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 March 31, 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.


Yesx      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 companyx




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 o      No ̈





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Securities
Exchange Act of 1934).


Yes oNo x





As of May
8, 2009, the registrant had 3,355,551,122 shares of common stock
outstanding.













Genta
Incorporated


INDEX
TO FORM 10-Q





PagePART
      I.FINANCIAL
      INFORMATIONItem
      1.
                                              Consolidated
      Financial Statements:Consolidated
      Balance Sheets at March 31, 2009 (unaudited) and December 31,
      2008
                                              3Consolidated
      Statements of Operations for the Three Months Ended March 31, 2009 and
      2008 (unaudited)
                                              4Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2009 and
      2008 (unaudited)
                                              5Notes
      to Consolidated Financial Statements
                                              6Item
      2.
                                              Management's
      Discussion and Analysis of Financial Condition and
      Results of Operations
                                              17Item
      3.
                                              Quantitative
      and Qualitative Disclosures about Market Risk
                                              27Item
      4T.
                                              Controls
      and Procedures
                                              27PART
      II. OTHER
      INFORMATIONItem
      1.
                                              Legal
      Proceedings
                                              28Item
      1A.
                                              Risk
      Factors
                                              28Item
      2.
                                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                                              42Item
      3.
                                              Defaults
      Upon Senior Securities
                                              42Item
      4.
                                              Submission
      of Matters to a Vote of Security Holders
                                              42Item
      5.
                                              Other
      Information
                                              42Item
      6.
                                              Exhibits
                                              43SIGNATURES
                                              44CERTIFICATIONS




2





GENTA
INCORPORATED


CONSOLIDATED
BALANCE SHEETS





(In
thousands, except par value data)





March
      31,2009
                              
                              
                              December
      31,(unaudited)
                              
                              
                              2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                              
                              $
                              598
                              
                              
                              $
                              4,908Accounts
      receivable - net of allowances of $10 at March 31, 2009 and $12 at
      December 31, 2008, respectively
                              
                              
                              8
                              
                              
                              
                              2Inventory
      (Note 3)
                              
                              
                              121
                              
                              
                              
                              121Prepaid
      expenses and other current assets
                              
                              
                              843
                              
                              
                              
                              973Total
      current assets
                              
                              
                              1,570
                              
                              
                              
                              6,004Property
      and equipment, net
                              
                              
                              269
                              
                              
                              
                              300Deferred
      financing costs and debt discount (Note 6)
                              
                              
                              5,298
                              
                              
                              
                              6,389Total
      assets
                              
                              $
                              7,137
                              
                              
                              $
                              12,693LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                              
                              $
                              11,080
                              
                              
                              $
                              11,224Total
      current liabilities
                              
                              
                              11,080
                              
                              
                              
                              11,224Long-term
      liabilities:Office
      lease settlement obligation (Note 4)
                              
                              
                              1,979
                              
                              
                              
                              1,979Convertible
      notes due June 9, 2010, $10,654 and $15,540 outstanding, net of debt
      discount of ($5,991) and ($11,186) at March 31, 2009 and December 31,
      2008, respectively (Note 6)
                              
                              
                              4,663
                              
                              
                              
                              4,354Total
      long-term liabilities
                              
                              
                              6,642
                              
                              
                              
                              6,333Commitments
      and contingencies (Note 9)Stockholders'
      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 March 31, 2009 and December 31,
      2008, respectively
                              
                              
                              -
                              
                              
                              
                              -Series
      G participating cumulative preferred stock, $.001 par value; 0 shares
      issued and outstanding at March 31, 2009 and December 31, 2008,
      respectively
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, $.001 par value; 6,000,000 and 6,000,000 shares authorized,
      1,014,111 and 486,724 shares issued and outstanding at March 31, 2009 and
      December 31, 2008, respectively
                              
                              
                              1,014
                              
                              
                              
                              487Additional
      paid-in capital
                              
                              
                              943,594
                              
                              
                              
                              938,775Accumulated
      deficit
                              
                              
                              (955,193
                              )
                              
                              
                              (944,126
                              )Total
      stockholders' deficit
                              
                              
                              (10,585
                              )
                              
                              
                              (4,864
                              )Total
      liabilities and stockholders' deficit
                              
                              $
                              7,137
                              
                              
                              $
                              12,693





See
accompanying notes to consolidated financial statements.


3





GENTA
INCORPORATED


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended March 31,(In
      thousands, except per share data)
                
                2009
                
                
                2008Product
      sales - net
                
                $
                62
                
                
                $
                117Cost
      of goods sold
                
                
                -
                
                
                
                25Gross
      margin
                
                
                62
                
                
                
                92Operating
      expenses:Research
      and development
                
                
                2,298
                
                
                
                6,438Selling,
      general and administrative
                
                
                2,172
                
                
                
                3,638Reduction
      in liability for settlement of litigation (Note 5)
                
                
                -
                
                
                
                (260
                )Total
      operating expenses
                
                
                4,470
                
                
                
                9,816Other
      income/(expense):Gain
      on maturity of marketable securities
                
                
                -
                
                
                
                31Interest
      and other income, net
                
                
                15
                
                
                
                61Interest
      expense
                
                
                (387
                )
                
                
                (25
                )Amortization
      of deferred financing costs and debt discount (Note 6)....
                
                
                (6,287
                )
                
                
                -Total
      other income/(expense), net
                
                
                (6,659
                )
                
                
                67Net
      loss
                
                $
                (11,067
                )
                
                $
                (9,657
                )Net
      loss per basic and diluted share
                
                $
                (0.01
                )
                
                $
                (0.29
                )Shares
      used in computing net loss per basic and
      diluted  share
                
                
                899,963
                
                
                
                33,781




See
accompanying notes to consolidated financial statements.


4





GENTA
INCORPORATED


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Three Months Ended March
      31,(In
      thousands)
                                                        
                                                        2009
                                                        
                                                        
                                                        2008Operating
      activities:Net
      loss
                                                        
                                                        $
                                                        (11,067
                                                        )
                                                        
                                                        $
                                                        (9,657
                                                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                        
                                                        
                                                        38
                                                        
                                                        
                                                        
                                                        41Amortization
      of deferred financing costs and debt discount
                                                        
                                                        
                                                        6,287Share-based
      compensation
                                                        
                                                        
                                                        73
                                                        
                                                        
                                                        
                                                        145Gain
      on maturity of marketable securities
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (31
                                                        )Reduction
      in liability for settlement of litigation
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (260
                                                        )Changes
      in operating assets and liabilities:Accounts
      receivable
                                                        
                                                        
                                                        (6
                                                        )
                                                        
                                                        
                                                        (19
                                                        )Inventory
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        25Prepaid
      expenses and other current assets
                                                        
                                                        
                                                        130
                                                        
                                                        
                                                        
                                                        419Accounts
      payable and accrued expenses
                                                        
                                                        
                                                        242
                                                        
                                                        
                                                        
                                                        3,110Other
      assets
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (13
                                                        )Net
      cash used in operating activities
                                                        
                                                        
                                                        (4,303
                                                        )
                                                        
                                                        
                                                        (6,240
                                                        )Investing
      activities:Maturities
      of marketable securities
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,000Purchase
      of property and equipment
                                                        
                                                        
                                                        (7
                                                        )
                                                        
                                                        
                                                        -Net
      cash provided by (used in) investing activities
                                                        
                                                        
                                                        (7
                                                        )
                                                        
                                                        
                                                        2,000Financing
      activities:Repayments
      of note payable
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (322
                                                        )Issuance
      of common stock, net
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,857Net
      cash provided by financing activities
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,535Decrease
      in cash and cash equivalents
                                                        
                                                        
                                                        (4,310
                                                        )
                                                        
                                                        
                                                        (1,705
                                                        )Cash
      and cash equivalents at beginning of period
                                                        
                                                        
                                                        4,908
                                                        
                                                        
                                                        
                                                        5,814Cash
      and cash equivalents at end of period
                                                        
                                                        $
                                                        598
                                                        
                                                        
                                                        $
                                                        4,109





See
accompanying notes to consolidated financial statements.


5


GENTA
INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009


(Unaudited)





1.
              Organization
      and Business





Genta
Incorporated (the “Company” or “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.
Management expects that such losses will continue at least until its lead
product, Genasense®
(oblimersen sodium) Injection, receives approval for commercial sale in one or
more indications. Achievement of profitability for the Company is currently
dependent on the timing of Genasense®
regulatory approval. Any adverse events with respect to approval by the U.S.
Food and Drug Administration (‘‘FDA’’) and/or European Medicines Agency
(‘‘EMEA’’) could negatively impact the Company’s ability to obtain additional
funding or identify potential partners.





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
operation 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.





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 100,000
shares of common stock for every $1,000.00 of principal. 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 500,000
shares of common stock for every $1,000.00 of principal. Certain members of
senior management of Genta participated in this offering. The notes are secured
by a first lien on all assets of Genta.





On April
2, 2009, the Company entered into a securities purchase agreement with certain
accredited institutional investors to place up to $12 million of senior secured
convertible notes, or the 2009 Notes, and corresponding warrants to purchase
common stock. The Company closed on approximately $6 million of such notes and
warrants on April 2, 2009. The 2009 Notes bear interest at an annual rate of 8%
payable semi-annually in other senior secured convertible promissory notes to
the holder, and will be convertible into shares of the Company’s common stock at
a conversion rate of 500,000 shares of common stock for every $1,000.00 of
principal amount outstanding. In addition, the 2009 Notes include certain events
of default, including a requirement that the Company effect a reverse stock
split of its Common Stock within 105 days of April 2, 2009. The notes and
warrants are convertible into approximately 3,897,000,000 shares. There are
currently not enough shares of common stock authorized under the Company’s
certificate of incorporation to cover the shares underlying the 2009 Notes and
warrants and the 2008 Notes.





A special
meeting of the Company’s stockholders will be held on May 27, 2009. The Company
has recommended to its stockholders that they provide authorization to the
Company’s Board of Directors to effect a reverse split in any ratio from 1:2 to
1:100.


6


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 further
development and global commercialization of Genasense®.
Additional alternatives available to the Company to subsequently sustain its
operations include development and commercialization partnerships on other
products in our pipeline, 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.





Net cash
used in operating activities during the three months ended March 31, 2009 was
$4.3 million. Presently, with no further financing, management projects that the
Company will run out of funds in June, 2009. The terms of the 2009 Notes enable
those noteholders, at their option, to purchase 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.





If the
Company is unable to raise additional funds, it will need to do one or more of
the following:




·
            delay,
      scale back or eliminate some or all of the Company’s research and product
      development programs and sales and marketing
  activity;




·
            license
      or sell to third parties products or technologies that the Company would
      otherwise seek to develop and commercialize
  themselves;




·
            attempt
      to sell the Company;




·
            cease
      operations; or




·
            declare
      bankruptcy.







2.
            Summary
      of Significant Accounting Policies




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 Securities and Exchange Commission. 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. 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.


7


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 March 31, 2009, the amounts on deposit that exceeded
the $250,000 federally insured limit was $0.3 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 three months ended March 31, 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 may have occurred or that could occur in the future, as
required by Section 382 of the Internal Revenue Code of 1986, as amended (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 March 31, 2009, the Company had accrued a tax liability of
$533 thousand, penalties of $27 thousand and interest of $294 thousand related
to this assessment. The Company appealed this decision to the State and on
February 13, 2008, the State 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 pretrial conference has been
scheduled with an assigned judge for May 5, 2009. It is anticipated that a trial
will commence in the second half of 2009.




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 $13
thousand and $18 thousand in interest expense related to the State of New Jersey
assessment during the three months ended March 31, 2009 and 2008,
respectively.




8




Stock
Options





Stock
Options are accounted for using the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (‘‘SFAS
123R’’), using the modified prospective transition method. Under the standard,
all share-based payments, including grants of employee stock options, are
recognized in the Consolidated Statement 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. The Company utilizes a Black-Scholes
option-pricing model to measure the fair value of stock options granted to
employees. See Note 7 and Note 8 to the Consolidated Financial Statements for a
further discussion on share-based compensation.




Deferred
Financing Costs




Deferred
financing costs are amortized over the term of its associated debt instrument.
The Company evaluates the terms of debt instruments to determine if any embedded
derivatives or beneficial conversion features exist. The Company allocates the
aggregate proceeds of debt instruments between warrants and notes based on their
relative fair values in accordance with Accounting Principle Board No. 14 (APB
14), “Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants.” The fair
value of the warrant issued to the placement agent is calculated utilizing the
Black-Scholes option-pricing model. The Company is amortizing the resultant
discount or other features over the term of the notes through its 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 debt is accelerated because
of defaults or conversions, then the amortization is accelerated.




Net
Loss Per Common Share





Net loss
per common share for the three months ended March 31, 2009 and 2008,
respectively, are based on the weighted average number of shares of common stock
outstanding during the periods. Basic and diluted net loss per share are
identical for the three months ended March 31, 2009 and 2008,
respectively,  as potentially dilutive securities have been excluded
from the calculation of the diluted net loss per common share, as the inclusion
of such securities would be antidilutive. At March 31, 2009 and 2008,
respectively, the potentially dilutive securities include approximately 2,122.6
million shares and approximately 2.3 million shares, respectively, reserved for
the conversion of convertible notes, convertible preferred stock and the
exercise of outstanding options and warrants.





Recent
Accounting Pronouncements





In April
2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
SFAS 141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, to amend and clarify the initial recognition and
measurement, subsequent measurement and accounting, and related disclosures
arising from contingencies in a business combination under SFAS 141(R). Under
the new guidance, assets acquired and liabilities assumed in a business
combination that arise from contingencies should be recognized at fair value on
the acquisition date if fair value can be determined during the measurement
period. If fair value can not be determined, companies should typically account
for the acquired contingencies using existing guidance. The implementation of
this standard did not have a material effect on the Company’s consolidated
financial statements.


9


In June
2008, the FASB ratified EITF 07-5, “Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock”. EITF 07-5
addresses how an entity should evaluate whether an instrument or embedded
feature is indexed to its own stock, accounting for situations where the
currency of the linked instrument differs from the host instrument and
accounting for market-based employee stock options. EITF 07-5 is effective for
fiscal years beginning after December 15, 2008 and early adoption is not
permitted. The implementation of this standard did not have a material effect on
the Company’s consolidated financial statements.





In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt That
May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which is effective for the Company January 1, 2009. The FSP
includes guidance that convertible debt instruments that may be settled in cash
upon conversion should be separated between its liability and equity components,
with each component being accounted for in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest costs are recognized
in subsequent periods. This guidance does not apply to the Company since its
existing convertible debt instruments are settled only in stock upon conversion,
and as a result does not have an impact on the Company’s unaudited Consolidated
Financial Statements.





In April
2008, the FASB issued FASB Staff Position 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”), which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”).  The objective of FSP 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS No. 141(R), “Business Combinations” and
other principles of generally accepted accounting principles.  FSP
142-3 applies to all intangible assets, whether acquired in a business
combination or otherwise, and shall be effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years and applied prospectively to intangible assets acquired after
the effective date. The implementation of this standard did not have a material
effect on the Company’s consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. The statement is intended to improve financial
reporting by identifying a consistent hierarchy for selecting accounting
principles to be used in preparing financial statements that are prepared in
conformance with generally accepted accounting principles. The statement is
effective 60 days following the Securities and Exchange Commission’s (SEC)
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity with GAAP”, and is not expected to have any
impact on the Company’s consolidated financial statements.





In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB SFAS
133” (“SFAS 161”), which requires enhanced disclosures for derivative and
hedging activities. SFAS 161 became effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The
implementation of this standard did not have a material effect on the Company’s
consolidated financial statements.


10


In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. The implementation of this standard did not have a material effect on the
Company’s consolidated financial statements.





In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”.
SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the United
States of America and expands disclosures about fair value measurements. SFAS
157 applies under other accounting pronouncements that require or permit fair
value measurements. The Company was required to adopt SFAS 157 beginning
January 1, 2008. In February 2008, the FASB released FASB Staff Position 157-2
- Effective Date of FASB
Statement No. 157, which delayed the effective date of SFAS No. 157 for
all non-financial assets and liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). In October 2008, the FASB released FASB Staff Position 157-3 -
Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active.In April 2009, the FASB
released FASB Staff Position 157-4 Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. The adoption
of SFAS No. 157 for the Company’s financial assets and liabilities did not have
a material impact on its consolidated financial statements and the adoption of
SFAS No. 157 for the Company’s non-financial assets and liabilities, effective
January 1, 2009, did not have a material effect on the Company’s consolidated
financial statements.





3.
            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):





March 31,
                  
                  
                  December 31,2009
                  
                  
                  2008Raw
      materials
                  
                  $
                  24
                  
                  
                  $
                  24Finished
      goods
                  
                  
                  97
                  
                  
                  
                  97$
                  121
                  
                  
                  $
                  121





During
the three months ended March 31, 2009, 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.





4.
            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. The Company will pay 6.0% interest in arrears to Connell from
July 1, 2009 through the new payment date.


11




5.
            Reduction
      in Liability for Settlement of
Litigation





In 2008
the Company reached an agreement to settle a class action litigation claim in
consideration for issuance of 2.0 million shares of common stock of the Company
(adjusted for any subsequent event that results in a change in the number of
shares outstanding as of January 31, 2007) and $18.0 million in cash for the
benefit of plaintiffs and the stockholder class. A Court order approving the
settlement was issued in May 2008 and the settlement became final in June 2008.
The Company also entered into release and settlement agreements with its
insurance carriers, pursuant to which insurance will cover the settlement fee
and various costs incurred in connection with the action. Under FASB Statement
No. 5, “Accounting for
Contingencies” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount
of a Loss, an interpretation of FASB Statement No. 5,” the Company
recorded an expense comprised of 2.0 million shares of the Company’s common
stock on December 31, 2006 and continued to mark this liability to market until
June 27, 2008. At March 31, 2008, the revised value of the common stock portion
of the litigation settlement resulted in a reduction in the provision of $0.3
million.





6.
            Convertible
      Notes and Warrant





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 100,000
shares of common stock for every $1,000.00 of principal. As a result of issuing
convertible notes on April 2, 2009, (see Note 11), these notes are presently
convertible into shares of Genta common stock at a conversion rate of 500,000
shares of common stock for every $1,000.00 of principal. Certain members of
senior management of Genta participated in this offering. The notes prohibit the
Company from consummating any additional financing transaction without the
approval of holders of more than two-thirds of the principal amount of the
notes. The Company is in compliance with all debt-related covenants at March 31,
2009.





At the
time the notes were issued, the Company recorded a debt discount (beneficial
conversion) relating to the conversion feature in the amount of $20.0 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 notes
was in excess of the face value of the $20.0 million 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 notes
through their maturity date using the effective interest method.





From
January 1, 2009 through March 31, 2009, holders of the convertible notes
voluntarily converted approximately $5.3 million, resulting in an issuance of
527.3 million shares of common stock.  At March 31, 2009,
approximately $10.7 million of the convertible notes were
outstanding.





Upon the
occurrence of an event of default, holders of the notes have the right to
require the Company to prepay all or a portion of their 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.





In
addition, in connection with the placement of the senior secured convertible
notes, the Company issued a warrant to its private placement agent to purchase
40,000,000 shares of common stock at an exercise price of $0.02 per share and
incurred a financing fee of $1.2 million. The deferred financing costs,
including the financing fee and the initial value of the warrant, are being
amortized over the two-year term of the convertible notes. At March 31, 2009,
the unamortized balances of the financing fee and the warrant are $0.8 million
and $4.5 million, respectively.


12





7.
            Share-Based
      Compensation





The
Company estimates the fair value of each 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. There were no
grants of stock options during the three months ended March 31, 2009 and 2008,
respectively.





Share-based
compensation expense recognized for the three months ended March 31, 2009 and
2008, respectively, was comprised as follows:


Three
      Months Ended March 31,($
      thousands, except per share data)
                  
                  2009
                  
                  
                  2008Research
      and development expenses
                  
                  $
                  21
                  
                  
                  $
                  44Selling,
      general and administrative
                  
                  
                  52
                  
                  
                  
                  101Total
      share-based compensation expense
                  
                  $
                  73
                  
                  
                  $
                  145Share-based
      compensation expense, per basic and diluted common share
                  
                  $
                  0.00
                  
                  
                  $
                  0.00





8.
            Stock
      Option Plans




As of
March 31, 2009, the Company has two outstanding share-based compensation plans,
which are described below:





1998
Stock Incentive Plan





Pursuant
to the Company’s 1998 Stock Incentive Plan, as amended (the “1998 Plan”), 3.4
million shares had been provided for the grant of stock options to employees,
directors, consultants and advisors of the Company. Option awards were granted
with an exercise price at not less than the fair market price of the Company’s
common stock on the date of the grant; those option awards generally vested over
a four-year period in equal increments of 25%, beginning on the first
anniversary of the date of the grant. All options granted had contractual terms
of ten years from the date of the grant. As of May 27, 2008, the authorization
to provide grants under the 1998 Plan expired.





The
following table summarizes the option activity under the 1998 Plan as of March
31, 2009 and changes during the three 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 December 31, 2008
                  
                  
                  1,877
                  
                  
                  $
                  23.83Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
      or expired
                  
                  
                  (114
                  )
                  
                  
                  0.76Outstanding
      at March 31, 2009
                  
                  
                  1,763
                  
                  
                  $
                  25.33
                  
                  
                  
                  3.2
                  
                  
                  $
                  -Vested
      and exercisable at March 31, 2009
                  
                  
                  1,341
                  
                  
                  $
                  21.77
                  
                  
                  
                  1.8
                  
                  
                  $
                  -




13




There is
no intrinsic value to outstanding stock options as the exercise prices of all
outstanding options are above the market price of the Company’s stock at March
31, 2009. The amount of aggregate intrinsic value may change based on the market
value of the Company’s stock.





As of
March 31, 2009, there was approximately $0.1 million of total unrecognized
compensation cost related to non-vested share-based compensation resulting from
stock options granted under the 1998 Plan, which is expected to be recognized
over a weighted-average period of 0.9 years.





The
following table summarizes the restricted stock unit (RSU) activity under the
1998 Plan as of March 31, 2009 and changes during the three 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
                    
                    
                    253
                    
                    
                    $
                    0.41Granted
                    
                    
                    -
                    
                    
                    
                    -Vested
                    
                    
                    (126
                    )
                    
                    $
                    0.41Forfeited
      or expired
                    
                    
                    (11
                    )
                    
                    $
                    0.41Outstanding  nonvested
      RSUs at March 31, 2009
                    
                    
                    116
                    
                    
                    $
                    0.41





As of
March 31, 2009, there was approximately $8 thousand of total unrecognized
compensation cost related to non-vested share-based compensation resulting from
RSUs granted under the 1998 Plan, which is expected to be recognized over the
next three months.





1998
Non-Employee Directors’ Plan





Pursuant
to the Company’s 1998 Non-Employee Directors’ Plan as amended (the “Directors’
Plan”), 0.6 million shares have been provided for the grant of non-qualified
stock options to the Company’s non-employee members of the Board of Directors.
Option awards must be granted with an exercise price at not less than the fair
market price of the Company’s common stock on the date of the grant. Initial
option grants vest over a three-year period in equal increments, beginning on
the first anniversary of the date of the grant. Subsequent grants generally vest
on the date of the grant. All options granted have contractual terms of ten
years from the date of the grant.





The fair
value of each option award is estimated on the date using the same valuation
model used for options granted under the 1998 Plan.





The
following table summarizes the option activity under the Directors’ Plan as of
March 31, 2009 and changes during the three 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
                    
                    
                    102
                    
                    
                    $
                    22.61Granted
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Forfeited
      or expired
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at March 31, 2009
                    
                    
                    102
                    
                    
                    $
                    22.61
                    
                    
                    
                    6.0
                    
                    
                    $
                    -Vested
      and exercisable at March 31, 2009
                    
                    
                    102
                    
                    
                    $
                    22.61
                    
                    
                    
                    6.0
                    
                    
                    $
                    -




14


There is
no intrinsic value to outstanding stock options as the exercise prices of all
outstanding options are above the market price of the Company’s stock at March
31, 2009. The amount of aggregate intrinsic value may change based on the market
value of the Company’s stock.





9.
            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. The
plaintiffs have filed a notice of appeal to the Appellate Division of the
Superior Court from the order dismissing this case.





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.





10.
            Supplemental
      Disclosure of Cash Flows Information and Non-cash Investing and Financing
      Activities





No
interest or income taxes were paid with cash during the three months ended March
31, 2009 and 2008, respectively.  On March 9, 2009, the Company issued
approximately $386 thousand of convertible notes in lieu of interest due on its
2008 Notes.




From
January 1, 2009 through March 31, 2009, holders of the Company’s convertible
notes voluntarily converted approximately $5.3 million, resulting in an issuance
of 527.3 million shares of common stock.





11.
            Subsequent
      Event





From
April 1, 2009 through April 30, 2009, holders of June 2008 convertible notes
have voluntarily converted approximately $3 million of their notes, resulting in
an issuance of approximately 1,500 million shares of common stock. At April 30,
2009, approximately $7.7 million of the convertible notes were
outstanding





On April
2, 2009, the Company entered into a securities purchase agreement with certain
accredited institutional investors to place up to $12 million of senior secured
convertible notes, or the 2009 Notes, and corresponding warrants to purchase
common stock. The Company closed on approximately $6 million of such notes and
warrants on April 2, 2009. The 2009 Notes bear interest at an annual rate of 8%
payable semi-annually in other senior secured convertible promissory notes to
the holder, and will be convertible into shares of the Company’s common stock at
a conversion rate of 500,000 shares of common stock for every $1,000.00 of
principal amount outstanding. In addition, the 2009 Notes include certain events
of default, including a requirement that the Company effect a reverse stock
split of the Company’s Common Stock within 105 days of April 2, 2009. The notes
and warrants are convertible into approximately 3,897,000,000
shares.


15


There are
currently not enough shares of Common Stock authorized under the Company’s
certificate of incorporation to cover the shares underlying the 2009 Notes and
warrants and the 2008 Notes. The Company will initially account for conversion
options embedded in convertible notes in accordance with SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”) and EITF 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock” (“EITF 00-19”). SFAS 133 generally requires companies to bifurcate
conversion options embedded in convertible notes from their host instruments and
to account for them as free standing derivative financial instruments in
accordance with EITF 00-19. EITF 00-19 states that if the conversion option
requires net cash settlement in the event of circumstances that are not solely
within the Company’s control, that the notes should be classified as a liability
measured at fair value on the balance sheet. In this case, if the Company is 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 will be required to cash settle the conversion
option.





In
accordance with EITF 00-19, when there are insufficient authorized shares to
permit exercise of all of the issued convertible notes and warrants, the
conversion obligation for the notes and the warrant obligations will be
classified as liabilities and measured at fair value on the balance sheet. The
conversion feature liability and the warrant liability will be accounted for
using mark-to-market accounting at each reporting date until all the criteria
for permanent equity have been met.





At the
time the notes were issued, the Company recorded a debt discount (beneficial
conversion) relating to the conversion feature in the amount of $6.0 million.
The aggregate intrinsic value of the difference between the market price of a
share of the Company’s stock on April 2, 2009 and the conversion price of the
notes was in excess of the face value of the $6.0 million notes, and thus, a
full debt discount was recorded in an amount equal to the face value of the
note. The Company will amortize the resultant debt discount over the term of the
notes through their maturity date.


16


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;


·
            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 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.


17


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 drug portfolio consists of products derived in two 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 March 31, 2009, we have incurred a cumulative net deficit of $955.2
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 expect that such
losses will continue at least until our lead product, Genasense®, is
approved by one or more regulatory authorities for commercial sale in one or
more indications. Achievement of profitability is currently dependent on the
timing of Genasense®
regulatory approvals. We have experienced significant quarterly fluctuations in
operating results and we expect that these fluctuations in revenues, expenses
and losses will continue.





Irrespective
of whether regulatory applications, such as a New Drug Application (NDA) or
Marketing Authorization Application (MAA), for Genasense®are
approved, we anticipate that we will require additional cash in order to
maximize the commercial opportunity and continue its clinical development
opportunities. 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
$0.6 million of cash and cash equivalents on hand at March 31,
2009.  Cash used in operating activities during the first three months
of 2009 was $4.3 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 entered into a
securities purchase agreement with certain accredited institutional investors to
place up to $12 million of senior secured convertible notes, or the 2009 Notes,
and corresponding warrants to purchase common stock. We closed on approximately
$6 million of such notes and warrants on April 2, 2009.





Presently,
with no further financing, we project that we will run out of funds in June,
2009. The terms of the 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 to
others products or technologies 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.





Our lead
drug, 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 the U.S.
National Cancer Institute (NCI), 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 (CLL); and
non-Hodgkin’s lymphoma (NHL).





18


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 chronic lymphocytic leukemia (CLL) (U.S.-only). None of these
applications resulted in regulatory approval for marketing. Nonetheless, we
believe that Genasense® can
ultimately be approved and commercialized and we have undertaken a number of
initiatives in this regard that are described below.




The
initial NDA for Genasense® in
melanoma was withdrawn in 2004 after an advisory committee to the Food and Drug
Administration (FDA) failed to recommend approval. A negative decision was also
received for a similar application in melanoma from the European Medicines
Agency (EMEA) in 2007. Data from the Phase 3 trial that comprised the primary
basis for these applications were published in a peer-reviewed journal in 2006.
These results showed that treatment with Genasense® plus
dacarbazine compared with dacarbazine alone in patients with advanced melanoma
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). Subsequently, our 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.




Based on
these data, 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.





AGENDA is
designed to expand evidence for the safety and efficacy of Genasense® when
combined with dacarbazine for patients who have not previously been treated with
chemotherapy. The study prospectively targets patients who have low-normal
levels of LDH. We have completed accrual of patient enrollment into AGENDA with
315 patients from the U.S., Canada, Western Europe, and Australia.  A
final analysis by an independent Data Monitoring Committee for both safety and
futility will be completed in May 2009. If the trial progresses to completion,
we expect to release results on the final assessment of PFS in the fourth
quarter of 2009. If those data are positive, we currently expect our regulatory
submissions will be based upon confirmation that the addition of Genasense®to
chemotherapy results in a statistically significant and clinically meaningful
improvement in PFS. Approval by FDA and EMEA will allow Genasense® to be
commercialized by us in the U.S. and in the European Union. Genasense® in
melanoma has been designated an Orphan Drug in Australia and the United States,
and the drug has received Fast Track designation in the United
States.





Given our
belief in the activity of Genasense® in
melanoma, we have initiated additional clinical studies in this disease. One
such study is a Phase 2 trial of Genasense® plus a
chemotherapy regimen consisting of Abraxane®
(paclitaxel protein-bound particles for injectable suspension) (albumin bound)
plus temozolomide (Temodar®). We
also expect to examine different dosing regimens that will improve the dosing
convenience and commercial acceptance of Genasense®,
including its administration by brief (1-2 hour) IV
infusions.


19


Our
initial 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®.





We
submitted our NDA to the FDA in December 2005 in which we sought accelerated
approval for the use of Genasense® in
combination with Flu/Cy for the treatment of patients with relapsed or
refractory CLL who had previously received fludarabine. In December 2006, we
received a “non-approvable” notice for that application from FDA. However, since
we believed that our application had met the regulatory requirements for
approval, in April 2007, we filed an appeal of the non-approvable notice using
FDA’s Formal Dispute Resolution process. In March 2008, we received a formal
notice from FDA that indicated additional confirmatory evidence would be
required to support approval of Genasense® in CLL.
In that communication, FDA recommended one option was to collect additional
information regarding the clinical course and progression of disease in patients
from the completed trial.





Subsequently,
we obtained information regarding long-term survival on patients who had been
accrued to our completed Phase 3 trial. In June 2008, we announced results from
5 years of follow-up These data showed that patients treated with Genasense® plus
chemotherapy who achieved either a complete response (CR) or a partial response
(PR) had also achieved a statistically significant increase in
survival.





Previous
analyses had shown a significant survival benefit accrued to patients in the
Genasense® group
who attained CR. Extended follow-up showed that all major responses (CR+PR)
achieved with Genasense® were
associated with significantly increased survival compared with all major
responses achieved 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.





These
data were again submitted to FDA in the second quarter of 2008, and the
application was again denied in December 2008. Genta re-appealed the denial, and
in March 2009, CDER decided that available data were still not adequate to
support approval of Genasense® in
chronic lymphocytic leukemia, and the Agency recommended conducting a
confirmatory clinical trial. We have not yet made a decision whether to conduct
this study.





20


Lastly,
several trials have shown definite evidence of clinical activity for
Genasense® in
patients with non-Hodgkin’s lymphoma (NHL). We would like to conduct additional
clinical studies in patients with NHL to test whether Genasense® can be
approved in this indication. Previously, we reported that randomized trials of
Genasense® in
patients with myeloma, acute myeloid leukemia, (AML), hormone-refractory
prostate cancer (HRPC), 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. However, we believe that alternate dosing schedules, in particular the
use of brief high-dose infusions, offer the opportunity to re-examine the drug’s
activity in some of these indications, in particular multiple
myeloma.





In March
2008, we obtained from Daiichi Sankyo Company Ltd. an exclusive worldwide
license for tesetaxel, 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 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 have been granted.
We have submitted a proposed protocol to FDA for Special Protocol Assessment
(SPA). A SPA is intended to secure agreement on the design, size, and endpoints
of clinical trials that are intended to form the primary basis of an efficacy
claim in a NDA. We also expect to seek Scientific Advice from the EMEA for this
study to support a Marketing Authorization Application (MAA). The protocol
proposes to examine the safety and efficacy of tesetaxel in patients with
advanced gastric cancer whose disease has progressed after receiving first-line
chemotherapy. Maintenance of the license from Daiichi Sankyo requires certain
payments that include amortization of licensing fees and
milestones.  If such payments are not made, Daiichi Sankyo may elect
to terminate the license; however, a portion of the licensing fees may still be
due even in the event of termination. We are currently in discussions with
Daiichi Sankyo regarding the timing of these payments.





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)” and the results were presented
at a scientific meeting in the second quarter of 2008. We are planning another
study using a modified formulation, known as “G4544(b)”. The FDA has indicated
that a limited, animal toxicology study in a single species will be required
prior to initiation of multi-dose studies of G4544(b). Progress in the clinical
development of G4544 program was delayed in 2008 and through the first quarter
of 2009 due to financial constraints.





We
currently intend to pursue a 505(b)(2) strategy to establish bioequivalence to
our marketed product, Ganite®, for the
initial regulatory approval of G4544.  However, we believe this drug
may also be 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.





Lastly,
we have announced our intention to seek a buyer for Ganite®, our
sole marketed product.  Our financial constraints have prevented us
from investing in adequate commercial support for Ganite®, and the
intellectual property that provided us with an exclusive position in the United
States has expired.


21




Results
of Operations for the Three Months Ended March 31, 2009 and March 31,
2008





($
      thousands)
                  
                  2009
                  
                  
                  2008Product
      sales – net
                  
                  $
                  62
                  
                  
                  $
                  117Cost
      of goods sold
                  
                  
                  -
                  
                  
                  
                  25Gross
      margin
                  
                  
                  62
                  
                  
                  
                  92Operating
      expenses:Research
      and development
                  
                  
                  2,298
                  
                  
                  
                  6,438Selling,
      general and administrative
                  
                  
                  2,172
                  
                  
                  
                  3,638Reduction
      in liability for settlement of litigation
                  
                  
                  -
                  
                  
                  
                  (260
                  )Total
      operating expenses
                  
                  
                  4,470
                  
                  
                  
                  9,816Other
      (expense)/income:Other
      (expense)/income, net
                  
                  
                  (372
                  )
                  
                  
                  67Amortization
      of deferred financing costs and debt discount
                  
                  
                  (6,287
                  )
                  
                  
                  -Total
      other income/(expense), net
                  
                  
                  (6,659
                  )
                  
                  
                  67Net
      loss
                  
                  $
                  (11,067
                  )
                  
                  $
                  (9,657
                  )





Product
sales-net





Product
sales-net were $62,000 for the three months ended March 31, 2009, compared with
$117,000 for the three months ended March 31, 2008. Unit sales of Ganite® declined
18%, while reported product sales include the negative impact of anticipated
returns of Ganite® due to
expired dating of product. Product sales-net include sales through the
“named-patient” program managed for us by IDIS Limited (a privately owned
company based in the United Kingdom), whereby IDIS distributes Ganite® and
Genasense® on a
‘‘named patient’’ basis. ‘‘Named patient’’ distribution refers to the
distribution or sale of a product to a specific healthcare professional for the
treatment of an individual patient. Product sales-net in 2009 include
named-patient program sales of $8,000 of Genasense® and
$5,000 of Ganite®, while
2008 results include sales of Ganite® of
$10,000.





Cost of goods
sold





During
the three months ended March 31, 2009, sales of Ganite® were
from product that had been previously accounted for as excess
inventory.





Research and development
expenses




Research
and development expenses were $2.3 million for the three months ended March 31,
2009, compared with $6.4 million for the three months ended March 31, 2008. In
March 2008, we entered into a worldwide license agreement for tesetaxel, a
taxane compound taken by mouth. Pursuant to this agreement, we recognized $2.5
million for license payments. Expenses in 2009 also declined primarily due to
lower payroll costs, resulting from lower headcount as we reduced our workforce
in April 2008 and May 2008 to conserve cash.





Research
and development expenses incurred on the Genasense® project
during the three months ended March 31, 2009 were approximately $2.1 million,
representing 90% 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.


22





Selling, general and
administrative expenses





Selling,
general and administrative expenses were $2.2 million for the three months ended
March 31, 2009, compared with $3.6 million for the three months ended March 31,
2008. This decrease was primarily due to lower payroll costs of $0.6 million,
resulting from the two reductions in workforce and lower office rent of $0.5
million, resulting from our termination of a lease for one floor of office space
in May 2008.





Reduction in liability for
settlement of litigation




In the
fourth quarter of 2006, we recorded an expense that provided for the issuance of
2.0 million shares of Genta common stock, for a settlement in principle of class
action litigation and continued to mark this liability to market until June 27,
2008. At March 31, 2008, the revised value of the common stock portion of the
litigation settlement resulted in a reduction in the provision of $0.3
million.





Gain on maturity of
marketable securities


Interest and other income,
net


Interest
expense





The total
of the above referenced accounts resulted in expense, net of $(0.4) million for
the first three months of 2009 and income, net of $0.1 million for the
prior-year period. This increase in expense was primarily due to interest
incurred on the convertible notes, as well as lower interest income, resulting
from lower investment balances.





Amortization of deferred
financing costs and debt discount





On June
9, 2008, we issued $20 million of our senior secured convertible notes, issued
our private placement agent a warrant to purchase 40,000,000 shares of our
common stock at an exercise price of $0.02 per share and incurred a financing
fee of $1.2 million. The deferred financing costs, including the financing fee
and the issuance of the warrant, are being amortized over the two-year term of
the convertible notes. At the time the notes were issued, we recorded a debt
discount (beneficial conversion) relating to the conversion feature in the
amount of $20.0 million. We are amortizing the resultant debt discount over the
term of the notes through their maturity date. The amortization of deferred
financing costs and debt discount was $6.3 million for the three months ended
March 31, 2009.





Net loss





Genta
recorded a net loss of $11.1 million, or net loss per basic and diluted share of
$0.01 for the three months ended March 31, 2009 and incurred a net loss of $9.7
million, or $0.29 per basic and diluted share, for the three months ended March
31, 2008.





The
higher net loss for the first quarter of 2009 was due to the amortization of
financing costs and debt discount resulting from the June 2008 convertible note
offering, partially offset by lower operational expenses, primarily attributable
to reduced headcount and payroll expenses.





Liquidity
and Capital Resources





At March
31, 2009, we had cash and cash equivalents totaling $0.6 million, compared with
$4.9 million at December 31, 2008, reflecting the funds used in operating our
company.


23


On June
9, 2008, we 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 100,000
shares of common stock for every $1,000.00 of principal. As a result of issuing
convertible notes on April 2, 2009, (see below), these notes are presently
convertible into shares of our common stock at a conversion rate of 500,000
shares of common stock for every $1,000.00 of principal. Certain members of our
senior management participated in this offering. Pursuant to a general security
agreement, entered into concurrently with the notes, the notes are secured by a
first lien on all of our assets. In addition, the notes prohibit any additional
financing without the approval of holders of more than two-thirds of the
principal amount of the notes.





Upon the
occurrence of an event of default, holders of the notes have the right to
require us to prepay all, or a portion, of their 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 our
common stock.





On April
2, 2009, we entered into a securities purchase agreement with certain accredited
institutional investors to place up to $12 million of senior secured convertible
notes, or the 2009 Notes, and corresponding warrants to purchase common stock.
We closed on approximately $6 million of such notes and warrants on April 2,
2009. The 2009 Notes bear interest at an annual rate of 8% payable semi-annually
in other senior secured convertible promissory notes to the holder, and will be
convertible into shares of the our common stock at a conversion rate of 500,000
shares of common stock for every $1,000.00 of principal amount outstanding. In
addition, the 2009 Notes include certain events of default, including a
requirement that we effect a reverse stock split of our Common Stock within 105
days of April 2, 2009. The notes and warrants are convertible into approximately
3,897,000,000 shares. There are currently not enough shares of Common Stock
authorized under our certificate of incorporation to cover the shares underlying
the 2009 Notes and warrants and the 2008 Notes.





A special
meeting of our stockholders will be held on May 27, 2009. We have recommended to
our stockholders that they provide authorization to our Board of Directors to
effect a reverse split in any ratio from 1:2 to 1:100.





Irrespective
of whether an NDA or MAA for Genasense® is
approved, we will require additional cash in order to maximize this commercial
opportunity and to continue its clinical development opportunities. We have had
discussions with other companies regarding partnerships for the further
development and global commercialization of Genasense®.
Additional alternatives available to us to sustain our operations include
financing arrangements with potential corporate partners, debt financing,
asset-based loans, royalty-based financing, equity financing, profits from
named-patient sales, and other potential sources of financing. 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.





During
the first three months of 2009, cash used in operating activities was $4.3
million compared with $6.2 million for the same period in 2008, reflecting the
reduced size of our company.





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


24


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; (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 and (vii) legal costs and the outcome of outstanding legal
proceedings.





Recent
Accounting Pronouncements





In April
2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
SFAS 141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, to amend and clarify the initial recognition and
measurement, subsequent measurement and accounting, and related disclosures
arising from contingencies in a business combination under SFAS 141(R). Under
the new guidance, assets acquired and liabilities assumed in a business
combination that arise from contingencies should be recognized at fair value on
the acquisition date if fair value can be determined during the measurement
period. If fair value can not be determined, companies should typically account
for the acquired contingencies using existing guidance. The implementation of
this standard did not have a material effect on our consolidated financial
statements.





In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt That
May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which is effective for the Company January 1, 2009. The FSP
includes guidance that convertible debt instruments that may be settled in cash
upon conversion should be separated between its liability and equity components,
with each component being accounted for in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest costs are recognized
in subsequent periods. This guidance does not apply to us since our existing
convertible debt instruments are settled only in stock upon conversion, and as a
result does not have an impact on our unaudited consolidated financial
statements.





In April
2008, the FASB issued FASB Staff Position 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”), which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”).  The objective of FSP 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS No. 141(R), “Business Combinations” and
other principles of generally accepted accounting principles.  FSP
142-3 applies to all intangible assets, whether acquired in a business
combination or otherwise, and shall be effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years and applied prospectively to intangible assets acquired after
the effective date. The implementation of this standard did not have a material
effect on our consolidated financial statements.





In June
2008, the FASB ratified EITF 07-5, “Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock”. EITF 07-5
addresses how an entity should evaluate whether an instrument or embedded
feature is indexed to its own stock, accounting for situations where the
currency of the linked instrument differs from the host instrument and
accounting for market-based employee stock options. EITF 07-5 is effective for
fiscal years beginning after December 15, 2008 and early adoption is not
permitted. The implementation of this standard did not have a material effect on
our consolidated financial statements.


25




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. The statement is intended to improve financial
reporting by identifying a consistent hierarchy for selecting accounting
principles to be used in preparing financial statements that are prepared in
conformance with generally accepted accounting principles. The statement is
effective 60 days following the Securities and Exchange Commission’s (SEC)
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity with GAAP”, and is not expected to have any
impact on our financial statements.





In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB SFAS
133” (“SFAS 161”), which requires enhanced disclosures for derivative and
hedging activities. SFAS 161 became effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The
implementation of this standard did not have a material effect on our
consolidated financial statements.





In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. The implementation of this standard did not have a material effect on our
consolidated financial statements.





In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”.
SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the United
States of America and expands disclosures about fair value measurements. SFAS
157 applies under other accounting pronouncements that require or permit fair
value measurements. The Company was required to adopt SFAS 157 beginning
January 1, 2008. In February 2008, the FASB released FASB Staff Position 157-2
- Effective Date of FASB
Statement No. 157, which delayed the effective date of SFAS No. 157 for
all non-financial assets and liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). In October 2008, the FASB released FASB Staff Position 157-3 -
Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active.In April 2009, the FASB
released FASB Staff Position 157-4 Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. The adoption
of SFAS No. 157 for the our financial assets and liabilities did not have a
material impact on our consolidated financial statements and the adoption of
SFAS No. 157 for the our non-financial assets and liabilities, effective January
1, 2009, did not have a material effect on our consolidated financial
statements.





Critical
Accounting Policies and Estimates





Our
significant accounting policies are more fully described in Note 2 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:


26





·
            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.




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





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 March 31, 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.


27


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.  The
plaintiffs have filed a notice of appeal to the Appellate Division  of
the Superior Court from the order dismissing this case.





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.





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 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 are presently
convertible into shares of Genta common stock at a conversion rate of 500,000
shares of common stock for every $1,000.00 of principal. Certain members of our
senior management participated in this offering. The notes are secured by a
first lien on all of our assets.


28


On April
2, 2009, we entered into a securities purchase agreement with certain accredited
institutional investors to place up to $12 million of senior secured convertible
notes, or the 2009 Notes, and corresponding warrants to purchase common stock.
We closed on approximately $6 million of such notes and warrants on April 2,
2009. The 2009 Notes bear interest at an annual rate of 8% payable semi-annually
in other senior secured convertible promissory notes to the holder, and will be
convertible into shares of our common stock at a conversion rate of 500,000
shares of common stock for every $1,000.00 of principal amount outstanding. In
addition, the 2009 Notes include certain events of default, including a
requirement that we effect a reverse stock split of our Common Stock within 105
days of April 2, 2009. There are currently not enough shares of our Common Stock
authorized under our certificate of incorporation to cover the shares underlying
the 2009 Notes and warrants and the 2008 Notes.





A special
meeting of our stockholders will be held on May 27, 2009. We have recommended to
our stockholders that they provide authorization to our Board of Directors to
effect a reverse split in any ratio from 1:2 to 1:100.





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.





If we are
unable to raise additional funds, we will need to do one or more of the
following:




·
            delay,
      scale back or eliminate some or all of our research and product
      development programs;




·
            license
      third parties to develop and commercialize products or technologies that
      we would otherwise seek to develop and commercialize
      ourselves;




·
            attempt
      to sell our company;




·
            cease
      operations; or




·
            declare
      bankruptcy.




Presently,
with no further financing, we will run out of funds in June 2009. We currently
do not have any additional financing in place. If we are unable to raise
additional financing, we could be required to reduce our spending plans, reduce
our workforce, license to others products or technologies we would otherwise
seek to commercialize ourselves and sell certain assets. There can be no
assurance that we can obtain financing, if at all, on terms acceptable to
us.





If
our stockholders do not approve authorizing our Board of Directors to effect a
reverse split in a ratio of any ratio from 1:2 to 1:100, we will be in default
on our 2009 Notes.




As noted
above, the 2009 Notes include certain events of default, including a requirement
that we effect a reverse stock split of our Common Stock within 105 days of
April 2, 2009. There are currently not enough shares of our Common Stock
authorized under our certificate of incorporation to cover the shares underlying
the 2009 Notes and warrants and the 2008 Notes.





A special
meeting of our stockholders will be held on May 27, 2009. We have recommended to
our stockholders that they provide authorization to our Board of Directors to
effect a reverse split in any ratio from 1:2 to 1:100.


29





If our
stockholders do not provide authorization to our Board of Directors to effect a
reverse split within 105 days of April 2, 2009, we will be in default on our
2009 Notes, and the principal amount of the notes plus accrued interest will be
immediately due to our noteholders.





We
may be unsuccessful in our efforts to obtain approval from the FDA or EMEA and
commercialize Genasense® or our
other pharmaceutical products.




The
commercialization of our pharmaceutical products involves a number of
significant challenges. In particular, our ability to commercialize products,
such as Ganite® 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 Genasense® will
receive FDA or EMEA approval. For example, the NDA for Genasense® in
melanoma was withdrawn 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 initial NDA for the use of
Genasense® plus
chemotherapy in patients with relapsed or refractory CLL was also unsuccessful.
In March 2009, the FDA Center for Drug Evaluation and Research (CDER) decided
that available data were still not adequate to support approval of
Genasense® for
treatment of patients in chronic lymphocytic leukemia, and the Agency has
recommended conducting a confirmatory clinical trial.





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 events 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
United States 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.


30


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
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.


31


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 March 31, 2009, we have incurred a
cumulative net deficit of $955.2 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 will 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.


32


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.


33


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.





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


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.




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.


35


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®. 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 Genasense® is
manufactured or tested for its ability to meet required specifications must be
approved by the FDA and/or the EMEA before it can manufacture Genasense®. Failure
of the facility to be approved could delay the approval of Genasense®.




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), 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.


36




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, 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;




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




37




·
            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.





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.


38





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.





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.




39


At March
31, 2009, our outstanding convertible notes were convertible into 5.3 billion
shares of common stock. On April 2, 2009 we sold additional notes and warrants,
convertible into 3.9 billion shares of common stock. Future sales of shares of
our common stock by existing stockholders, holders of preferred stock who might
convert such preferred stock into common stock, holders of convertible notes who
might convert such convertible notes into common stock and option and warrant
holders who may exercise their options and 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 into shares of our common stock,
our stockholders will be diluted.





On June
9, 2008, we 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 are presently
convertible into shares of our common stock at a conversion rate of 500,000
shares of common stock for every $1,000.00 of principal. Certain members of our
senior management participated in this offering. The notes are secured by a
first lien on all of our assets. At March 31, 2009, our outstanding convertible
notes were convertible into 5.3 billion shares of our common stock.





On April
2, 2009, we entered into a securities purchase agreement with certain accredited
institutional investors to place up to $12 million of senior secured convertible
notes, or the 2009 Notes, and corresponding warrants to purchase common stock.
We closed on approximately $6 million of such notes and warrants on April 2,
2009. The 2009 Notes bear interest at an annual rate of 8% payable semi-annually
in other senior secured convertible promissory notes to the holder, and will be
convertible into shares of our common stock at a conversion rate of 500,000
shares of common stock for every $1,000.00 of principal amount outstanding. In
addition, the 2009 Notes include certain events of default, including a
requirement that we effect a reverse stock split of our Common Stock within 105
days of April 2, 2009. The notes and warrants are convertible into approximately
3.9 billion shares. There are currently not enough shares of Common Stock
authorized under our certificate of incorporation to cover the shares underlying
the 2009 Notes and warrants and the 2008 Notes.





The
conversion of some or all of our notes dilute 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.


40




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.


41


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





None.





Item
3.   Defaults Upon
Senior Securities





None.





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





No
matters were submitted to a vote of security holders in the quarter ended March
31, 2009.





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. The
Form S-1/A is not effective and does not relate to any pending or specific
future financing.


42





Item
6. Exhibits.





(a)
Exhibits





Exhibit
                    Number
                
                Description of Document10.1
                
                Amendment
      of Lease, dated January 29, 2009 by and between The Connell Company and
      the Company (filed herewith).10.2
                
                Purchase
      Agreement and Note Amendment, dated February 17, 2009 among the Company
      and the purchasers set forth therein (incorporated by reference to Exhibit
      10.1 to the Company’s Current Report on Form 8-K filed on March 12, 2009,
      Commission File No. 0-19635).10.3
                
                Note
      Amendment dated March 9, 2009 among the Company and the Purchasers set
      forth therein (incorporated by reference to Exhibit 10.2 to the Company’s
      Current Report on Form 8-K filed on March 12, 2009, Commission File No.
      0-19635).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).


43


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:
      May 12,
      2009/s/ RAYMOND P. WARRELL, JR.,
      M.D.Raymond
      P. Warrell, Jr., M.D.Chairman
      and Chief Executive Officer(principal
      executive officer)Date:
      May 12,
      2009/s/ GARY SIEGELGary
      SiegelVice
      President, Finance(principal
      financial and accounting
officer)


44




Exhibit
Index





Exhibit
              Number
            
            Description of Document10.1
            
            Amendment
      of Lease, dated January 29, 2009 by and between The Connell Company and
      the Company (filed herewith).10.2
            
            Purchase
      Agreement and Note Amendment, dated February 17, 2009 among the Company
      and the purchasers set forth therein (incorporated by reference to Exhibit
      10.1 to the Company’s Current Report on Form 8-K filed on March 12, 2009,
      Commission File No. 0-19635).10.3
            
            Note
      Amendment dated March 9, 2009 among the Company and the Purchasers set
      forth therein (incorporated by reference to Exhibit 10.2 to the Company’s
      Current Report on Form 8-K filed on March 12, 2009, Commission File No.
      0-19635).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).


45