
(loss)/income per common share for the three and nine months ended September 30,
2009 and 2008, respectively, are based on the weighted average number of shares
of common stock outstanding during the periods. Basic net loss per share is
equal to diluted net loss per share for the three months and nine months ended
September 30, 2009 and for the nine months ended September 30,
2008,  as potentially dilutive securities have been excluded from the
calculation of diluted net loss per common share, as the inclusion of such
securities would be antidilutive. At September 30, 2009 and 2008, respectively,
the potentially dilutive securities include approximately 253.4 million shares
and approximately 40.8 million shares, respectively, reserved for the conversion
of convertible notes, convertible preferred stock, vesting of RSUs and the
exercise of outstanding options and warrants.





4. Inventory





Inventories
are stated at the lower of cost or market with cost being determined using the
first-in, first-out (FIFO) method. Inventories consisted of the following ($
thousands):





September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Raw
      materials
                  
                  $
                  24
                  
                  
                  $
                  24Finished
      goods
                  
                  
                  85
                  
                  
                  
                  97$
                  109
                  
                  
                  $
                  121


10





During
the nine months ended September 30, 2009, most of the sales of Ganite® were
from product that had been previously accounted for as excess
inventory.





The
Company has substantial quantities of Genasense®drug
supply which are recorded at zero cost. Such inventory would be available for
the commercial launch of this product, should Genasense® be
approved.





5.
            Office
      Lease Settlement Obligation





In
January 2009, the Company entered into an amendment of its lease agreement with
The Connell Company, whereby the Company’s future payment of $2.0 million,
related to an earlier amendment of its lease for office space, is payable on
January 1, 2011, with 6.0% interest payable in arrears.





6.
            Convertible
      Notes and Warrants





On June
9, 2008, the Company placed $20 million of the 2008 Notes with certain
institutional and accredited investors. The notes bear interest at an annual
rate of 15% payable at quarterly intervals in other senior secured convertible
promissory notes to the holder, and originally were convertible into shares of
Genta common stock at a conversion rate of 2,000 shares of common stock for
every $1,000.00 of principal, (adjusted for the reverse stock split). As a
result of issuing convertible notes on April 2, 2009, (see below), these notes
are presently convertible into shares of Genta common stock at a conversion rate
of 10,000 shares of common stock for every $1,000.00 of principal. The 2008
Notes are secured by a first lien on all assets of Genta, which security
interest is pari passu with the security interest held by the holders of the
April 2009 Notes.





At the
time the 2008 Notes were issued, the Company recorded a debt discount
(beneficial conversion) relating to the conversion feature in the amount of $20
million. The aggregate intrinsic value of the difference between the market
price of the Company’s share of stock on June 9, 2008 and the conversion price
of the 2008 Notes was in excess of the face value of the $20 million 2008 Notes,
and thus, a full debt discount was recorded in an amount equal to the face value
of the debt. The Company is amortizing the resultant debt discount over the term
of the 2008 Notes through their maturity date.





From
January 1, 2009 through September 30, 2009, holders of the 2008 Notes
voluntarily converted approximately $13.9 million, resulting in an issuance of
97.3 million shares of common stock. At September 30, 2009, approximately $2.2
million of the 2008 Notes were outstanding.





Upon the
occurrence of an event of default, holders of the 2008 notes have the right to
require the Company to prepay all or a portion of their 2008 notes as calculated
as the greater of (a) 150% of the aggregate principal amount of the note plus
accrued interest or (b) the aggregate principal amount of the note plus accrued
interest divided by the conversion price; multiplied by a weighted average price
of the Company’s common stock. Pursuant to a general security agreement, entered
into concurrently with the notes (the “Security Agreement”), the notes are
secured by a first lien on all assets of the Company, subject to certain
exceptions set forth in the Security Agreement, which security interest is pari
passu with the security interest held by the holders of the April 2009
Notes.





In
addition, in connection with the placement of the 2008 Notes, the Company issued
a warrant to its private placement agent to purchase 800,000 shares of common
stock at an exercise price of $1.00 per share and incurred a financing fee of
$1.2 million. The financing fees and the initial value of the warrant are being
amortized over the term of the convertible notes. At September 30, 2009 and
December 31, 2008, the unamortized balances of the financing fee were $0.5
million and $0.9 million, respectively, and the warrants were $2.6 million and
$5.4 million, respectively.


11


On April
2, 2009, the Company placed approximately $6 million of the April 2009 Notes and
corresponding warrants to purchase common stock. The April 2009 Notes bear
interest at an annual rate of 8% payable semi-annually in other senior secured
convertible promissory notes to the holder, and are convertible into shares of
the Company’s common stock at a conversion rate of 10,000 shares of common stock
for every $1,000.00 of principal amount outstanding. The April 2009 Notes are
also secured by a first lien on all assets of Genta, which security interest is
pari passu with the security interest held by the holders of the 2008 Notes. The
terms of the April 2009 Notes enable those noteholders, at their option, to
purchase up to approximately $6 million of additional notes with similar
terms.





From
April 2, 2009 through September 30, 2009, holders of the April 2009 Notes
voluntarily converted approximately $0.7 million, resulting in an issuance of
7.5 million shares of common stock.  At September 30, 2009,
approximately $5.4 million of the April 2009 Notes were
outstanding.





In
connection with the placement of the April 2009 Notes, the Company issued a
warrant to its private placement agent to purchase 3.6 million shares of common
stock at an exercise price of $0.50 per share and incurred financing fees of
$0.6 million. The financing fees and the initial value of the warrant are being
amortized over the term of the convertible notes. At September 30, 2009, the
unamortized balances of the financing fee and the warrant were $0.6 million and
$3.4 million, respectively.





The
Company concluded that it should initially account for conversion options
embedded in the 2008 Notes and April 2009 Notes by bifurcating the conversion
options embedded in convertible notes from their host instruments and to account
for them as free standing derivative financial instruments. If the conversion
option requires net cash settlement in the event of circumstances that are not
solely within the Company’s control, then the notes should be classified as a
liability measured at fair value on the balance sheet. In this case, if the
Company was not successful in obtaining approval of its stockholders to increase
the number of authorized shares to accommodate the potential number of shares
that the notes convert into, the Company would have been required to cash settle
the conversion option.





At the
time the April 2009 Notes were issued, the aggregate intrinsic value of the
difference between the market price of the Company’s share of stock on April 2,
2009 and the conversion price of the April 2009 Notes was in excess of the face
value of the $6 million April 2009 Notes, and thus, a full debt discount was
recorded in an amount equal to the face value of the debt. The Company is
amortizing the resultant debt discount over the term of the April 2009 Notes
through their maturity date. At April 2, 2009, there were an insufficient number
of authorized shares of common stock in order to permit exercise of all of the
issued convertible notes. When there are insufficient authorized shares, the
conversion obligation for the notes should be classified as a liability measured
at fair value on the balance sheet. At April 2, 2009, in connection with the $6
million closing, the fair value of the conversion feature, $67.8 million,
exceeded the proceeds of $6 million. The difference of $61.8 million was charged
to expense as the change in the fair market value of conversion
liability.





On June
26, 2009, at a Special Meeting of Stockholders, the Company’s stockholders
authorized its Board of Directors to effect a reverse stock split in any ratio
up to 1-for-100, while not reducing the number of authorized shares and not
changing the par value of the common stock. The Board of Directors implemented a
reverse stock split in a ratio of 1-for-50 and in so doing, the Company had
enough shares to accommodate the potential number of shares that the April 2009
Notes convert into. The fair value of the conversion feature was re-measured at
June 26, 2009 at $25.0 million and credited to permanent equity, resulting in
total expense of $19.0 million. The conversion option was valued at April 2,
2009 and June 26, 2009 using the Black-Scholes valuation model using the
following assumptions:





June 26, 2009
                  
                  
                  April 2, 2009Price
      of share of Genta common stock
                  
                  $
                  0.425
                  
                  
                  $
                  1.15Volatility
                  
                  
                  258
                  %
                  
                  
                  240
                  %Risk-free
      interest rate
                  
                  
                  1.50
                  %
                  
                  
                  1.25
                  %Remaining
      contractual lives
                  
                  
                  2.8
                  
                  
                  
                  3.0


12





As a
result of issuing the April 2009 Notes, the conversion rate for the 2008 Notes
was adjusted to be the same conversion rate as the April 2009 Notes.
Accordingly, the 2008 Notes that originally were convertible into shares of
Genta common stock at a conversion rate of 2,000 shares of common stock for
every $1,000.00 of principal were adjusted to be convertible into shares of
Genta common stock at a conversion rate of 10,000 shares of common stock for
every $1,000.00 of principal. The Company valued this change in the conversion
rate on April 2, 2009; the aggregate intrinsic value of the difference in
conversion rates was in excess of the $10.7 million face value of the 2008
Notes. Thus, a full debt discount was recorded in an amount equal to the face
value of the 2008 Notes, and the Company is amortizing the resultant debt
discount over the remaining term of the 2008 Notes.





As there
were an insufficient number of authorized shares of common stock in order to
fulfill all existing obligations at the time of issuance, the Company classified
the April 2009 warrant obligations as liabilities to be measured at fair value
on the balance sheet. Accordingly, at April 2, 2009, the Company recorded the
warrant liabilities at a fair value of $20.8 million, based upon the
Black-Scholes valuation model. The warrant liability was re-measured at June 26,
2009 at a fair value of $7.7 million, and credited to permanent equity,
resulting in an expense of $7.7 million. The warrant liability was valued at
April 2, 2009 and June 26, 2009 using the Black-Scholes valuation model using
the following assumptions:





June 26, 2009
                  
                  
                  April 2, 2009Price
      of share of Genta common stock
                  
                  $
                  0.425
                  
                  
                  $
                  1.15Volatility
                  
                  
                  244
                  %
                  
                  
                  224
                  %Risk-free
      interest rate
                  
                  
                  1.75
                  %
                  
                  
                  1.89
                  %Remaining
      contractual lives
                  
                  
                  3.3
                  
                  
                  
                  3.5





On July
7, 2009, the Company entered into a securities purchase agreement with certain
accredited institutional investors to place up to $10 million in aggregate
principal amount of units consisting of (i) 70% July 2009 Notes and (ii) 30%
common stock.  In connection with the sale of the units, the Company
also issued to the investors July 2009 Warrants. The Company closed on $3
million of such July 2009 Notes, common stock and July 2009 warrants on July 7,
2009. The July 2009 Notes bear interest at an annual rate of 8% payable
semi-annually in other senior secured convertible promissory notes to the
holder, and are convertible into shares of the Company’s common stock at a
conversion rate of 10,000 shares of common stock for every $1,000.00 of
principal amount outstanding.





From July
7, 2009 through September 30, 2009, holders of the July 2009 Notes voluntarily
converted approximately $1.3 million, resulting in an issuance of 13.5 million
shares of common stock.  At September 30, 2009, approximately $0.8
million of the July 2009 Notes were outstanding.





In
connection with the placement of the July 2009 Notes, the Company issued a
warrant to its private placement agent to purchase 1.8 million shares of common
stock at an exercise price of $1.00 per share and incurred financing fees of
$0.1 million. The Company measured the initial value of the placement agent
warrant at $0.7 million using a Black Scholes model. The financing fees and the
initial value of the warrant are being amortized over the term of the
convertible notes. At September 30, 2009, the unamortized balances of the
financing fee and the warrant were $0.1 million and $0.6 million,
respectively.





At the
time the July 2009 Notes were issued, the aggregate intrinsic value,
representing the difference between the market price of the Company’s share of
stock on July 7, 2009 and the conversion price of the July 2009 Notes was in
excess of the face value of the $2.1 million of July 2009 Notes, and thus, a
full debt discount was recorded in an amount equal to the face value of the
debt. The Company is amortizing the resultant debt discount over the term of the
July 2009 Notes through their maturity date.


13


On
September 4, 2009, the Company closed on $7 million of additional July 2009
Notes, common stock and July 2009 Warrants. Also on September 4, 2009, the
Company entered into a securities purchase agreement with certain accredited
institutional investors, pursuant to which the Company issued $3 million of
units consisting of (i) 70% September 2009 Notes, and (ii) 30% common stock, or
the September 2009 financing.  In connection with the sale of the
units, the Company also issued to the investors September 2009
Warrants.  The September 2009 Notes bear interest at an annual rate of
8% payable semi-annually in other senior secured convertible promissory notes to
the holder, and are convertible into shares of the Company’s common stock at a
conversion rate of 10,000 shares of common stock for every $1,000.00 of
principal amount outstanding.





There has
been no conversion of September 2009 Notes or July 2009 Notes issued on
September 4, 2009.





In
connection with the placement of the September 2009 Notes and July 2009 Notes on
September 4, 2009, the Company issued warrants to its private placement agent to
purchase 6.0 million shares of common stock at an exercise price of $1.00 per
share and incurred financing fees of $0.6 million. The financing fees and the
value of the warrants of $2.2 million are being amortized over the term of the
convertible notes.





At the
time the September 2009 Notes and July 2009 Notes were issued on September 4,
2009, the aggregate intrinsic value, representing the difference between the
market price of the Company’s share of stock on September 4, 2009 and the
effective conversion price of the notes was in excess of the face value of the
$7.0 million of notes issued on September 4, 2009, and thus, a full debt
discount was recorded in an amount equal to the face value of the debt. The
Company is amortizing the resultant debt discount over the term of the notes
through their maturity date.





The
Company is in compliance with all debt-related covenants at September 30,
2009.





7.
            Stock
      Incentive Plans and Share-Based
Compensation




During
2009, the Company had the following share-based compensation plans, which are
described below:





2009
Stock Incentive Plan





On July
9, 2009 the Company’s Board of Directors approved the establishment of the 2009
Stock Incentive Plan, (“2009 Plan”), subject to approval by the Company’s
stockholders. In addition, the Board of Directors approved an Equity Award
Exchange Offer Program for non-employee Directors, whereby each non-employee
Director was given an opportunity to exchange his outstanding stock options to
purchase shares of Genta common stock for new RSUs to be granted pursuant to the
Director grant program under the 2009 Plan. All of our eligible non-employee
Directors submitted their eligible stock options for cancellation, and
accordingly, each non-employee Director was granted a RSU award on July 16,
2009, subject to approval of the 2009 Plan by the Company’s stockholders. At the
Annual Meeting of Stockholders of Genta Incorporated held on August 26, 2009,
the Company’s stockholders approved the establishment of the 2009 Plan. Upon
approval of the 2009 Plan by the Company’s stockholders, the stock options
submitted pursuant to the Equity Award Exchange Offer were cancelled and the
RSUs became fully vested.


14


On August
26, 2009 the Compensation Committee of the Board of Directors approved an Equity
Award Exchange Offer Program for all U.S. employees, whereby each employee was
given an opportunity to exchange his outstanding stock options that had been
granted under the Company’s 1998 Stock Incentive Plan, as amended (“1998 Plan”),
to purchase shares of Genta common stock for new replacement RSUs. All eligible
employees submitted their eligible stock options for cancellation, and
accordingly, each employee was granted a RSU award on August 31, 2009. The
surrender of the options was accounted for as a modification of an award. The
Company determined the compensation cost of the modification as the difference
in the fair value of the options immediately before the modification and the
fair value of the RSUs immediately after the modification. A charge of $8.2
million was recorded in the Consolidated Statement of Operations related to the
modification of awards that were vested as of the modification date. The
incremental cost for awards that were not vested as of the modification date
will be expensed over the remaining vesting period.





The
following table summarizes the RSU activity under the 2009 Plan for the three
months ended September 30, 2009:




Restricted Stock Units
                        
                        Number of Shares
                          (in thousands)
                        
                        
                        Weighted Average
                          Grant Date Fair
                          Value per ShareOutstanding  nonvested
      RSUs at July 1, 2009
                        
                        
                        -
                        
                        
                        
                        -Granted
                        
                        
                        56,378
                        
                        
                        $
                        0.395Vested
                        
                        
                        (6,512
                        )
                        
                        $
                        0.395Forfeited
      or expired
                        
                        
                        -
                        
                        
                        
                        -Outstanding  nonvested
      RSUs at September 30, 2009
                        
                        
                        49,866
                        
                        
                        $
                        0.395





Based on
the closing price of Genta common stock of $1.00 per share on September 30,
2009, the intrinsic value of the nonvested RSUs at September 30, 2009 is $49.9
million. As of September 30, 2009, there was approximately $8.5 million of total
unrecognized compensation cost related to non-vested share-based compensation
granted under the 2009 Plan, which is expected to be recognized over a
weighted-average period of 0.8 years.





Stock
options were also awarded to employees during the three months ended September
30, 2009. Option awards were granted with an exercise price equal to the fair
market price of the Company’s common stock on the date of the grant; all options
granted had contractual terms of ten years from the date of the
grant.  These awards were granted with the following vesting schedule:
25% vests in three equal installments on November 21, 2009, March 22, 2010 and
May 17, 2010, 25% vests on August 31, 2010, 25% vests on August 31, 2011 and 25%
vests on August 31, 2012. The following table summarizes the stock option
activity under the 2009 Plan for the three months ended September 30,
2009:





Stock
      Options
                      
                      Number of
                        Shares
                        (in
                        thousands)
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Term
                        (in years)
                      
                      
                      Aggregate
                        Intrinsic
                        Value
                        (in
                        thousands)Outstanding at
      July 1, 2009
                      
                      
                      -
                      
                      
                      
                      -Granted
                      
                      
                      300
                      
                      
                      $
                      0.77Exercised
                      
                      
                      -
                      
                      
                      
                      -Forfeited
      or expired
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at September 30, 2009
                      
                      
                      300
                      
                      
                      $
                      0.77
                      
                      
                      
                      10
                      
                      
                      $
                      69


15


1998
Stock Incentive Plan





Pursuant
to the 1998 Plan, 68 thousand shares had been provided for the grant of stock
options to employees, directors, consultants and advisors of the Company. As of
May 27, 2008, the authorization to provide grants under the 1998 Plan expired.
With the completion of the Equity Award Exchange Offer Program, virtually all
options under the 1998 Plan have been cancelled.





The
following table summarizes the option activity under the 1998 Plan as of
September 30, 2009 and changes during the nine months then ended:




Stock
      Options
                
                Number
      of
                  Shares
                  (in
                  thousands)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
                  (in years)
                
                
                Aggregate
                  Intrinsic
                  Value
                  (in
                  thousands)Outstanding
      at January 1, 2009
                
                
                37
                
                
                $
                1,191.50Granted
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited
      or expired
                
                
                (37
                )
                
                
                1,191.50Outstanding
      at September 30, 2009
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -





The
following table summarizes the RSU activity under the 1998 Plan as of September
30, 2009 and changes during the nine months then ended:




Restricted
      Stock Units
                  
                  Number of Shares
                    (in thousands)
                  
                  
                  Weighted Average
                    Grant Date Fair
                    Value per ShareOutstanding  nonvested
      RSUs at January 1, 2009
                  
                  
                  5
                  
                  
                  $
                  20.50Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (5
                  )
                  
                  $
                  20.50Forfeited
      or expired
                  
                  
                  -
                  
                  
                  
                  -Outstanding  nonvested
      RSUs at September 30, 2009
                  
                  
                  -
                  
                  
                  
                  -





1998
Non-Employee Directors’ Plan





Pursuant
to the Company’s 1998 Non-Employee Directors’ Plan, as amended (the “Directors’
Plan”), 12 thousand shares had been provided for the grant of non-qualified
stock options to the Company’s non-employee members of the Board of Directors.
Upon stockholder approval of the 2009 Plan, the Directors’ Plan was
terminated.





The
following table summarizes the option activity under the Directors’ Plan as of
September 30, 2009 and changes during the nine months then ended:




Stock
      Options
                
                Number
      of
                  Shares
                  (in
                  thousands)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
                  (in years)
                
                
                Aggregate
                  Intrinsic
                  Value
                  (in
                  thousands)Outstanding
      at January 1, 2009
                
                
                2
                
                
                $
                1,130.47Granted
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited
      or expired
                
                
                (2
                )
                
                $
                1,130.47Outstanding
      at September 30, 2009
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -


16





The
Company estimates the fair value of each stock option award on the date of the
grant using the Black-Scholes option valuation model. Expected volatilities are
based on the historical volatility of the Company’s common stock over a period
commensurate with the options’ expected term. The expected term represents the
period of time that options granted are expected to be outstanding and is
calculated in accordance with the SEC guidance provided in the SEC’s Staff
Accounting Bulletin 107, (“SAB 107”) and Staff Accounting Bulletin 110 (“SAB
110”), using a “simplified” method. The Company will continue to use the
simplified method as it does not have sufficient historical exercise data to
provide a reasonable basis upon which to estimate an expected term. The
risk-free interest rate assumption is based upon observed interest rates
appropriate for the expected term of the Company’s stock options. The following
table summarizes the weighted-average assumptions used in the Black-Scholes
model for options granted during the nine months ended September 30,
2009:




Expected
      volatility
                    
                    
                    193
                    %Expected
      dividends
                    
                    
                    -Expected
      term (in years)
                    
                    
                    6.25Risk-free
      rate
                    
                    
                    2.6
                    %





With the
implementation of the Equity Award Exchange programs, outstanding stock option
awards granted under the Directors’ Plan and 1998 Plan were exchanged for grants
of new RSUs. Incremental compensation cost for the new RSUs was measured as the
excess of the fair value of the RSUs over the fair value of the stock option
awards on the date of exchange. The incremental compensation cost of the RSUs is
being recognized over the remaining amortization period of the stock option
awards.





Share-based
compensation expense recognized for the three and nine months ended September
30, 2009 and 2008, respectively, was comprised as follows:




Three
      months ended
                  September 30
                
                
                Nine
      months ended
                  September 30($
      thousands, except per share data)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Research
      and development expenses
                
                $
                2,918
                
                
                $
                35
                
                
                $
                2,950
                
                
                $
                131Selling,
      general and administrative
                
                
                6,599
                
                
                
                92
                
                
                
                6,674
                
                
                
                301Total
      share-based compensation expense
                
                $
                9,517
                
                
                $
                127
                
                
                $
                9,624
                
                
                $
                432Share-based
      compensation expense, per basic and diluted common share
                
                $
                0.07
                
                
                $
                0.17
                
                
                $
                0.13
                
                
                $
                0.60





8.
            Commitments
      and Contingencies





Litigation
and Potential Claims





In
September 2008, several shareholders of the Company, on behalf of themselves and
all others similarly situated, filed a class action complaint against the
Company, the Board of Directors, and certain of its executive officers in
Superior Court of New Jersey, captioned Collins v. Warrell, Docket No.
L-3046-08. The complaint alleged that in issuing convertible notes, the Board of
Directors and certain officers breached their fiduciary duties, and the Company
aided and abetted the breach of fiduciary duty. On March 20, 2009, the Superior
Court of New Jersey granted the motion of the Company to dismiss the class
action complaint and dismissed the complaint with prejudice. On April 30, 2009,
the plaintiffs filed a notice of appeal with the Appellate Division. On May
13, 2009, the plaintiffs filed a motion for relief from judgment based on a
claim of new evidence, which was denied on June 12, 2009. The plaintiffs
also asked the Appellate Division for a temporary remand to permit the Superior
Court judge to resolve the issues of the new evidence plaintiffs sought to raise
and the Appellate Division granted the motion for temporary remand. Following
briefing and a hearing, the Superior Court denied the motion for relief from
judgment on August 28, 2009. Thus, this matter will proceed in the Appellate
Division. Plaintiffs' brief before the Appellate Division was due on October 28,
2009, and the Company's responsive brief is due on November 30, 2009. The
Company intends to continue its vigorous defense of this
lawsuit.


17





In
November 2008, a complaint against the Company and its transfer agent, BNY
Mellon Shareholder Services, was filed in the Supreme Court of the State of New
York by an individual stockholder. The complaint alleges that the Company and
its transfer agent caused or contributed to losses suffered by the stockholder.
The Company denies the allegations of this complaint and intends to vigorously
defend this lawsuit.





9.
            Supplemental
      Disclosure of Cash Flows Information and Non-Cash Investing and Financing
      Activities





No
interest or income taxes were paid with cash during the nine months ended
September 30, 2009 and 2008, respectively. On March 9, 2009, the Company issued
approximately $386 thousand of 2008 Notes in lieu of interest due on its 2008
Notes. On June 9, 2009, the Company issued approximately $125 thousand of 2008
Notes in lieu of interest due on its 2008 Notes. On September 2, 2009, the
Company issued approximately $175 thousand of April 2009 Notes in lieu of
interest due on its April 2009 Notes. On September 9, 2009, the Company issued
approximately $81 thousand of 2008 Notes in lieu of interest due on its 2008
Notes.




From
January 1, 2009 through September 30, 2009, holders of the Company’s convertible
notes voluntarily converted approximately $15.9 million, resulting in an
issuance of 118.3 million shares of common stock.





10.
            Subsequent
      Events





On
October 1, 2009, the Company entered into an amendment of its Lease Agreement
with The Connell Company, whereby the Company extended its lease of office space
in Berkeley Heights, New Jersey for an additional six months until August 31,
2010.





From
October 1, 2009 through October 31, 2009, holders of 2008 Notes have voluntarily
converted approximately $38 thousand of their 2008 Notes, resulting in an
issuance of approximately 383 thousand shares of common stock. At October 31,
2009, approximately $2.1 million of the 2008 Notes were
outstanding.





From
October 1, 2009 through October 31, 2009, holders of April 2009 Notes have
voluntarily converted approximately $0.4 million of their April 2009 Notes,
resulting in an issuance of approximately 4.5 million shares of common stock. In
addition, from October 1, 2009 through October 31, 2009, warrants associated
with the April 2009 Notes were exercised, resulting in the issuance of 1.9
million shares. At October 31, 2009, approximately $5.0 million of the April
2009 Notes were outstanding.




On
November 16, 2009, the Company announced a restructuring, reduction in
workforce, and re-ordering of clinical development priorities. The restructuring
has reduced the workforce by approximately 30%, which is estimated to reduce
annualized payroll costs by approximately 25%.


18


Item
2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations





Certain
Factors Affecting Forward-Looking Statements – Safe Harbor
Statement





The
statements contained in this Quarterly Report on Form 10-Q that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. Such
forward-looking statements include those which express plan, anticipation,
intent, contingency, goals, targets or future development and/or otherwise are
not statements of historical fact. The words “potentially”, “anticipate”,
“expect”, “could”, “calls for” and similar expressions also identify
forward-looking statements. We intend 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 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 could affect actual results include
risks associated with:





·
            the
      Company’s financial projections;


·
            the
      Company’s projected cash flow requirements and estimated timing of
      sufficient cash flow;


·
            the
      Company’s current and future license agreements, collaboration agreements,
      and other strategic alliances;


·
            the
      Company’s ability to obtain necessary regulatory approval for
      Genasense®(oblimersen sodium) Injection from the U.S. Food and Drug
      Administration (FDA) or European Medicines Agency
  (EMEA);


·
            the
      safety and efficacy of the Company’s
products;


·
            the
      commencement and completion of clinical
trials;


·
            the
      Company’s ability to develop, manufacture, license and sell its products
      or product candidates;


·
            the
      Company’s ability to enter into and successfully execute license and
      collaborative agreements, if any;


·
            the
      adequacy of the Company’s capital resources and cash flow projections, and
      the Company’s ability to obtain sufficient financing to maintain the
      Company’s planned operations, or the Company’s risk of
      bankruptcy;


·
            the
      adequacy of the Company’s patents and proprietary
  rights;


·
            the
      impact of litigation that has been brought against the Company and its
      officers and directors and any proposed settlement of such litigation;
      and


·
            the
      other risks described under Risk Factors in the Company’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 2008 and in this Form
      10-Q.





We do not
undertake to update any forward-looking statements.





We make
available free of charge on our Internet website (http://www.genta.com) our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K
and amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission. The content on the Company’s website is
available for informational purposes only. It should not be relied upon for
investment purposes, nor is it incorporated by reference into this Form
10-Q.


19


Overview





Genta
Incorporated is a biopharmaceutical company engaged in pharmaceutical research
and development. We are dedicated to the identification, development and
commercialization of novel drugs for the treatment of cancer and related
diseases. Our research portfolio consists of two major programs: DNA/RNA
Medicines (which includes our lead oncology drug, Genasense®); and
Small Molecules (which includes our marketed product, Ganite®, and the
investigational compounds tesetaxel and G4544). We have had recurring annual
operating losses since inception, and we expect to incur substantial operating
losses due to continued requirements for ongoing and planned research and
development activities, pre-clinical and clinical testing, manufacturing
activities, regulatory activities and the eventual establishment of a sales and
marketing organization.





From our
inception to September 30, 2009, we have incurred a cumulative net deficit of
$1,019.5 million. Our recurring losses from operations and our negative cash
flow from operations raise substantial doubt about our ability to continue as a
going concern. Our consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. We currently
expect that such losses will continue at least until one or more of our product
candidates are approved by one or more regulatory authorities for commercial
sale in one or more indications. We have experienced significant quarterly
fluctuations in operating results, and we expect that these fluctuations in
revenues, expenses and losses will continue.





We will
require additional cash in order to maximize the commercial opportunity and
continue clinical development of our product candidates. Alternatives available
to us to sustain our operations include collaborative agreements, equity
financing, debt and other financing arrangements with potential corporate
partners and other sources. However, there can be no assurance that any such
collaborative agreements or other sources of funds will be available on
favorable terms, if at all. We will need substantial additional funds before we
can expect to realize significant product revenue.





We had
$7.4 million of cash and cash equivalents on hand at September 30,
2009.  Cash used in operating activities during the first nine months
of 2009 was $15.1 million.





On June
9, 2008, we placed $20 million of senior secured convertible notes with certain
institutional and accredited investors. On April 2, 2009, we placed
approximately $6 million of senior secured convertible notes, or the April 2009
Notes, and corresponding warrants to purchase common stock. On July 7, 2009, we
entered into a securities purchase agreement with certain accredited
institutional investors to place up to $10 million in aggregate principal amount
of units consisting of (i) 70% unsecured subordinated convertible notes, or the
July 2009 Notes, and (ii) 30% common stock.  The July 2009 Notes bear
interest at an annual rate of 8% payable at quarterly intervals in other July
2009 Notes to the holder, and are convertible into shares of our common stock at
a conversion rate of 10,000 shares of common stock for every $1,000.00 of
principal. In connection with the sale of the units, we also issued to the
investors two-year warrants to purchase common stock in an amount equal to 25%
of the number of shares of common stock issuable upon conversion of the July
2009 Notes purchased by each investor, or July 2009 Warrants. We closed on $3.0
million of such July 2009 Notes, common stock and July 2009 Warrants on July 7,
2009.


20


On
September 4, 2009, we closed on $7.0 million of additional July 2009 Notes,
common stock and July 2009 Warrants. Also on September 4, 2009, we entered into
a securities purchase agreement with certain accredited institutional investors,
pursuant to which we issued $3 million of units consisting of (i) 70% unsecured
subordinated convertible notes, or September 2009 Notes, and (ii) 30% common
stock, or the September 2009 financing. The notes bear interest at an
annual rate of 8% payable at quarterly intervals in other convertible notes to
the holder, and are convertible into shares of our common stock at a conversion
rate of 10,000 shares of common stock for every $1,000.00 of principal. In
connection with the sale of the units, we also issued to the investors two-year
warrants to purchase common stock in an amount equal to 25% of the number of
shares of common stock issuable upon conversion of the September 2009 Notes
purchased by each investor, or September 2009 Warrants.





Presently,
with no further financing, we project that we will run out of funds in the
second quarter of 2010. The terms of the April 2009 Notes enable those
noteholders, at their option, to purchase additional notes with similar terms.
We currently do not have any additional financing in place. If we are unable to
raise additional funds, we could be required to reduce our spending plans,
reduce our workforce, license one or more of our products or technologies that
we would otherwise seek to commercialize ourselves, or sell certain assets.
There can be no assurance that we can obtain financing, if at all, on terms
acceptable to us.





Most
recently, our principal goal has been to secure regulatory approval for the
marketing of Genasense®.
Genasense® has been
studied in combination with a wide variety of anticancer drugs in a number of
different cancer indications. We have reported results from randomized trials of
Genasense® in a
number of diseases. Under our own sponsorship or in collaboration with others,
we are currently conducting additional clinical trials. We are especially
interested in the development, regulatory approval, and commercialization of
Genasense® in at least three diseases: melanoma; chronic lymphocytic leukemia,
referred to herein as CLL; and non-Hodgkin’s lymphoma, referred to herein as
NHL.





Genasense® has been
submitted for regulatory approval in the U.S. on two occasions and to the
European Union (EU) once. These applications proposed the use of Genasense® plus
chemotherapy for patients with advanced melanoma (U.S. and EU) and relapsed or
refractory CLL (U.S.-only). None of these applications resulted in regulatory
approval for marketing. Nonetheless, we believe that Genasense® may
ultimately be approved and commercialized, and we have undertaken certain
initiatives in this regard that are described below.




Our major
current initiative is a randomized controlled trial that tests whether the
addition of Genasense® to
standard chemotherapy can improve outcomes for patients with advanced
melanoma.  In August 2007, we initiated a new Phase 3 trial of
Genasense® plus
chemotherapy in advanced melanoma. This trial, known as AGENDA, is a randomized,
double-blind, placebo-controlled study in which patients are randomly assigned
to receive Genasense® plus
dacarbazine or dacarbazine alone. The study uses LDH as a biomarker to identify
patients who are most likely to respond to Genasense®, based
on data obtained from our preceding trial in melanoma. The co-primary endpoints
of AGENDA are progression-free survival (PFS) and overall
survival.


21


The
design of AGENDA was based on data obtained from a similarly designed Phase 3
trial that was published in 2006. Results from this antecedent study showed that
treatment with Genasense®plus
dacarbazine compared with dacarbazine alone was associated with a statistically
significant increase in overall response, complete response, durable response,
and progression-free survival (PFS). However, the primary endpoint of overall
survival approached but did not quite reach statistical significance (P=0.077)
in the entire “intent-to-treat” population. Our further analysis of this trial
showed that there was a significant treatment interaction effect related to
levels of a blood enzyme known as LDH. When this effect was analyzed by
treatment arm, survival was shown to be significantly superior for patients with
a non-elevated LDH who received Genasense®
(P=0.018; n=508). Moreover, this benefit was particularly noteworthy for
patients whose baseline LDH did not exceed 80% of the upper limit of normal for
this lab value. LDH had also been previously described by others as the single
most important prognostic factor in advanced melanoma. Thus, the AGENDA trial
seeks to confirm the observations that were previously observed in the
antecedent trial in a biomarker-defined patient population.





In March
2009, we completed accrual of 315 patients into AGENDA. In October 2009, we
announced that AGENDA did not show a statistically significant benefit for its
co-primary endpoint of progression-free survival.  Secondary endpoints
of overall response rate and disease control rate (which includes complete and
partial responses, plus stable disease greater than 3 months duration) also did
not show a statistically significant benefit. According to the prespecified
analysis plan, the statistical significance of durable response, (a secondary
endpoint that measures the proportion of patients who achieved a complete or
partial response that lasts greater than 6 months), is too early to evaluate.
However, the observed differences in progression-free survival, overall
response, disease control and durable response all numerically favored the group
that received Genasense®.





Overall
survival, the other co-primary endpoint in AGENDA, is too early to evaluate, as
prospectively specified.  An analysis for futility, which was defined
as greater than 50% conditional power to observe a statistically significant
benefit of Genasense® under
the prospectively assumed hazard ratio of 0.69, was conducted for the co-primary
endpoint of overall survival.  AGENDA passed this futility analysis,
and an Independent Data Monitoring Committee has recommended that the trial
continue to completion for the determination of the overall survival endpoint.
The safety profile of Genasense® in
AGENDA was consistent with prior studies. We are currently assessing the impact
of these data on the Company’s strategic direction.





We have
been conducting other trials of Genasense® in
melanoma, including a Phase 2 trial of Genasense® plus
chemotherapy consisting of Abraxane®
(paclitaxel protein-bound particles for injectable suspension) (albumin bound)
plus temozolomide (Temodar®). We
have expected to examine whether different dosing regimens would improve the
dosing convenience. We are currently assessing whether to continue such
trials.





Our NDA
for the use of Genasense® plus
chemotherapy in patients with relapsed or refractory CLL was not approved. We
conducted a randomized Phase 3 trial in 241 patients with relapsed or refractory
CLL who were treated with fludarabine and cyclophosphamide (Flu/Cy) with or
without Genasense®.The
trial achieved its primary endpoint: a statistically significant increase (17%
vs. 7%; P=0.025) in the proportion of patients who achieved a complete response
(CR), defined as a complete or nodular partial response. Patients who achieved
this level of response also experienced disappearance of predefined disease
symptoms. A key secondary endpoint, duration of CR, was also significantly
longer for patients treated with Genasense® (median
exceeding 36+ months in the Genasense® group,
versus 22 months in the chemotherapy-only group).





Several
secondary endpoints were not improved by the addition of Genasense®. The
percentage of patients who experienced serious adverse events was increased in
the Genasense® arm;
however, the percentages of patients who discontinued treatment due to adverse
events were equal in the treatment arms. The incidence of certain serious
adverse reactions, including but not limited to nausea, fever and
catheter-related complications, was increased in patients treated with
Genasense®.


22


We
received a “non-approvable” notice from the FDA in December 2006 for our NDA
that proposed the use of Genasense® in
combination with Flu/Cy for the treatment of patients with relapsed or
refractory CLL who had previously received fludarabine. We appealed this
decision with FDA’s Center for Drug Evaluation and Research (CDER) using the
agency’s Formal Dispute Resolution process. In June 2008, we announced results
from 5 years of follow-up on patients who had been accrued to our completed
Phase 3 trial. These data showed that patients treated with Genasense® plus
chemotherapy who achieved either a complete response (CR) or a partial response
(PR) also achieved a statistically significant increase in survival compared
with patients treated with chemotherapy alone (median = 56 months vs. 38 months,
respectively).  After 5 years of follow-up, 22 of 49 (45%) responders
in the Genasense® group
were alive compared with 13 of 54 (24%) responders in the chemotherapy-only
group (hazard ratio = 0.6; P = 0.038). Moreover, with 5 years of follow-up, 12
of 20 patients (60%) in the Genasense® group
who achieved CR were alive, 5 of these patients remained in continuous CR
without relapse, and 2 additional patients had relapsed but had not required
additional therapy. By contrast, only 3 of 8 CR patients in the
chemotherapy-only group were alive, all 3 had relapsed, and all 3 had required
additional anti-leukemic treatment.





In March
2009, CDER decided that available data were still insufficient to support
approval of Genasense® in CLL,
and the Agency recommended conducting another clinical trial. We have made no
decision whether to conduct this study or whether to pursue this application
without further study for regulatory approval in other territories.





As with
melanoma, we have believed the clinical activity in CLL, as well as in
non-Hodgkin’s lymphoma and other types of cancer, should be explored with
additional clinical research. We are currently reassessing whether to proceed
with such studies.





In March
2008, we obtained an exclusive worldwide license for tesetaxel from Daiichi
Sankyo Company Ltd. Tesetaxel is a novel taxane compound that is taken by mouth.
Tesetaxel has completed Phase 2 trials in a number of cancer types, and the drug
has shown definite evidence of antitumor activity in gastric cancer and breast
cancer. Tesetaxel also appears to be associated with a lower incidence of
peripheral nerve damage, a common side effect of taxanes that limits the maximum
amount of these drugs that can be given to patients. At the time we obtained the
license, tesetaxel was on “clinical hold” by FDA due to the occurrence of
several fatalities in the setting of severe neutropenia. In the second quarter
of 2008, we filed a response to the FDA requesting a lift of the clinical hold,
which was granted in June 2008. In January 2009, we announced initiation of a
new clinical trial with tesetaxel to examine the clinical pharmacology of the
drug over a narrow dosing range around the established Phase 2 dose. We expect
accrual to the initial phase of this study to be complete in the Fourth Quarter
2009.





We have
also submitted applications to FDA for designation of tesetaxel as an Orphan
Drug for treatment of patients with advanced gastric cancer and for patients
with advanced melanoma.  Both of these designations were granted. Our
current priorities for clinical testing of tesetaxel include the evaluation of
safety and efficacy in patients with advanced gastric cancer, advanced melanoma
and prostate cancer. Other disease priorities for clinical research include
cancers of the bladder and breast, among other disorders. Maintenance of the
license from Daiichi Sankyo requires certain milestone payments. If such
payments are not made, Daiichi Sankyo may elect to terminate the
license.





Our third
pipeline product is G4544, which is a novel oral formulation of a
gallium-containing compound that we developed in collaboration with Emisphere
Technologies, Inc. We completed a single-dose Phase 1 study of an initial
formulation of this new drug known as “G4544(a)”, the results of which were
presented in the second quarter of 2008. We are currently contemplating a second
study using a modified formulation, known as “G4544(b)”, in order to test
whether this formulation will prove more clinically acceptable.


23


If we are
able to identify a clinically and commercially acceptable formulation of G4544
or another oral gallium-containing compound, we currently intend to evaluate
whether an expedited regulatory approval may be possible. We believe a drug of
this class may also be broadly useful for treatment of other diseases associated
with accelerated bone loss, such as bone metastases, Paget’s disease and
osteoporosis. In addition, new uses of gallium-containing compounds have been
identified for treatment of certain infectious diseases. While we have no
current plans to begin clinical development in the area of infectious disease,
we intend to support research conducted by certain academic institutions by
providing clinical supplies of our gallium-containing drugs.





We are
currently marketing Ganite® in the
U.S., which is an intravenous formulation of gallium, for treatment of
cancer-related hypercalcemia that is resistant to hydration. We have announced
our intention to seek a buyer for Ganite®, but we
have not yet found an acceptable transaction.





Results
of Operations for the Three Months Ended September 30, 2009 and September 30,
2008





($
      thousands)
                    
                    2009
                    
                    
                    2008Product
      sales – net
                    
                    $
                    49
                    
                    
                    $
                    115Cost
      of goods sold
                    
                    
                    10
                    
                    
                    
                    26Gross
      margin
                    
                    
                    39
                    
                    
                    
                    89Operating
      expenses:Research
      and development
                    
                    
                    5,874
                    
                    
                    
                    5,255Selling,
      general and administrative
                    
                    
                    8,869
                    
                    
                    
                    2,308Total
      operating expenses
                    
                    
                    14,743
                    
                    
                    
                    7,563Other
      (expense)/income:Interest
      income and other income/(expense), net
                    
                    
                    (12
                    )
                    
                    
                    56Interest
      expense
                    
                    
                    (265
                    )
                    
                    
                    (769
                    )Amortization
      of deferred financing costs and debt discount
                    
                    
                    (5,450
                    )
                    
                    
                    (3,600
                    )Fair
      value – conversion feature liability
                    
                    
                    -
                    
                    
                    
                    220,000Fair
      value – warrant liability
                    
                    
                    -
                    
                    
                    
                    4,400Total
      other income/(expense), net
                    
                    
                    (5,727
                    )
                    
                    
                    220,087Net
      (loss)/income
                    
                    $
                    (20,431
                    )
                    
                    $
                    212,613





Product
sales-net





Product
sales-net were $49 thousand for the three months ended September 30, 2009,
compared with $115 thousand for the three months ended September 30, 2008. The
unit price of Ganite® was 28%
higher than in the comparison period due to a price increase.Unit
sales of Ganite® declined
48% due to the continued absence of promotional support.





Cost of goods
sold





Cost of
goods sold as a percentage of product sales-net declined from 22.6% in the
prior-year period to 20.4%, primarily due to the effect of higher unit prices
for Ganite®.





Research and development
expenses




Research
and development expenses were $5.9 million for the three months ended September
30, 2009, compared with $5.3 million for the three months ended September 30,
2008.


24


During
2009, with the establishment of the 2009 Stock Incentive Plan, or the 2009 Plan,
and implementation of two Equity Award Exchange programs, outstanding stock
option awards granted under the 1998 Non-Employee Directors Plan, as amended and
1998 Stock Incentive Plan, as amended, were exchanged for grants of new
restricted stock units (RSUs). Incremental compensation cost for the new RSUs
was measured as the excess of the fair value of the RSUs over the fair value of
the stock option awards on the date of exchange. The incremental compensation
cost of the RSUs is being recognized over the remaining amortization period of
the exchanged stock option awards. Share-based compensation expense recognized
for the three months ended September 30, 2009 and 2008 was $2.9 million and $35
thousand, respectively for those employees categorized as research and
development. Partially offsetting this increase were lower expenses on the
AGENDA clinical trial and lower payroll costs, resulting from lower
headcount.





Research
and development expenses incurred on the Genasense® project
during the three months ended September 30, 2009 were approximately $5.1
million, representing 87% of research and development expenses.





Due to
the significant risks and uncertainties inherent in the clinical development and
regulatory approval processes, the nature, timing and costs of the efforts
necessary to complete projects in development are subject to wide variability.
Results from clinical trials may not be favorable. Data from clinical trials are
subject to varying interpretation and may be deemed insufficient by the
regulatory bodies that review applications for marketing approvals. As such,
clinical development and regulatory programs are subject to risks and changes
that may significantly impact cost projections and timelines.





Selling, general and
administrative expenses





Selling,
general and administrative expenses were $8.9 million for the three months ended
September 30, 2009, compared with $2.3 million for the three months ended
September 30, 2008. Share-based compensation expense recognized for the three
months ended September 30, 2009 and 2008 was $6.6 million and $0.1 million,
respectively.





Interest and other
income/(expense), net


Interest
expense





The total
of interest and other income/(expense), net and interest expense resulted in
expense, net of $(0.3) million for the three months ended September 30, 2009,
compared to $(0.7) million for the prior-year period. A lower balance of our
2008 Notes, resulting in lower interest expense, was partially offset by
interest expense on our April 2009 Notes, July 2009 Notes and September 2009
Notes.





Amortization of deferred
financing costs and debt discount





For the
three months ended September 30, 2009, the amortization of deferred financing
costs and debt discount for the 2008 Notes was $2.2 million, for the April 2009
Notes $1.5 million, for the July 2009 Notes $1.5 million and for the September
2009 Notes and July 2009 Notes issued in September $0.3 million. In the
prior-year period, the $3.6 million amortization of deferred financing costs and
debt discount resulted from the 2008 Notes.





Fair value – conversion
feature liability





On the
date that we issued the 2008 Notes, there were an insufficient number of
authorized shares of common stock in order to permit conversion of all of the
2008 Notes. When there are insufficient authorized shares to allow for
settlement of convertible financial instruments, the conversion obligation for
notes should be classified as a liability and measured at fair value on the
balance sheet.


25


On June
9, 2008, based upon a Black-Scholes valuation model, we calculated a fair value
of the conversion feature of the 2008 Notes of $380.0 million and expensed
$360.0 million, the amount that exceeded the proceeds of the $20.0 million from
the closing. On June 30, 2008, we expensed an additional $380.0 million to mark
the conversion feature liability of the 2008 Note to market. At September 30,
2008, the fair value was valued at $520.0 million, resulting in a reduction in
the conversion feature liability of $220.0 million, with the resultant reduction
in the liability included in earnings.





Fair value – warrant
liability





The
warrants that were issued with the 2008 Notes were also treated as liabilities,
due to the insufficient number of authorized shares of common stock at the time
that they were issued. The warrants issued were initially recorded at a fair
value of $7.6 million based upon a Black-Scholes valuation model and re-measured
at June 30, 2008, resulting in expense of $7.2 million in June 2008. At
September 30, 2008, the fair value of the warrant liability was valued at $10.4
million, resulting in a reduction in the warrant liability of $4.4 million, with
the resultant reduction in the liability included in earnings.





Net
(loss)/income





Genta
recorded a net loss of $20.4 million, or net loss per basic and diluted share of
$(0.15), for the three months ended September 30, 2009 and reported net income
of $212.6 million, or net income per basic share of $289.23 per share and net
income per fully diluted share of $5.12 per share, for the three months ended
September 30, 2008.





In
comparison to the prior-year quarter, the net loss for the three months ended
September 30, 2009 was primarily due to the absence of income as a result of
marking to market the conversion feature liabilities of our notes and warrants,
slightly offset by higher share-based compensation expense and higher
amortization of financing costs and debt discount.





Results
of Operations for the Nine Months Ended September 30, 2009 and September 30,
2008





($
      thousands)
                  
                  2009
                  
                  
                  2008Product
      sales – net
                  
                  $
                  180
                  
                  
                  $
                  363Cost
      of goods sold
                  
                  
                  12
                  
                  
                  
                  79Gross
      margin
                  
                  
                  168
                  
                  
                  
                  284Operating
      expenses:Research
      and development
                  
                  
                  11,846
                  
                  
                  
                  16,146Selling,
      general and administrative
                  
                  
                  13,008
                  
                  
                  
                  8,534Setttlement
      of office lease obligation
                  
                  
                  -
                  
                  
                  
                  3,307Reduction
      in liability for settlement of litigation
                  
                  
                  -
                  
                  
                  
                  (340
                  )Total
      operating expenses
                  
                  
                  24,854
                  
                  
                  
                  27,647Other
      (expense)/income:Interest
      income and other income, net
                  
                  
                  4
                  
                  
                  
                  188Interest
      expense
                  
                  
                  (841
                  )
                  
                  
                  (992
                  )Amortization
      of deferred financing costs and debt discount
                  
                  
                  (22,362
                  )
                  
                  
                  (4,441
                  )Fair
      value – conversion feature liability
                  
                  
                  (19,040
                  )
                  
                  
                  (500,000
                  )Fair
      value – warrant liability
                  
                  
                  (7,655
                  )
                  
                  
                  (2,800
                  )Total
      other income/(expense), net
                  
                  
                  (49,894
                  )
                  
                  
                  (508,045
                  )Net
      loss
                  
                  $
                  (74,580
                  )
                  
                  $
                  (535,408
                  )





Product
sales-net





Product
sales-net were $180 thousand for the nine months ended September 30, 2009,
compared with $363 thousand for the nine months ended September 30, 2008. Unit
sales of Ganite® declined
50%.


26


Cost of goods
sold





During
the nine months ended September 30, 2009, most of the sales of Ganite® were
from product that had been previously accounted for as excess
inventory.





Research and development
expenses




Research
and development expenses were $11.8 million for the nine months ended September
30, 2009, compared with $16.1 million for the nine months ended September 30,
2008. Share-based compensation expense recognized for the nine months ended
September 30, 2009 and 2008 was $2.9 million and $0.1 million, respectively, for
those employees categorized as research and development. This increase was more
than offset by lower expenses on the AGENDA clinical trial and lower payroll
costs, resulting from lower headcount. In addition, in March 2008, we entered
into a worldwide license agreement for tesetaxel, resulting in our recognition
of $2.5 million for license payments.





Research
and development expenses incurred on the Genasense® project
during the nine months ended September 30, 2009 were approximately $10.5
million, representing 89% of research and development expenses.





Selling, general and
administrative expenses





Selling,
general and administrative expenses were $13.0 million for the nine months ended
September 30, 2009, compared with $8.5 million for the nine months ended
September 30, 2008. Share-based compensation expense recognized for the nine
months ended September 30, 2009 and 2008 was $6.7 million and $0.3 million,
respectively. This increase was partially offset by lower payroll costs and
lower office rent of $0.8 million, resulting from our termination of a lease for
one floor of office space in May 2008.





Settlement of office lease
obligation





In May
2008, we entered into an amendment of our lease for office space with The
Connell Company, (Connell) whereby the lease for one floor of our office space
in Berkeley Heights, New Jersey was terminated. Connell received a termination
payment of $1.3 million, comprised solely of our security deposits and we agreed
to pay Connell $2.0 million on July 1, 2009. We accrued for the $2.0 million and
it is included on our Consolidated Balance Sheets. In January 2009, we entered
into another amendment of our agreement with Connell whereby our future payment
of $2.0 million is now payable on January 1, 2011, with 6.0% interest paid in
arrears.





Interest and other income,
net


Interest
expense





The total
of the above referenced accounts resulted in expense, net of $(0.8) million for
the nine months ended September 30, 2009 and September 30, 2008. Lower interest
expense on our 2008 Notes, (due to conversions), was offset by interest on our
April 2009 Notes, July 2009 Notes and September 2009 Notes.





Amortization of deferred
financing costs and debt discount





For the
nine months ended September 30, 2009, the amortization of deferred financing
costs and debt discount for the 2008 Notes was $18.3 million, for the April 2009
Notes $2.3 million, for the July 2009 Notes $1.5 million and for the September
2009 Notes and July 2009 Notes issued in September $0.3 million. In the
prior-year period, the $4.4 million amortization of deferred financing costs and
debt discount resulted from the 2008 Notes.


27


Fair value – conversion
feature liability





On the
dates that we issued the 2008 Notes and the April 2009 Notes, there were an
insufficient number of authorized shares of common stock in order to permit
conversion of all of the notes. When there are insufficient authorized shares to
allow for settlement of convertible financial instruments, the conversion
obligation for the notes should be classified as a liability and measured at
fair value on the balance sheet.





On April
2, 2009, using a Black-Scholes valuation model, we calculated a fair value of
the conversion feature of the April 2009 Notes of $67.8 million and expensed
$61.8 million, the amount that exceeded the proceeds of the $6.0 million from
the closing. On June 26, 2009, our stockholders, at a Special Meeting of
Stockholders, authorized our Board of Directors to effect a reverse stock split
and our Board of Directors effected a 1-for-50 reverse stock split, resulting in
us having enough shares of common stock in order to permit conversion of all the
April 2009 Notes. We re-measured the conversion feature liability at $25.0
million, resulting in net expense of $19.0 million.





Based
upon a Black-Scholes valuation model, we calculated a fair value of the
conversion feature of the 2008 Notes of $380.0 million on June 9, 2008 and
expensed $360.0 million, the amount that exceeded the proceeds of the $20.0
million from the closing. At September 30, 2008, the fair value of our
conversion feature liability was valued at $520.0 million, resulting in expense
of $500.0 million for the nine months ended September 30, 2008.





Fair value – warrant
liability





The
warrants that were issued with the 2008 Notes and the April 2009 Notes were also
treated as liabilities, due to the insufficient number of authorized shares of
common stock at the time that they were issued.





On April
2, 2009, using a Black-Scholes valuation model, we calculated a fair value for
the warrants issued with the April 2009 Notes of $20.8 million. On June 26,
2009, the date of the reverse stock split, we re-measured the warrants at a fair
value of $7.7 million, resulting in expense of $7.7 million.





The
warrants issued with the 2008 Notes were initially recorded at a fair value of
$7.6 million based upon a Black-Scholes valuation model. At September 30, 2008,
the fair value of the warrant liability was valued at $10.4 million, resulting
in expense of $2.8 million.





Net loss





Genta
recorded a net loss of $74.6 million, or net loss per basic and diluted share of
$0.98, for the nine months ended September 30, 2009 and incurred a net loss of
$535.4 million, or net loss per basic and diluted share of $748.55, for the nine
months ended September 30, 2008.





The lower
net loss for the nine months ended September 30, 2009 was primarily due to lower
expenses from marking to market the conversion feature liabilities of our notes.
In addition, the results reflect last year’s settlement of office lease
obligation, last year’s recognition of tesetaxel payments, higher share-based
compensation, reduced headcount and payroll expenses, higher amortization of
financing costs and debt discount and higher expense from marking to market
our warrant liabilities.





Liquidity
and Capital Resources





At
September 30, 2009, we had cash and cash equivalents totaling $7.4 million,
compared with $4.9 million at December 31, 2008, reflecting our April 2009
financing, July 2009 financing and September 2009 financing offset by funds used
in operating our company.





During
the first nine months of 2009, cash used in operating activities was $15.1
million compared with $22.0 million for the same period in 2008, reflecting the
reduced size of our company and our cost-control efforts.


28





Presently,
with no further financing, we project that we will run out of funds in the
second quarter of 2010. The terms of the April 2009 Notes enable those
noteholders, at their option, to purchase additional notes with similar terms.
We currently do not have any additional financing in place. If we are unable to
raise additional funds, we could be required to reduce our spending plans,
reduce our workforce, license one or more of our products or technologies that
we would otherwise seek to commercialize ourselves, or sell certain assets.
There can be no assurance that we can obtain financing, if at all, on terms
acceptable to us.





We will
require additional cash in order to maximize the commercial opportunity and
continue clinical development of our product candidates. Alternatives available
to us to sustain our operations include collaborative agreements, equity
financing, debt and other financing arrangements with potential corporate
partners and other sources. However, there can be no assurance that any such
collaborative agreements or other sources of funding will be available to us on
favorable terms, if at all.





We
anticipate seeking additional product development opportunities through
potential acquisitions or investments. Such acquisitions or investments may
consume cash reserves or require additional cash or equity. Our working capital
and additional funding requirements will depend upon numerous factors,
including: (i) the progress of our research and development programs; (ii) the
timing and results of pre-clinical testing and clinical trials; (iii) the level
of resources that we devote to sales and marketing capabilities; (iv)
technological advances; (v) the activities of competitors; and (vi) our ability
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.





Critical
Accounting Policies and Estimates





Our
significant accounting policies are more fully described in Note 3 to our
consolidated financial statements. In preparing our financial statements in
accordance with accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that, among
other things, affect the reported amounts of assets and liabilities and reported
amounts of revenues and expenses. These estimates are most significant in
connection with our critical accounting policies, namely those of our accounting
policies that are most important to the portrayal of our financial condition and
results and require management’s most difficult, subjective or complex
judgments. These judgments often result from the need to make estimates about
the effects of matters that are inherently uncertain. Actual results may differ
from those estimates under different assumptions or conditions. We believe that
the following represents our critical accounting policies:





·
            Going concern. Our
      recurring losses from operations and negative cash flows from operations
      raise substantial doubt about our ability to continue as a going concern
      and as a result, our independent registered public accounting firm
      included an explanatory paragraph in its report on our consolidated
      financial statement for the year ended December 31, 2008 with respect to
      this uncertainty. We have prepared our financial statements on a going
      concern basis, which contemplates the realization of assets and the
      satisfaction of liabilities and commitments in the normal course of
      business. The financial statements do not include any adjustments relating
      to the recoverability and classification of recorded asset amounts or
      amounts of liabilities that might be necessary should we be unable to
      continue in existence.





·
            Revenue recognition. We
      recognize revenue from product sales when title to product and associated
      risk of loss has passed to the customer and we are reasonably assured of
      collecting payment for the sale. All revenue from product sales are
      recorded net of applicable allowances for returns, rebates and other
      applicable discounts and allowances. We allow return of our product for up
      to twelve months after product
expiration.





·
            Research and development
      costs. All such costs are expensed as incurred, including raw
      material costs required to manufacture drugs for clinical
      trials.


29




·
            Estimate of fair value of
      convertible notes and warrants. We use a Black-Scholes model to
      estimate the fair value of our convertible notes and
    warrants.





Item
3. Quantitative and
Qualitative Disclosures about Market Risk





Our
carrying values of cash, marketable securities, accounts payable, accrued
expenses and debt are a reasonable approximation of their fair value. The
estimated fair values of financial instruments have been determined by us using
available market information and appropriate valuation methodologies. We have
not entered into and do not expect to enter into, financial instruments for
trading or hedging purposes. We do not currently anticipate entering into
interest rate swaps and/or similar instruments.




Our
primary market risk exposure with regard to financial instruments is to changes
in interest rates, which would impact interest income earned on such
instruments. We have no material currency exchange or interest rate risk
exposure as of September 30, 2009. Therefore, there will be no ongoing exposure
to a potential material adverse effect on our business, financial condition or
results of operation for sensitivity to changes in interest rates or to changes
in currency exchange rates.





Item
4T. Controls and
Procedures





Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures





As
required by Rule 13a-15(b), Genta’s Chief Executive Officer and Principal
Accounting and 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)). Based on
that evaluation, the Chief Executive Officer and Principal Accounting and
Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of the end of the period covered by this
report.





Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rule
13a-15 that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.


30


PART
II





Item
1. Legal
Proceedings





In
September 2008, several shareholders of our Company, on behalf of themselves and
all others similarly situated, filed a class action complaint against our
Company, our Board of Directors, and certain of our executive officers in
Superior Court of New Jersey, captioned Collins v. Warrell, Docket No.
L-3046-08. The complaint alleged that in issuing convertible notes, our Board of
Directors, and certain officers breached their fiduciary duties, and our Company
aided and abetted the breach of fiduciary duty. On March 20, 2009, the Superior
Court of New Jersey granted the motion of our Company to dismiss the class
action complaint and dismissed the complaint with prejudice.  On April
30, 2009, the plaintiffs filed a notice of appeal with the Appellate
Division. On May 13, 2009, the plaintiffs filed a motion for relief from
judgment based on a claim of new evidence, which was denied on June 12,
2009. The plaintiffs also asked the Appellate Division for a temporary
remand to permit the Superior Court judge to resolve the issues of the new
evidence plaintiffs sought to raise, and the Appellate Division granted the
motion for temporary remand. Following briefing and a hearing, the Superior
Court denied the motion for relief from judgment on August 28, 2009. Thus, this
matter will proceed in the Appellate Division. Plaintiffs' brief before the
Appellate Division was due on October 28, 2009, and our responsive brief is due
on November 30, 2009. We intend to continue our vigorous defense of this
lawsuit.





In
November 2008, a complaint against our Company and its transfer agent, BNY
Mellon Shareholder Services, was filed in the Supreme Court of the State of New
York by an individual stockholder. The complaint alleges that our Company and
our transfer agent caused or contributed to losses suffered by the stockholder.
Our Company denies the allegations of this complaint and intends to vigorously
defend this lawsuit.


31


Item
1A.Risk
Factors





You
should carefully consider the following risks and all of the other information
set forth in this Form 10-Q and the Form 10-K for the year ended December 31,
2008 before deciding to invest in shares of our common stock. The risks
described below are not the only ones facing our Company. Additional risks not
presently known to us or that we currently deem immaterial may also impair our
business operations.





If
any of the following risks actually occur, our business, financial condition or
results of operations would likely suffer. In such case, the market price of our
common stock would likely decline due to the occurrence of any of these risks,
and you may lose all or part of your investment.





Risks
Related to our Business




Our
business will suffer if we fail to obtain timely funding.




Our
operations to date have required significant cash expenditures. Our future
capital requirements will depend on the results of our research and development
activities, preclinical studies and clinical trials, competitive and
technological advances, and regulatory activities of the FDA and other
regulatory authorities. In order to commercialize our products, seek new product
candidates and continue our research and development programs, we will need to
raise additional funds.





On June
9, 2008, we placed $20 million of the 2008 Notes with certain institutional and
accredited investors. The 2008 Notes bear interest at an annual rate of 15%
payable at quarterly intervals in other 2008 Notes to the holder, and are
presently convertible into shares of Genta common stock at a conversion rate of
10,000 shares of common stock for every $1,000.00 of principal.





On April
2, 2009, we placed approximately $6 million of the April 2009 Notes and April
2009 Warrants. The April 2009 Notes bear interest at an annual rate of 8%
payable semi-annually in April 2009 Notes to the holder, and are convertible
into shares of our common stock at a conversion rate of 10,000 shares of common
stock for every $1,000.00 of principal amount outstanding.





On July
7, 2009, we entered into a securities purchase agreement with certain accredited
institutional investors to place up to $10 million in aggregate principal amount
of units consisting of (i) 70% July 2009 Notes, and (ii) 30% common
stock.  In connection with the sale of the units, we also issued to
the investors July 2009 Warrants.  We closed on $3 million of such
July 2009 Notes, common stock and July 2009 Warrants on July 7,
2009.





On
September 4, 2009, we closed on $7 million of additional July 2009 Notes, common
stock and July 2009 Warrants. Also on September 4, 2009, we entered into a
securities purchase agreement with certain accredited institutional investors,
pursuant to which we issued $3 million of units consisting of (i) 70% September
2009 Notes, and (ii) 30% common stock. The September 2009 Notes bear
interest at an annual rate of 8% payable at semi-annual intervals in September
2009 Notes to the holder, and are convertible into shares of our common stock at
a conversion rate of 10,000 shares of common stock for every $1,000.00 of
principal. In connection with the sale of the units, we also issued to the
investors September 2009 Warrants.





We will
need to obtain more funding in the future through collaborations or other
arrangements with research institutions and corporate partners or public and
private offerings of our securities, including debt or equity financing. We may
not be able to obtain adequate funds for our operations from these sources when
needed or on acceptable terms. Future collaborations or similar arrangements may
require us to license valuable intellectual property to, or to share substantial
economic benefits with, our collaborators. If we raise additional capital by
issuing additional equity or securities convertible into equity, our
stockholders may experience dilution and our share price may decline. Any debt
financing may result in restrictions on our spending.


32


If we are
unable to raise additional funds, we could be required to reduce our spending
plans, reduce our workforce, license one or more of our products or technologies
that we would otherwise seek to commercialize ourselves, sell certain assets,
cease operations or declare bankruptcy. Presently, with no further financing, we
project that we will run out of funds in the second quarter of 2010. The terms
of the April 2009 Notes enable those noteholders, at their option, to purchase
additional notes with similar terms. We currently do not have any additional
financing in place. There can be no assurance that we can obtain financing, if
at all, on terms acceptable to us.




We
may be unsuccessful in our efforts to obtain approval from the FDA or EMEA and
to commercialize our pharmaceutical product candidates.




The
commercialization of our pharmaceutical products involves a number of
significant challenges. In particular, our ability to commercialize products,
such as tesetaxel, an oral gallium compound and Genasense®,
depends, in large part, on the success of our clinical development programs, our
efforts to obtain regulatory approvals and our sales and marketing efforts
directed at physicians, patients and third-party payors. A number of factors
could affect these efforts, including:




·
            our
      ability to demonstrate clinically that our products are useful and safe in
      particular indications;




·
            delays
      or refusals by regulatory authorities in granting marketing
      approvals;




·
            our
      limited financial resources and sales and marketing experience relative to
      our competitors;




·
            actual
      and perceived differences between our products and those of our
      competitors;




·
            the
      availability and level of reimbursement for our products by third-party
      payors;




·
            incidents
      of adverse reactions to our
products;




·
            side
      effects or misuse of our products and the unfavorable publicity that could
      result; and




·
            the
      occurrence of manufacturing, supply or distribution
      disruptions.




We cannot
assure you that our product candidates will receive FDA or EMEA approval. For
example, the recent results in the Phase 3 AGENDA trial of Genasense® in
advanced melanoma will not be sufficient to apply for a NDA in the U.S. If
extended followup of the AGENDA trial is possible and shows a statistically
significant benefit for patients, we may be able to submit a NDA after that
result is known. However, we withdrew our prior NDA for Genasense®in
melanoma in 2004 after an advisory committee to the FDA failed to recommend
approval. A negative decision was also received for a similar application in
melanoma from the EMEA in 2007. Our NDA for Genasense® plus
chemotherapy in patients with relapsed or refractory CLL was also
unsuccessful.





Our
financial condition and results of operations have been and will continue to be
significantly affected by FDA and EMEA action with respect to Genasense®. Any
adverse outcomes with respect to FDA and/or EMEA approvals could negatively
impact our ability to obtain additional funding or identify potential
partners.




Ultimately,
our efforts may not prove to be as effective as those of our competitors. In the
U.S. and elsewhere, our products will face significant competition. The
principal conditions on which our product development efforts are focused and
some of the other disorders for which we are conducting additional studies, are
currently treated with several drugs, many of which have been available for a
number of years or are available in inexpensive generic forms. Thus, even if we
obtain regulatory approvals, we will need to demonstrate to physicians, patients
and third-party payors that the cost of our products is reasonable and
appropriate in light of their safety and efficacy, the price of competing
products and the relative health care benefits to the patient. If we are unable
to demonstrate that the costs of our products are reasonable and appropriate in
light of these factors, we will likely be unsuccessful in commercializing our
products.


33




Recurring
losses and negative cash flows from operations raise substantial doubt about our
ability to continue as a going concernand we may
not be able to continue as a going concern.




Our
recurring losses from operations and negative cash flows from operations raise
substantial doubt about our ability to continue as a going concern and as a
result, our independent registered public accounting firm included an
explanatory paragraph in its report on our consolidated financial statement for
the year ended December 31, 2008 with respect to this uncertainty. Substantial
doubt about our ability to continue as a going concern may create negative
reactions to the price of the common shares of our stock and we may have a more
difficult time obtaining financing.




We have
prepared our financial statements on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities and commitments in
the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts of liabilities that might be necessary should we be unable to
continue in existence.




We
will not be able to commercialize our product candidates if our preclinical
studies do not produce successful results or if our clinical trials do not
demonstrate safety and efficacy in humans.




Our
success will depend on the success of our currently ongoing clinical trials and
subsequent clinical trials that have not yet begun. It may take several years to
complete the clinical trials of a product, and a failure of one or more of our
clinical trials can occur at any stage of testing. We believe that the
development of each of our product candidates involves significant risks at each
stage of testing. If clinical trial difficulties and failures arise, our product
candidates may never be approved for sale or become commercially viable. We do
not believe that any of our product candidates have alternative uses if our
current development activities are unsuccessful.




There are
a number of difficulties and risks associated with clinical trials. These
difficulties and risks may result in the failure to receive regulatory approval
to sell our product candidates or the inability to commercialize any of our
product candidates. The possibility exists that:




·
            we
      may discover that a product candidate does not exhibit the expected
      therapeutic results in humans, may cause harmful side effects or have
      other unexpected characteristics that may delay or preclude regulatory
      approval or limit commercial use if
approved;




·
            the
      results from early clinical trials may not be statistically significant or
      predictive of results that will be obtained from expanded, advanced
      clinical trials;




·
            institutional
      review boards or regulators, including the FDA, may hold, suspend or
      terminate our clinical research or the clinical trials of our product
      candidates for various reasons, including noncompliance with regulatory
      requirements or if, in their opinion, the participating subjects are being
      exposed to unacceptable health
risks;




·
            subjects
      may drop out of our clinical
trials;




·
            our
      preclinical studies or clinical trials may produce negative, inconsistent
      or inconclusive results, and we may decide, or regulators may require us,
      to conduct additional preclinical studies or clinical trials;
      and




·
            the
      cost of our clinical trials may be greater than we currently
      anticipate.




Between
2004 and 2007, we reported that randomized trials of Genasense® in patients with
myeloma, acute myeloid leukemia, AML, hormone-refractory prostate cancer, small
cell lung cancer and non small cell lung cancer were not sufficiently positive
to warrant further investigation on the dose-schedules that were examined or
with the chemotherapy that was employed in these trials. Data from these trials
have been presented at various scientific meetings.


34




In
October 2009, we announced that AGENDA did not show a statistically significant
benefit for its co-primary endpoint of progression-free
survival.  Secondary endpoints of overall response rate and disease
control rate (which includes complete and partial responses, plus stable disease
greater than 3 months duration) also did not show a statistically significant
benefit. According to the prespecified analysis plan, the statistical
significance of durable response, (a secondary endpoint that measures the
proportion of patients who achieved a complete or partial response that lasts
greater than 6 months), is too early to evaluate. However, the observed
differences in progression-free survival, overall response, disease control and
durable response all numerically favored the group that received Genasense®.





Overall
survival, the other co-primary endpoint in AGENDA, is too early to evaluate, as
prospectively specified.  An analysis for futility, which was defined
as  greater than 50% conditional power to observe a statistically
significant benefit of Genasense® under
the prospectively assumed hazard ratio of 0.69, has been conducted for the
co-primary endpoint of overall survival.  AGENDA has passed this
futility analysis, and an Independent Data Monitoring Committee has recommended
that the trial continue to completion for the determination of the overall
survival endpoint.  The safety profile of Genasense® in
AGENDA was consistent with prior studies. We are currently assessing the impact
of these data on the Company’s strategic direction.





We cannot
assure you that our ongoing preclinical studies and clinical trials will produce
successful results in order to support regulatory approval of Genasense® in any
territory or for any indication. Failure to obtain approval, or a substantial
delay in approval of Genasense® for
these or any other indications would have a material adverse effect on our
results of operations and financial condition.





We have a significant amount of debt.
Our substantial indebtedness could adversely affect our business,
financial condition and results of operations and our ability to meet our payment
obligations under the notes and our other debt.





We have a
significant amount of debt.  As of September 30, 2009, we had a face amount
of debt outstanding of $15.3 million, consisting of the face value of 2008 Notes
of $2.2 million, the face value of April 2009 Notes of $5.4 million, the face
value of July 2009 Notes of $0.7 million and the face value of September 2009
Notes of $7.0 million.





Our
aggregate level of debt could have significant consequences on our future
operations, including:





•
            making
      it more difficult for us to meet our payment and other obligations under
      our outstanding debt;





•
            resulting
      in an event of default if we fail to comply with the restrictive covenants
      contained in our debt agreements, which could result in all of our debt
      becoming due and payable and, in the case of an event of default under our
      secured debt, could permit the lenders to foreclose on our assets securing
      such debt;





•
            limiting
      our flexibility in planning for, or reacting to, and increasing our
      vulnerability to, changes in our business, the industry in which we
      operate and the general economy;
and





•
            placing
      us at a competitive disadvantage compared to our competitors that have
      less debt or are less leveraged.





Any of
the above-listed factors could have an adverse effect on our business, financial
condition and results of operations and our ability to meet our payment
obligations under the notes and our other debt.


35


Our substantial amount of secured
debt may prevent us from obtaining additional financing in the future or make the
terms of securing such additional financing more onerous to
us.





The 2008
Notes and April 2009 Notes are secured by a first priority lien on our assets
and the July 2009 Notes and September 2009 Notes are unsecured. While the terms
or availability of additional capital is always uncertain, should we need to
obtain additional financing in the future, because of the existing liens on our
assets, it may be even more difficult for us to do so. Potential future lenders
may be unwilling to provide financing on an unsecured basis and may not agree to
share the collateral with our existing secured debt. Alternatively, if we are
able to raise additional financing in the future, the terms of any such
financing may be onerous to us. This potential inability to obtain borrowings or
our obtaining borrowings on unfavorable terms could negatively impact our
operations and impair our ability to maintain sufficient working
capital.





We may not have the ability to repay
the principal on our convertible notes when due.





Our
convertible notes mature on various dates in 2010 and 2011, and bear interest
payable quarterly or semi-annually at rates of 8.00% or 15.00% per annum. Absent
additional financing, we will likely not have sufficient funds to pay the
principal upon maturity or upon any acceleration thereof. If we fail to pay
principal on our convertible notes when due, we will be in default under our
debt agreements which could have an adverse effect on our business, financial
condition and results of operations.





We
have relied on and continue to rely on our contractual collaborative
arrangements with research institutions and corporate partners for development
and commercialization of our products. Our business could suffer if we are not
able to enter into suitable arrangements, maintain existing relationships, or if
our collaborative arrangements are not successful in developing and
commercializing products.




We have
entered into collaborative relationships relating to the conduct of clinical
research and other research activities in order to augment our internal research
capabilities and to obtain access to specialized knowledge and expertise. Our
business strategy depends in part on our continued ability to develop and
maintain relationships with leading academic and research institutions and with
independent researchers. The competition for these relationships is intense, and
we can give no assurances that we will be able to develop and maintain these
relationships on acceptable terms.





We also
seek strategic alliances with corporate partners, primarily pharmaceutical and
biotechnology companies, to help us develop and commercialize drugs. Various
problems can arise in strategic alliances. A partner responsible for conducting
clinical trials and obtaining regulatory approval may fail to develop a
marketable drug. A partner may decide to pursue an alternative strategy or focus
its efforts on alliances or other arrangements with third parties. A partner
that has been granted marketing rights for a certain drug within a geographic
area may fail to market the drug successfully. Consequently, strategic alliances
that we may enter into may not be scientifically or commercially
successful.





We cannot
control the resources that any collaborator may devote to our products. Any of
our present or future collaborators may not perform their obligations as
expected. These collaborators may breach or terminate their agreements with us,
for instance upon changes in control or management of the collaborator, or they
may otherwise fail to conduct their collaborative activities successfully and in
a timely manner.





In
addition, our collaborators may elect not to develop products arising out of our
collaborative arrangements or to devote sufficient resources to the development,
regulatory approval, manufacture, marketing or sale of these products. If any of
these events occur, we may not be able to develop or commercialize our
products.


36


An
important part of our strategy involves conducting multiple product development
programs. We may pursue opportunities in fields that conflict with those of our
collaborators. In addition, disagreements with our collaborators could develop
over rights to our intellectual property. The resolution of such conflicts and
disagreements may require us to relinquish rights to our intellectual property
that we believe we are entitled to. In addition, any disagreement or conflict
with our collaborators could reduce our ability to obtain future collaboration
agreements and negatively impact our relationship with existing collaborators.
Such a conflict or disagreement could also lead to delays in collaborative
research, development, regulatory approval or commercialization of various
products or could require or result in litigation or arbitration, which would be
time consuming and expensive, divert the attention of our management and could
have a significant negative impact on our business, financial condition and
results of operations.





We
anticipate that we will incur additional losses and we may never be
profitable.




We have
never been profitable. We have incurred substantial annual operating losses
associated with ongoing research and development activities, preclinical
testing, clinical trials, regulatory submissions and manufacturing activities.
From the period since our inception to September 30, 2009, we have incurred a
cumulative net deficit of $1,018.7 million. We may never achieve revenue
sufficient for us to attain profitability. Achieving profitability is unlikely
unless Genasense® receives
approval from the FDA or EMEA for commercial sale in one or more
indications.





Our
business depends heavily on a small number of products.




We
currently market and sell one product, Ganite® and the
principal patent covering its use for the approved indication expired in April
2005. If Genasense® is not
approved, if approval is significantly delayed, or if in the event of approval
the product is commercially unsuccessful, then we do not expect significant
sales of other products to offset this loss of potential revenue.





To
diversify our product line in the long term, it will be important for us to
identify suitable technologies and products for acquisition or licensing and
development. If we are unable to identify suitable technologies and products, or
if we are unable to acquire or license products we identify, we may be unable to
diversify our product line and to generate long-term growth.





We may be unable
to obtain or enforce patents, other proprietary rights and licenses to protect
our business; we could become involved in litigation relating to our patents or
licenses that could cause us to incur additional costs and delay or prevent our
introduction of new drugs to market.




Our
success will depend to a large extent on our ability to:




·
            obtain
      U.S. and foreign patent or other proprietary protection for our
      technologies, products and
processes;




·
            preserve
      trade secrets; and




·
            operate
      without infringing the patent and other proprietary rights of third
      parties.




Legal
standards relating to the validity of patents covering pharmaceutical and
biotechnological inventions and the scope of claims made under these types of
patents are still developing, and they involve complex legal and factual
questions. As a result, our ability to obtain and enforce patents that protect
our drugs is highly uncertain. If we are unable to obtain and enforce patents
and licenses to protect our drugs, our business, results of operations and
financial condition could be adversely affected.


37


We hold
numerous U.S., foreign and international patents covering various aspects of our
technology, which include novel compositions of matter, methods of large-scale
synthesis and methods of controlling gene expression and methods of treating
disease. In the future, however, we may not be successful in obtaining
additional patents despite pending or future applications. Moreover, our current
and future patents may not be sufficient to protect us against competitors who
use similar technology. Additionally, our patents, the patents of our business
partners and the patents for which we have obtained licensing rights may be
challenged, narrowed, invalidated or circumvented. Furthermore, rights granted
under our patents may not be broad enough to cover commercially valuable drugs
or processes, and therefore, may not provide us with sufficient competitive
advantage with respect thereto.





The
pharmaceutical and biotechnology industries have been greatly affected by
time-consuming and expensive litigation regarding patents and other intellectual
property rights. We may be required to commence, or may be made a party to,
litigation relating to the scope and validity of our intellectual property
rights or the intellectual property rights of others. Such litigation could
result in adverse decisions regarding the patentability of our inventions and
products, the enforceability, validity or scope of protection offered by our
patents or our infringement of patents held by others. Such decisions could make
us liable for substantial money damages, or could bar us from the manufacture,
sale or use of certain products. Moreover, an adverse decision may also compel
us to seek a license from a third party. The costs of any license may be
prohibitive and we may not be able to enter into any required licensing
arrangement on terms acceptable to us.





The cost
to us of any litigation or proceeding relating to patent or license rights, even
if resolved in our favor, could be substantial. Some of our competitors may be
able to sustain the costs of complex patent or licensing litigation more
effectively than we can because of their substantially greater resources.
Uncertainties resulting from the initiation and continuation of any patent or
related litigation could have a material adverse effect on our ability to
compete in the marketplace.





We also
may be required to participate in interference proceedings declared by the U.S.
Patent and Trademark Office in opposition or similar proceedings before foreign
patent offices and in International Trade Commission proceedings aimed at
preventing the importation of drugs that would compete unfairly with our drugs.
These types of proceedings could cause us to incur considerable
costs.





The
principal patent covering the use of Ganite® for its
approved indication, including Hatch-Waxman extensions, expired in April
2005.





Genta’s
patent portfolio includes approximately 65 granted patents and 66 pending
applications in the U.S. and foreign countries. We endeavor to seek appropriate
U.S. and foreign patent protection on our oligonucleotide
technology.





We have
licensed ten U.S. patents relating to Genasense® and its
backbone chemistry that expire between 2008 and 2015. Corresponding patent
applications have been filed in three foreign countries. We also own five U.S.
patent applications relating to methods of using Genasense® expected
to expire in 2020 and 2026, with approximately 50 corresponding foreign patent
applications and granted patents.


38


Most
of our products are in an early stage of development, and we may never receive
regulatory approval for these products.





Most of
our resources have been dedicated to the research and development of potential
antisense pharmaceutical products such as Genasense®, based
upon oligonucleotide technology. While we have demonstrated the activity of
antisense oligonucleotide technology in model systems in vitro and in animals,
Genasense® is our
only antisense product to have been tested in humans. Several of our other
technologies that serve as a possible basis for pharmaceutical products are only
in preclinical testing. Results obtained in preclinical studies or early
clinical investigations are not necessarily indicative of results that will be
obtained in extended human clinical trials. Our products may prove to have
undesirable and unintended side effects or other characteristics that may
prevent our obtaining FDA or foreign regulatory approval for any indication. In
addition, it is possible that research and discoveries by others will render our
oligonucleotide technology obsolete or noncompetitive. Similar types of
limitations apply to all our product candidates.





Clinical
trials are costly and time consuming and are subject to delays; our business
would suffer if the development process relating to our products were subject to
meaningful delays.




Clinical
trials are very costly and time-consuming. The length of time required to
complete a clinical study depends upon many factors, including but not limited
to the size of the patient population, the ability of patients to get to the
site of the clinical study, the criteria for determining which patients are
eligible to join the study and other issues. Delays in patient enrollment and
other unforeseen developments could delay completion of a clinical study and
increase its costs, which could also delay any eventual commercial sale of the
drug that is the subject of the clinical trial.




Our
commencement and rate of completion of clinical trials also may be delayed by
many other factors, including the following:




·
            inability
      to obtain sufficient quantities of materials for use in clinical
      trials;




·
            inability
      to adequately monitor patient progress after
  treatment;




·
            unforeseen
      safety issues;




·
            the
      failure of the products to perform well during clinical trials;
      and




·
            government
      or regulatory delays.




If
we fail to obtain the necessary regulatory approvals, we cannot market and sell
our products in the United States.




The FDA
imposes substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
preclinical and clinical testing and other costly and time-consuming procedures.
Satisfaction of these requirements typically takes several years or more
depending upon the type, complexity and novelty of the product. We cannot apply
for FDA approval to market any of our products under development until
preclinical and clinical trials on the product are successfully completed.
Several factors could prevent successful completion or cause significant delays
of these trials, including an inability to enroll the required number of
patients or failure to demonstrate adequately that the product is safe and
effective for use in humans. If safety concerns develop, the FDA could stop our
trials before completion. We may not market or sell any product for which we
have not obtained regulatory approval.




We cannot
assure you that the FDA will ever approve the use of our products that are under
development. If the patient populations for which our products are approved are
not sufficiently broad, or if approval is accompanied by unanticipated labeling
restrictions, the commercial success of our products could be limited and our
business, results of operations and financial condition could consequently be
materially adversely affected.


39




If
the third party manufacturers upon which we rely fail to produce our products in
the volumes that we require on a timely basis, or to comply with stringent
regulations applicable to pharmaceutical drug manufacturers, we may face delays
in the commercialization of, or be unable to meet demand for, our products and
may lose potential revenues.




We do not
manufacture any of our products or product candidates and we do not plan to
develop any capacity to do so. We have contracted with third-party manufacturers
to manufacture Ganite® and
Genasense®. We are
currently seeking a third-party manufacturer for tesetaxel. The manufacture of
pharmaceutical products requires significant expertise and capital investment,
including the development of advanced manufacturing techniques and process
controls. Manufacturers of pharmaceutical products often encounter difficulties
in production, especially in scaling up initial production. These problems
include difficulties with production costs and yields, quality control and
assurance and shortages of qualified personnel, as well as compliance with
strictly enforced federal, state and foreign regulations. Our third-party
manufacturers may not perform as agreed or may terminate their agreements with
us.




In
addition to product approval, any facility in which our product candidates are
manufactured or tested for its ability to meet required specifications must be
approved by the FDA and/or the EMEA before a commercial product can be
manufactured. Failure of such a facility to be approved could delay the approval
of our product candidates.




We do not
currently have alternate manufacturing plans in place. The number of third-party
manufacturers with the expertise, required regulatory approvals and facilities
to manufacture bulk drug substance on a commercial scale is limited, and it
would take a significant amount of time to arrange for alternative
manufacturers. If we need to change to other commercial manufacturers, the FDA
and comparable foreign regulators must approve these manufacturers’ facilities
and processes prior to our use, which would require new testing and compliance
inspections, and the new manufacturers would have to be educated in or
independently develop the processes necessary for the production of our
products.




Any of
these factors could cause us to delay or suspend clinical trials, regulatory
submissions, required approvals or commercialization of our products or product
candidates, entail higher costs and result in our being unable to effectively
commercialize our products. Furthermore, if our third-party manufacturers fail
to deliver the required commercial quantities of bulk drug substance or finished
product on a timely basis and at commercially reasonable prices, and we were
unable to promptly find one or more replacement manufacturers capable of
production at a substantially equivalent cost, in substantially equivalent
volume and on a timely basis, we would likely be unable to meet demand for our
products and we would lose potential revenues.




Even
if we obtain regulatory approval, we will be subject to ongoing regulation, and
any failure by us or our manufacturers to comply with such regulation could
suspend or eliminate our ability to sell our products.




Ganite®,
Genasense®(if it obtains regulatory approval), tesetaxel and any other product we
may develop will be subject to ongoing regulatory oversight, primarily by the
FDA. Failure to comply with post-marketing requirements, such as maintenance by
us or by the manufacturers of our products of current Good Manufacturing
Practices as required by the FDA, or safety surveillance of such products or
lack of compliance with other regulations could result in suspension or
limitation of approvals or other enforcement actions. Current Good Manufacturing
Practices are FDA regulations that define the minimum standards that must be met
by companies that manufacture pharmaceuticals and apply to all drugs for human
use, including those to be used in clinical trials, as well as those produced
for general sale after approval of an application by the FDA. These regulations
define requirements for personnel, buildings and facilities, equipment, control
of raw materials and packaging components, production and process controls,
packaging and label controls, handling and distribution, laboratory controls and
recordkeeping. Furthermore, the terms of any product candidate approval,
including the labeling content and advertising restrictions, may be so
restrictive that they could adversely affect the marketability of our product
candidates. Any such failure to comply or the application of such restrictions
could limit our ability to market our product candidates and may have a material
adverse effect on our business, results of operations and financial condition.
Such failures or restrictions may also prompt regulatory recalls of one or more
of our products, which could have material and adverse effects on our
business.




40




The
raw materials for our products are produced by a limited number of suppliers,
and our business could suffer if we cannot obtain needed quantities at
acceptable prices and qualities.




The raw
materials that we require to manufacture our drugs, particularly
oligonucleotides and taxanes, are available from only a few suppliers. If these
suppliers cease to provide us with the necessary raw materials or fail to
provide us with an adequate supply of materials at an acceptable price and
quality, we could be materially adversely affected.





If
third-party payors do not provide coverage and reimbursement for use of our
products, we may not be able to successfully commercialize our
products.




Our
ability to commercialize drugs successfully will depend in part on the extent to
which various third-party payors are willing to reimburse patients for the costs
of our drugs and related treatments. These third-party payors include government
authorities, private health insurers and other organizations, such as health
maintenance organizations. Third-party payors often challenge the prices charged
for medical products and services. Accordingly, if less costly drugs are
available, third-party payors may not authorize or may limit reimbursement for
our drugs, even if they are safer or more effective than the alternatives. In
addition, the federal government and private insurers have changed and continue
to consider ways to change the manner in which health care products and services
are provided and paid for in the United States. In particular, these third-party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products. In the
future, it is possible that the government may institute price controls and
further limits on Medicare and Medicaid spending. These controls and limits
could affect the payments we collect from sales of our products.
Internationally, medical reimbursement systems vary significantly, with some
countries requiring application for, and approval of, government or third-party
reimbursement. In addition, some medical centers in foreign countries have fixed
budgets, regardless of levels of patient care. Even if we succeed in bringing
therapeutic products to market, uncertainties regarding future health care
policy, legislation and regulation, as well as private market practices, could
affect our ability to sell our products in quantities, or at prices, that will
enable us to achieve profitability.




Our
business exposes us to potential product liability that may have a negative
effect on our financial performance and our business generally.




The
administration of drugs to humans, whether in clinical trials or commercially,
exposes us to potential product and professional liability risks, which are
inherent in the testing, production, marketing and sale of human therapeutic
products. Product liability claims can be expensive to defend and may result in
large judgments or settlements against us, which could have a negative effect on
our financial performance and materially and adversely affect our business. We
maintain product liability insurance (subject to various deductibles), but our
insurance coverage may not be sufficient to cover claims. Furthermore, we cannot
be certain that we will always be able to maintain or increase our insurance
coverage at an affordable price. Even if a product liability claim is not
successful, the adverse publicity and time and expense of defending such a claim
may interfere with or adversely affect our business and financial
performance.





We
may incur a variety of costs to engage in future acquisitions of companies,
products or technologies, and the anticipated benefits of those acquisitions may
never be realized.




As a part
of our business strategy, we may make acquisitions of, or significant
investments in, complementary companies, products or technologies, although no
significant acquisition or investments are currently pending. Any future
acquisitions would be accompanied by risks such as:




·
            difficulties
      in assimilating the operations and personnel of acquired
      companies;




·
            diversion
      of our management’s attention from ongoing business
    concerns;




41




·
            our
      potential inability to maximize our financial and strategic position
      through the successful incorporation of acquired technology and rights to
      our products and services;




·
            additional
      expense associated with amortization of acquired
  assets;




·
            maintenance
      of uniform standards, controls, procedures and policies;
    and




·
            impairment
      of existing relationships with employees, suppliers and customers as a
      result of the integration of new management
  personnel.




We cannot
guarantee that we will be able to successfully integrate any business, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.




We
face substantial competition from other companies and research institutions that
are developing similar products, and we may not be able to compete
successfully.




In many
cases, our products under development will be competing with existing therapies
for market share. In addition, a number of companies are pursuing the
development of antisense technology and controlled-release formulation
technology and the development of pharmaceuticals utilizing such technologies.
We compete with fully integrated pharmaceutical companies that have more
substantial experience, financial and other resources and superior expertise in
research and development, manufacturing, testing, obtaining regulatory
approvals, marketing and distribution. Smaller companies may also prove to be
significant competitors, particularly through their collaborative arrangements
with large pharmaceutical companies or academic institutions. Furthermore,
academic institutions, governmental agencies and other public and private
research organizations have conducted and will continue to conduct research,
seek patent protection and establish arrangements for commercializing products.
Such products may compete directly with any products that may be offered by
us.





Our
competition will be determined in part by the potential indications for which
our products are developed and ultimately approved by regulatory authorities.
For certain of our potential products, an important factor in competition may be
the timing of market introduction of our or our competitors’ products.
Accordingly, the relative speed with which we can develop products, complete the
clinical trials and approval processes and supply commercial quantities of the
products to the market are expected to be important competitive factors. We
expect that competition among products approved for sale will be based, among
other things, on product efficacy, safety, reliability, availability, price,
patent position and sales, marketing and distribution capabilities. The
development by others of new treatment methods could render our products under
development non-competitive or obsolete.





Our
competitive position also depends upon our ability to attract and retain
qualified personnel, obtain patent protection or otherwise develop proprietary
products or processes and secure sufficient capital resources for the
often-substantial period between technological conception and commercial sales.
We cannot assure you that we will be successful in this regard.





We
are dependent on our key executives and scientists, and the loss of key
personnel or the failure to attract additional qualified personnel could harm
our business.




Our
business is highly dependent on our key executives and scientific staff. The
loss of key personnel or the failure to recruit necessary additional or
replacement personnel will likely impede the achievement of our development
objectives. There is intense competition for qualified personnel in the
pharmaceutical and biotechnology industries, and there can be no assurances that
we will be able to attract and retain the qualified personnel necessary for the
development of our business.


42


Risks
Related to Outstanding Litigation





The
outcome of and costs relating to pending litigation are uncertain.




In
November 2008, a complaint against us and our transfer agent, BNY Mellon
Shareholder Services, was filed in the Supreme Court of the State of New York by
an individual stockholder. The complaint alleges that we and our transfer agent
caused or contributed to losses suffered by the stockholder. We deny the
allegations of the complaint and intend to vigorously defend this
lawsuit.





In
September 2008, several shareholders of the Company, on behalf of themselves and
all others similarly situated, filed a class action complaint against the
Company, the Board of Directors, and certain of its executive officers in
Superior Court of New Jersey, captioned Collins v. Warrell, Docket No.
L-3046-08. The complaint alleged that in issuing convertible notes, the Board of
Directors, and certain officers breached their fiduciary duties, and the Company
aided and abetted the breach of fiduciary duty.  On March 20, 2009,
the Superior Court of New Jersey granted the motion of the Company to dismiss
the class action complaint and dismissed the complaint with prejudice. On April
30, 2009, the plaintiffs filed a notice of appeal with the Appellate
Division. On May 13, 2009, the plaintiffs filed a motion for relief from
judgment based on a claim of new evidence, which was denied on June 12,
2009. The plaintiffs also asked the Appellate Division for a temporary
remand to permit the Superior Court judge to resolve the issues of the new
evidence plaintiffs sought to raise and the Appellate Division granted the
motion for temporary remand. Following briefing and a hearing, the Superior
Court denied the motion for relief from judgment on August 28,
2009.  Thus, this matter will proceed in the Appellate
Division.  Plaintiffs' brief before the Appellate Division is due on
October 28, 2009, and our responsive brief is due on November 30, 2009. We
intend to continue our vigorous defense of this lawsuit.





Risks
Related to Our Common Stock





Provisions
in our restated certificate of incorporation and bylaws and Delaware law may
discourage a takeover and prevent our stockholders from receiving a premium for
their shares.




Provisions
in our restated certificate of incorporation and bylaws may discourage third
parties from seeking to obtain control of us and, therefore, could prevent our
stockholders from receiving a premium for their shares. Our restated certificate
of incorporation gives our Board of Directors the power to issue shares of
preferred stock without approval of the holders of common stock. Any preferred
stock that is issued in the future could have voting rights, including voting
rights that could be superior to that of our common stock. The affirmative vote
of 66 2/3% of our voting stock is required to approve certain transactions and
to take certain stockholder actions, including the amendment of certain
provisions of our certificate of incorporation. Our bylaws contain provisions
that regulate how stockholders may present proposals or nominate directors for
election at annual meetings of stockholders.





In
addition, we are subject to Section 203 of the Delaware General Corporation Law,
which contains restrictions on stockholder action to acquire control of
us.





In
September 2005, our Board of Directors approved a Stockholder Rights Plan and
declared a dividend of one preferred stock purchase right, which we refer to as
a Right, for each share of our common stock held of record as of the close of
business on September 27, 2005. In addition, Rights shall be issued in respect
of all shares of common stock issued after such date. The Rights contain
provisions to protect stockholders in the event of an unsolicited attempt to
acquire us, including an accumulation of shares in the open market, a partial or
two-tier tender offer that does not treat all stockholders equally and other
activities that the Board believes are not in the best interests of
stockholders. The Rights may discourage a takeover and prevent our stockholders
from receiving a premium for their shares.





We
have not paid, and do not expect to pay in the future, cash dividends on our
common stock.




We have
never paid cash dividends on our common stock and do not anticipate paying any
such dividends in the foreseeable future. We currently intend to retain our
earnings, if any, for the development of our business.


43





Our
stock price is volatile.




The
market price of our common stock, like that of the common stock of many other
biopharmaceutical companies, has been and likely will continue to be highly
volatile. Factors that could have a significant impact on the future price of
our common stock include but are not limited to:




·
            the
      results of preclinical studies and clinical trials by us or our
      competitors;




·
            announcements
      of technological innovations or new therapeutic products by us or our
      competitors;




·
            government
      regulation;




·
            developments
      in patent or other proprietary rights by us or our competitors, including
      litigation;




·
            fluctuations
      in our operating results; and




·
            market
      conditions for biopharmaceutical stocks in
  general.




At
September 30, 2009, our outstanding convertible notes and warrants were
convertible into 202.9 million shares of common stock. Future sales of shares of
our common stock by existing stockholders, holders of convertible notes who
might convert such convertible notes into common stock and warrant holders who
may exercise their warrants to purchase common stock also could adversely affect
the market price of our common stock. Moreover, the perception that sales of
substantial amounts of our common stock might occur could adversely affect the
market price of our common stock.




As
our convertible noteholders convert their notes and warrants into shares of our
common stock, our stockholders will be diluted.





The
conversion of some or all of our notes dilutes the ownership interests of
existing stockholders. Any sales in the public market of the common stock
issuable upon conversion of the notes could adversely affect prevailing market
prices of our common stock. In addition, the existence of the notes may
encourage short selling by market participants because the conversion of the
notes could depress the price of our common stock.




If
holders of our notes elect to convert their notes and sell material amounts of
our common stock in the market, such sales could cause the price of our common
stock to decline, and such downward pressure on the price of our common stock
may encourage short selling of our common stock by holders of our notes or
others.




If there
is significant downward pressure on the price of our common stock, it may
encourage holders of notes or others to sell shares by means of short sales to
the extent permitted under the U.S. securities laws.  Short sales
involve the sale by a holder of notes, usually with a future delivery date, of
common stock the seller does not own.  Covered short sales are sales
made in an amount not greater than the number of shares subject to the short
seller’s right to acquire common stock, such as upon conversion of
notes.  A holder of notes may close out any covered short position by
converting its notes or purchasing shares in the open market.  In
determining the source of shares to close out the covered short position, a
holder of notes will likely consider, among other things, the price of common
stock available for purchase in the open market as compared to the conversion
price of the notes.  The existence of a significant number of short
sales generally causes the price of common stock to decline, in part because it
indicates that a number of market participants are taking a position that will
be profitable only if the price of the common stock declines.


44




Our
common stock is considered a "penny stock" and does not qualify for exemption
from the “penny stock” restrictions, which may make it more difficult for you to
sell your shares.




Our
common stock is classified as a “penny stock” by the SEC and is subject to rules
adopted by the SEC regulating broker-dealer practices in connection with
transactions in “penny stocks.” The SEC has adopted regulations which define a
“penny stock” to be any equity security that has a market price of less than
$5.00 per share, or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless
exempt, these rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule relating to the penny stock market. Disclosure is also
required to be made about current quotations for the securities and commissions
payable to both the broker-dealer and the registered representative. Finally,
broker-dealers must send monthly statements to purchasers of penny stocks
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. As a result of our shares of
common stock being subject to the rules on penny stocks, the liquidity of our
common stock may be adversely affected.


45


Item
2.  Unregistered
Sales of Equity Securities and Use of Proceeds





As
previously disclosed on Current Reports on Forms 8-K filed by the Company on
July 8, 2009, August 12, 2009 and September 9, 2009, the Company has issued
unregistered equity securities.





Item
3.  Defaults Upon
Senior Securities





None.





Item
4.  Submission of Matters
to a Vote of Security Holders





None.





Item
5.  Other
Information





On August
29, 2008, the Company filed a Form S-1 Registration Statement with the
Securities and Exchange Commission for the offer and sale of the Company’s
common stock. On March 9, 2009, the Company amended its filing to be for the
offer and sale of the Company’s convertible debt securities and warrants. On
July 30, 2009, the Company amended its filing to be for the offer and sale of
the Company’s common stock, convertible debt securities and warrants. On August
14,  2009, the Company amended its filing to increase the amount of
the Company's common stock, convertible debt securities and warrants offered for
sale. The Form S-1/A is not effective and does not relate to any pending or
specific future financing.


46





Item
6. Exhibits.





(a)
Exhibits





Exhibit
                  Number
              
              Description of Document4.1
              
              Form
      of Subordinated Unsecured Convertible Note (Incorporated by reference to
      Exhibit 4.1 of the Company’s Current Report on Form 8-K, as filed with the
      SEC on July 8, 2009).4.2
              
              Form
      of Warrant (Incorporated by reference to Exhibit 4.2 of the Company’s
      Current Report on Form 8-K, as filed with the SEC on July 8,
      2009)4.3
              
              Form
      of Subordinated Unsecured Convertible Note (Incorporated by reference to
      Exhibit 4.1 of the Company’s Current Report on Form 8-K, as filed with the
      SEC on September 9, 2009).4.4
              
              Form
      of Warrant (Incorporated by reference to Exhibit 4.2 of the Company’s
      Current Report on Form 8-K, as filed with the SEC on September 9,
      2009)10.1
              
              Form
      of Securities Purchase Agreement, by and among the Company and certain
      accredited investors set forth therein (Incorporated by reference to
      Exhibit 10.1 of the company’s Current Report on Form 8-K, as filed with
      the SEC on July 8, 2009).10.2
              
              Form
      of Registration Rights Agreement, by and among the Company and certain
      accredited investors set forth therein (Incorporated by reference to
      Exhibit 10.2 of the company’s Current Report on Form 8-K, as filed with
      the SEC on July 8, 2009).10.3
              
              Form
      of Consent and Amendment Agreement, by and among the Company and certain
      accredited investors set forth therein (Incorporated by reference to
      Exhibit 10.3 to the Company’s Current Report on Form 8-K, as filed with
      the SEC on July 8, 2009).10.4
              
              Form
      of Amendment Agreement, dated August 6, 2009, by and among the Company and
      certain accredited investors set forth therein (Incorporated by reference
      to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with
      the SEC on August 12, 2009)10.5
              
              Form
      of Amendment Agreement, dated August 24, 2009, by and among the Company
      and certain accredited investors set forth therein (Incorporated by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as
      filed with the SEC on September 9, 2009)10.6
              
              Form
      of Consent and Amendment Agreement, by and among the Company and certain
      accredited investors set forth therein (Incorporated by reference to
      Exhibit 10.2 to the Company’s Current Report on Form 8-K, as filed with
      the SEC on September 9, 2009).10.7
              
              Form
      of Securities Purchase Agreement, dated September 4, 2009, by and among
      the Company and certain accredited investors set forth therein
      (Incorporated by reference to Exhibit 10.3 of the company’s Current Report
      on Form 8-K, as filed with the SEC on September 9,
  2009).10.8
              
              Form
      of Registration Rights Agreement, dated September 4, 2009, by and among
      the Company and certain accredited investors set forth therein
      (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report
      on Form 8-K, as filed with the SEC on September 9,
  2009).10.9
              
              Placement
      Agent Agreement, dated as of February 4, 2009, by and between the company
      and Rodman & Renshaw, LLC (Incorporated by reference to Exhibit 10.5
      to the Company’s Current Report on Form 8-K, as filed with the SEC on
      September 9, 2009).10.10
              
              Amendment
      No. 1 to Placement Agent Agreement, dated as of July 6, 2009, by and
      between the Company and Rodman & Renshaw, LLC (Incorporated by
      reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K, as
      filed with the SEC on September 9, 2009).10.11
              
              Genta
      Incorporated 2009 Stock Incentive Plan (filed herewith)1012
              
              Form
      of Restricted Stock Unit Issuance Agreement (filed
    herewith)31.1
              
              Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).31.2
              
              Certification
      by Vice President, Finance pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).32.1
              
              Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
      herewith).32.2
              
              Certification
      by Vice President, Finance pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
      herewith).


47


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
      IncorporatedDate:
      November 16,
      2009/s/ RAYMOND P. WARRELL, JR.,
      M.D.Raymond
      P. Warrell, Jr., M.D.Chairman
      and Chief Executive Officer(principal
      executive officer)Date:
      November 16,
      2009/s/ GARY SIEGELGary
      SiegelVice
      President, Finance(principal
      financial and accounting
officer)
  48




Exhibit
Index





Exhibit
                  Number
              
              Description of Document4.1
              
              Form
      of Subordinated Unsecured Convertible Note (Incorporated by reference to
      Exhibit 4.1 of the Company’s Current Report on Form 8-K, as filed with the
      SEC on July 8, 2009).4.2
              
              Form
      of Warrant (Incorporated by reference to Exhibit 4.2 of the Company’s
      Current Report on Form 8-K, as filed with the SEC on July 8,
      2009)4.3
              
              Form
      of Subordinated Unsecured Convertible Note (Incorporated by reference to
      Exhibit 4.1 of the Company’s Current Report on Form 8-K, as filed with the
      SEC on September 9, 2009).4.4
              
              Form
      of Warrant (Incorporated by reference to Exhibit 4.2 of the Company’s
      Current Report on Form 8-K, as filed with the SEC on September 9,
      2009)10.1
              
              Form
      of Securities Purchase Agreement, by and among the Company and certain
      accredited investors set forth therein (Incorporated by reference to
      Exhibit 10.1 of the company’s Current Report on Form 8-K, as filed with
      the SEC on July 8, 2009).10.2
              
              Form
      of Registration Rights Agreement, by and among the Company and certain
      accredited investors set forth therein (Incorporated by reference to
      Exhibit 10.2 of the company’s Current Report on Form 8-K, as filed with
      the SEC on July 8, 2009).10.3
              
              Form
      of Consent and Amendment Agreement, by and among the Company and certain
      accredited investors set forth therein (Incorporated by reference to
      Exhibit 10.3 to the Company’s Current Report on Form 8-K, as filed with
      the SEC on July 8, 2009).10.4
              
              Form
      of Amendment Agreement, dated August 6, 2009, by and among the Company and
      certain accredited investors set forth therein (Incorporated by reference
      to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with
      the SEC on August 12, 2009)10.5
              
              Form
      of Amendment Agreement, dated August 24, 2009, by and among the Company
      and certain accredited investors set forth therein (Incorporated by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as
      filed with the SEC on September 9, 2009)10.6
              
              Form
      of Consent and Amendment Agreement, by and among the Company and certain
      accredited investors set forth therein (Incorporated by reference to
      Exhibit 10.2 to the Company’s Current Report on Form 8-K, as filed with
      the SEC on September 9, 2009).10.7
              
              Form
      of Securities Purchase Agreement, dated September 4, 2009, by and among
      the Company and certain accredited investors set forth therein
      (Incorporated by reference to Exhibit 10.3 of the company’s Current Report
      on Form 8-K, as filed with the SEC on September 9,
  2009).10.8
              
              Form
      of Registration Rights Agreement, dated September 4, 2009, by and among
      the Company and certain accredited investors set forth therein
      (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report
      on Form 8-K, as filed with the SEC on September 9,
  2009).10.9
              
              Placement
      Agent Agreement, dated as of February 4, 2009, by and between the company
      and Rodman & Renshaw, LLC (Incorporated by reference to Exhibit 10.5
      to the Company’s Current Report on Form 8-K, as filed with the SEC on
      September 9, 2009).10.10
              
              Amendment
      No. 1 to Placement Agent Agreement, dated as of July 6, 2009, by and
      between the Company and Rodman & Renshaw, LLC (Incorporated by
      reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K, as
      filed with the SEC on September 9, 2009).10.11
              
              Genta
      Incorporated 2009 Stock Incentive Plan (filed herewith)10.12
              
              Form
      of Restricted Stock Unit Issuance Agreement (filed
    herewith)31.1
              
              Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).31.2
              
              Certification
      by Vice President, Finance pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).32.1
              
              Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
      herewith).32.2
              
              Certification
      by Vice President, Finance pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
      herewith).


49