UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549
 
 FORM
10-Q
  x
                QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended September 30, 2010
 
 OR
 
 o
                TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period __________ to __________.
 
 Commission
file number 001-32626
 
 Hana
Biosciences, Inc.
 (Exact
Name of Registrant as Specified in Its Charter)
 
 Delaware
                        (State
      or other jurisdiction of
                        incorporation
      or organization)
                      
                      32-0064979
                        (I.R.S.
      Employer Identification No.)7000
      Shoreline Ct., Suite 370
                        South
      San Francisco, CA.
                      
                      94080(Address
      of principal executive offices)
                      
                      (Zip
      Code)
  (650)
588-6404
 (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 issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes  x  No  o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, 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 large accelerated filer, accelerated
filer, or 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   o
                Accelerated
      filer   oNon-accelerated
      filer   o
                Smaller
      reporting company   x(Do
      not check if smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
 Yes 
o  No 
x
  As of
November 12, 2010, there were issued and outstanding 21,234,307 shares of
the registrant's common stock, $.001 par value.
  
  INDEX
 
 PagePART I
                      
                      FINANCIAL
      INFORMATION
                      
                      5Item
      1.
                      
                      Unaudited
      Condensed Financial Statements
                      
                      5Unaudited
      Condensed Balance Sheets
                      
                      5Unaudited
      Condensed Statements of Operations and Other Comprehensive
      Loss
                      
                      6Unaudited
      Condensed Statement of Changes in Redeemable, Convertible Preferred Stock
      and Stockholders' Deficit
                      
                      7Unaudited
      Condensed Statements of Cash Flows
                      
                      8Notes
      to Unaudited Condensed Financial Statements
                      
                      9Item
      2.
                      
                      Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      21Item
      3.
                      
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      
                      26Item
      4.
                      
                      Controls
      and Procedures
                      
                      26PART II
                      
                      OTHER
      INFORMATION
                      
                      27Item
      1.
                      
                      Legal
      Proceedings
                      
                      27Item
      1A.
                      
                      Risk
      Factors
                      
                      27Item
      2.
                      
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      
                      27Item
      3.
                      
                      Defaults
      Upon Senior Securities
                      
                      27Item
      4.
                      
                      [Removed
      and Reserved]
                      
                      27Item
      5.
                      
                      Other
      Information
                      
                      27Item
      6.
                      
                      Exhibits
                      
                      28Signatures
                      
                      29Index
      of Exhibits Filed with this Report
                      
                      30
  -2-
  Forward-Looking
Statements
 
 This
Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities
Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or
the Exchange Act. Any statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts
and may be forward-looking. These forward-looking statements include, but are
not limited to, statements about:
 
 ·
              our ability to obtain adequate
      financing;
 
 ·
              the development of our drug
      candidates, including when we expect to undertake, initiate and complete
      clinical trials of our product
  candidates;
 
 ·
              the regulatory approval of our
      drug candidates;
 
 ·
              our use of clinical research
      centers and other
contractors;
 
 ·
              our ability to find collaborative
      partners for research, development and commercialization of potential
      products;
 
 ·
              acceptance of our products by
      doctors, patients or payors and the availability of reimbursement for our
      product candidates;
 
 ·
              our ability to market any of our
      products;
 
 ·
              our history of operating
      losses;
 
 ·
              our ability to secure adequate
      protection for our intellectual
property;
 
 ·
              our ability to compete against
      other companies and research
  institutions;
 
 ·
              the effect of potential strategic
      transactions on our
business;
 
 ·
              our ability to attract and retain
      key personnel; and
 
 ·
              the volatility of our stock
      price.
 
 These
statements are often, but not always, made through the use of words or phrases
such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,”
“expect,” “believe,” “intend” and similar words or phrases. For such statements,
we claim the protection of the Private Securities Litigation Reform Act of 1995.
Readers of this Quarterly Report on Form 10-Q are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the time
this Quarterly Report on Form 10-Q was filed with the Securities and Exchange
Commission, or SEC. These forward-looking statements are based largely on our
expectations and projections about future events and future trends affecting our
business, and are subject to risks and uncertainties that could cause actual
results to differ materially from those anticipated in the forward-looking
statements. Discussions containing these forward-looking statements may be found
throughout this report, including Part I, the section entitled “Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations.” These forward-looking statements involve risks and uncertainties,
including the risks discussed under Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2009 (the “2009 Form 10-K”), and under Part
II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2010, that could cause our actual results to differ materially
from those in the forward-looking statements. Except as required by law, we
undertake no obligation to publicly revise our forward-looking statements to
reflect events or circumstances that arise after the filing of this report or
documents incorporated by reference herein that include forward-looking
statements. The risks discussed in this report should be considered in
evaluating our prospects and future financial performance.
 
 In
addition, past financial or operating performance is not necessarily a reliable
indicator of future performance and you should not use our historical
performance to anticipate results or future period trends. We can give no
assurances that any of the events anticipated by the forward-looking statements
will occur or, if any of them do, what impact they will have on our results of
operations and financial condition.
 
 References
to the “Company,” “Hana,” the “Registrant,” “we,” “us,” or “our” in this report
refer to Hana Biosciences, Inc., a Delaware corporation, unless the context
indicates otherwise.
  -3-
  NOTE
REGARDING REVERSE STOCK SPLIT
  On
September 8, 2010, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 200,000,000 to
350,000,000 and to effect a combination of its outstanding Common Stock at a
ratio of one-for-four (the “Reverse Stock Split”).  The Reverse Stock
Split was effective at the close of business on September 10,
2010.  No fractional shares were issued as a result of the
Reverse Stock Split, but instead stockholders received cash in lieu of any
fractional shares to which they would otherwise have been entitled, based upon
the last quoted bid price of the Common Stock on September 10, 2010, as reported
on the OTC Bulletin Board. All historical share and per share amounts have been
adjusted to reflect the Reverse Stock Split.  All stock options and
warrants outstanding were appropriately adjusted to give effect to the Reverse
Stock Split.
  -4-
  PART
I - FINANCIAL INFORMATION
 
 Item
1. Unaudited Condensed Financial Statements
 
 HANA
BIOSCIENCES, INC.
 
 CONDENSED
BALANCE SHEETS
 
 September 30,
                                        2010
                                      
                                      
                                      December 31,
                                        2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                      
                                      $
                                      8,669,331
                                      
                                      
                                      $
                                      9,570,453Available-for-sale,
      equity securities
                                      
                                      
                                      64,000
                                      
                                      
                                      
                                      68,000Available-for-sale,
      debt securities
                                      
                                      
                                      18,981,752
                                      
                                      
                                      
                                      —Prepaid
      expenses and other current assets
                                      
                                      
                                      107,074
                                      
                                      
                                      
                                      114,067Total
      current assets
                                      
                                      
                                      27,822,157
                                      
                                      
                                      
                                      9,752,520Property
      and equipment, net
                                      
                                      
                                      135,266
                                      
                                      
                                      
                                      252,455Restricted
      cash
                                      
                                      
                                      125,000
                                      
                                      
                                      
                                      125,000Debt
      issuance costs
                                      
                                      
                                      938,109
                                      
                                      
                                      
                                      1,193,594Total
      assets
                                      
                                      $
                                      29,020,532
                                      
                                      
                                      $
                                      11,323,569LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities
                                      
                                      $
                                      4,024,057
                                      
                                      
                                      $
                                      4,027,075Other
      short-term liabilities
                                      
                                      
                                      6,479
                                      
                                      
                                      
                                      43,586Total
      current liabilities
                                      
                                      
                                      4,030,536
                                      
                                      
                                      
                                      4,070,661Notes
      payable, net of discount
                                      
                                      
                                      23,188,508
                                      
                                      
                                      
                                      22,597,050Other
      long-term liabilities
                                      
                                      
                                      5,253
                                      
                                      
                                      
                                      6,540Investors’
      right to purchase future shares of Series A-1 and A-2 preferred stock
      (Note 5)
                                      
                                      
                                      6,239,000
                                      
                                      
                                      
                                      -Warrant
      liabilities, non-current
                                      
                                      
                                      692,271
                                      
                                      
                                      
                                      2,145,511Total
      long term liabilities
                                      
                                      
                                      30,125,032
                                      
                                      
                                      
                                      24,749,101Total
      liabilities
                                      
                                      
                                      34,155,568
                                      
                                      
                                      
                                      28,819,762Commitments
      and contingencies (Notes 4, 5, 6, 8, 9, 11 and 12):Redeemable
      convertible preferred stock; $100 par value:10
      million shares authorized, 0.4 million and 0 shares issued and outstanding
      at September 30, 2010 and December 31, 2009, respectively; aggregate
      liquidation value of $41.5 million and $0 at September 30, 2010 and
      December 31, 2009, respectively
                                      
                                      
                                      30,643,219
                                      
                                      
                                      
                                      -Stockholders'
      deficit:Common
      stock; $0.001 par value:350
      million and 200 million shares authorized, 21.2 million and 19.9 million
      shares issued and outstanding at September 30, 2010 and December 31, 2009,
      respectively
                                      
                                      
                                      21,234
                                      
                                      
                                      
                                      19,912Additional
      paid-in capital
                                      
                                      
                                      119,071,635
                                      
                                      
                                      
                                      117,632,111Accumulated
      other comprehensive income
                                      
                                      
                                      (29,532
                                      )
                                      
                                      
                                      (24,000
                                      )Accumulated
      deficit
                                      
                                      
                                      (154,841,592
                                      )
                                      
                                      
                                      (135,124,216
                                      )Total
      stockholders' deficit
                                      
                                      
                                      (35,778,255
                                      )
                                      
                                      
                                      (17,496,193
                                      )Total
      liabilities, redeemable, convertible preferred stock and stockholders'
      deficit
                                      
                                      $
                                      29,020,532
                                      
                                      
                                      $
                                      11,323,569
 
 See
accompanying notes to unaudited condensed financial statements.
  -5-
  HANA BIOSCIENCES, INC.
 
 CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (Unaudited)
 
 Three Months Ended
                            
                            
                            Nine Months EndedSeptember 30,
                            
                            
                            September 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Operating
      expenses:General
      and administrative
                            
                            $
                            1,253,194
                            
                            
                            $
                            932,221
                            
                            
                            $
                            4,299,929
                            
                            
                            $
                            3,504,895Research
      and development
                            
                            
                            9,002,798
                            
                            
                            
                            3,506,920
                            
                            
                            
                            14,966,768
                            
                            
                            
                            10,701,473Total
      operating expenses
                            
                            
                            10,255,992
                            
                            
                            
                            4,439,141
                            
                            
                            
                            19,266,697
                            
                            
                            
                            14,206,368Loss
      from operations
                            
                            
                            (10,255,992
                            )
                            
                            
                            (4,439,141
                            )
                            
                            
                            (19,266,697
                            )
                            
                            
                            (14,206,368
                            )Other
      income (expense):Interest
      income
                            
                            
                            37,514
                            
                            
                            
                            470
                            
                            
                            
                            38,020
                            
                            
                            
                            12,626Interest
      expense
                            
                            
                            (856,050
                            )
                            
                            
                            (935,993
                            )
                            
                            
                            (2,881,369
                            )
                            
                            
                            (2,496,143
                            )Other
      expense, net
                            
                            
                            (3,511
                            )
                            
                            
                            -
                            
                            
                            
                            (3,511
                            )
                            
                            
                            (4,908
                            )Change
      in fair value of warrant liabilities
                            
                            
                            348,717
                            
                            
                            
                            (292,111
                            )
                            
                            
                            (34,819
                            )
                            
                            
                            (2,449,220
                            )Change
      in fair value of investors’ right to purchase future shares of Series A-1
      and A-2 preferred stock
                            
                            
                            2,809,000
                            
                            
                            
                            —
                            
                            
                            
                            2,431,000
                            
                            
                            
                            —Total
      other income (expense)
                            
                            
                            2,335,670
                            
                            
                            
                            (1,227,634
                            )
                            
                            
                            (450,679
                            )
                            
                            
                            (4,937,645
                            )Net
      loss
                            
                            $
                            (7,920,322
                            )
                            
                            $
                            (5,666,775
                            )
                            
                            $
                            (19,717,376
                            )
                            
                            $
                            (19,144,013
                            )Deemed
      dividends attributable to preferred stock
                            
                            
                            (22,059,541
                            )
                            
                            
                            —
                            
                            
                            
                            (31,366,973
                            )
                            
                            
                            —Net
      loss applicable to common stock
                            
                            
                            (29,979,863
                            )
                            
                            
                            —
                            
                            
                            
                            (51,084,348
                            )
                            
                            
                            —Net
      loss per share attributable to common stock, basic and
      diluted
                            
                            $
                            (1.41
                            )
                            
                            $
                            (0.70
                            )
                            
                            $
                            (2.48
                            )
                            
                            $
                            (2.36
                            )Weighted
      average shares used in computing net loss per share, basic and
      diluted
                            
                            
                            21,233,804
                            
                            
                            
                            8,145,034
                            
                            
                            
                            20,570,038
                            
                            
                            
                            8,123,541Comprehensive
      loss:Net
      loss
                            
                            $
                            (7,920,322
                            )
                            
                            $
                            (5,666,775
                            )
                            
                            $
                            (19,717,376
                            )
                            
                            $
                            (19,144,013
                            )Unrealized
      holdings gains (losses) arising during the period
                            
                            
                            (13,532
                            )
                            
                            
                            (20,000
                            )
                            
                            
                            (5,532
                            )
                            
                            
                            (24,000
                            )Comprehensive
      loss
                            
                            $
                            (7,933,854
                            )
                            
                            $
                            (5,686,775
                            )
                            
                            $
                            (19,722,908
                            )
                            
                            $
                            (19,168,013
                            )
 
 See
accompanying notes to unaudited condensed financial statements.
  -6-
  HANA
BIOSCIENCES, INC.
 
 CONDENSED
STATEMENT OF CHANGES IN REDEEMABLE, CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
 (Unaudited)
 
 Period
from January 1, 2010 to September 30, 2010
 All
historical share amounts have been adjusted to reflect the reverse stock
split
  Redeemable Convertible
                                                            Preferred Stock
                                                          
                                                          
                                                          Common stock
                                                          
                                                          
                                                          Additional
                                                            paid-in
                                                          
                                                          
                                                          Accumulated
                                                            Other
                                                            Comprehensive
                                                          
                                                          
                                                          Accumulated
                                                          
                                                          
                                                          Total
                                                            stockholders'Shares
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Shares
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Capital
                                                          
                                                          
                                                          income
                                                          
                                                          
                                                          deficit
                                                          
                                                          
                                                          deficitBalance
      at January 1, 2010
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          
                                                          19,912,493
                                                          
                                                          
                                                          $
                                                          19,912
                                                          
                                                          
                                                          $
                                                          117,632,111
                                                          
                                                          
                                                          $
                                                          (24,000
                                                          )
                                                          
                                                          $
                                                          (135,124,216
                                                          )
                                                          
                                                          $
                                                          (17,496,193
                                                          )Share-based
      compensation of employees amortized over vesting period of stock
      options
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          574,055
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          574,055Issuance
      of shares upon exercise of warrants for cash proceeds of $0.1
      million
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          1,264,137
                                                          
                                                          
                                                          
                                                          1,264
                                                          
                                                          
                                                          
                                                          1,537,357
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          1,538,621Issuance
      of shares under employee stock purchase plan
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          57,677
                                                          
                                                          
                                                          
                                                          58
                                                          
                                                          
                                                          
                                                          35,238
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          35,296Issuance
      of Series A-1 redeemable, convertible preferred stock, net of issuance
      costs of $1,431,781, and fair value of investors’ right to acquire future
      shares of Series A-1 and A-2 preferred stock
                                                          
                                                          
                                                          400,000
                                                          
                                                          
                                                          
                                                          29,898,219
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —Additional
      Series A-1 redeemable, convertible shares issued upon completion of second
      closing
                                                          
                                                          
                                                          12,562
                                                          
                                                          
                                                          
                                                          745,000
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (745,000
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (745,000
                                                          )Beneficial
      conversion feature on Series A-1 redeemable, convertible preferred
      stock
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (29,898,219
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          29,898,219
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          29,898,219Deemed
      dividend attributable to beneficial conversion feature on Series A-1
      redeemable, convertible preferred stock
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          29,898,219
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (29,898,219
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (29,898,219
                                                          )Issuance
      of warrants related to Series A-1 redeemable, convertible preferred
      stock
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          37,874
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          37,874Unrealized
      loss on available-for-sale securities
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (5,532
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (5,532
                                                          )Net
      loss
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (19,717,376
                                                          )
                                                          
                                                          
                                                          (19,717,376
                                                          )Balance
      at September 30, 2010
                                                          
                                                          
                                                          412,562
                                                          
                                                          
                                                          $
                                                          30,643,219
                                                          
                                                          
                                                          
                                                          21,234,307
                                                          
                                                          
                                                          $
                                                          21,234
                                                          
                                                          
                                                          $
                                                          119,071,635
                                                          
                                                          
                                                          $
                                                          (29,532
                                                          )
                                                          
                                                          $
                                                          (154,841,592
                                                          )
                                                          
                                                          $
                                                          (35,778,255
                                                          )
  See
accompanying notes to unaudited condensed financial statements.
  -7-
  HANA
BIOSCIENCES, INC.
 
 CONDENSED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Nine Months Ended September 30,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (19,717,376
                    )
                    
                    $
                    (19,144,013
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                    
                    
                    120,671
                    
                    
                    
                    137,354Share-based
      compensation to employees for services
                    
                    
                    574,055
                    
                    
                    
                    976,576Amortization
      of discount and debt issuance costs
                    
                    
                    846,943
                    
                    
                    
                    651,684Loss
      on disposal of equipment
                    
                    
                    3,017
                    
                    
                    
                    —Change
      in fair value of warrant liability
                    
                    
                    34,819
                    
                    
                    
                    2,449,220Change
      in fair value of investors’ right to purchase future shares of Series A-1
      and A-2 preferred stock
                    
                    
                    (2,431,000
                    )
                    
                    
                    —Changes
      in operating assets and liabilities:(Increase)/decrease
      in prepaid expenses and other assets
                    
                    
                    6,357
                    
                    
                    
                    (58,156
                    )Decrease
      in accounts payable and accrued liabilities
                    
                    
                    (3,018
                    )
                    
                    
                    (1,038,466
                    )Net
      cash used in operating activities
                    
                    
                    (20,565,532
                    )
                    
                    
                    (16,025,801
                    )Cash
      flows from investing activities:Purchase
      of property and equipment
                    
                    
                    (6,499
                    )
                    
                    
                    —Sale
      of marketable securities
                    
                    
                    5,245,202
                    
                    
                    
                    —Purchase
      of marketable securities
                    
                    
                    (24,227,854
                    )
                    
                    
                    —Net
      cash used in investing activities
                    
                    
                    (18,989,151
                    )
                    
                    
                    —Cash
      flows from financing activities:Proceeds
      from exercise of warrants and options and issuance of shares under
      employee stock purchase plan
                    
                    
                    85,862
                    
                    
                    
                    40,162Payments
      on capital leases
                    
                    
                    (38,394
                    )
                    
                    
                    (46,535
                    )Expenses
      incurred related to sale of common stock in October 2009
                    
                    
                    —
                    
                    
                    
                    (6,015
                    )Proceeds
      from issuances of notes payable
                    
                    
                    —
                    
                    
                    
                    5,000,000Proceeds
      from private placement of Series A-1 preferred stock for $40 million less
      cash issuance costs of $1.4 million
                    
                    
                    38,606,093
                    
                    
                    
                    —Net
      cash provided by financing activities
                    
                    
                    38,653,561
                    
                    
                    
                    4,987,612Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (901,122
                    )
                    
                    
                    (11,038,189
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    9,570,453
                    
                    
                    
                    13,999,080Cash
      and cash equivalents, end of period
                    
                    $
                    8,669,331
                    
                    
                    $
                    2,960,891Supplemental
      disclosures of cash flow data:Cash
      paid for interest
                    
                    $
                    2,034,001
                    
                    
                    $
                    1,640,606Supplemental
      disclosures of noncash financing activities:Equipment
      financed with capital leases
                    
                    
                    —
                    
                    
                    
                    9,895Unrealized
      loss on available-for-sale securities
                    
                    
                    (5,532
                    )
                    
                    $
                    (24,000
                    )Fair
      value of warrants issued to nonemployee as partial payment of services
      rendered
                    
                    $
                    37,874
                    
                    
                    $
                    —Extinguishment
      of warrant liabilities, net of cash proceeds from warrant
      exercise
                    
                    $
                    1,488,055
                    
                    
                    $
                    —
 
 See
accompanying notes to unaudited condensed financial statements.
  -8-
  HANA BIOSCIENCES, INC.
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
 
 NOTE
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
 
 BUSINESS
 
 Hana
Biosciences, Inc. (“Hana”, “we”, “our”, “us” or the “Company”) is a
biopharmaceutical company based in South San Francisco, California, which seeks
to acquire, develop, and commercialize innovative products to strengthen the
foundation of cancer care. The Company is committed to creating value by
accelerating the development of its product candidates, including entering
into strategic partnership agreements and expanding its product candidate
pipeline by being an alliance partner of choice to universities, research
centers and other companies.  Our product candidates consist of the
following:
 
 ·
              Marqibo® (vincristine sulfate
      liposomes injection), our lead product candidate, is a novel, targeted
      OptisomeTM encapsulated formulation product candidate of the anti-cancer
      drug vincristine, which is approved by the Food and Drug Administration,
      or FDA, and is currently in development primarily for the treatment of
      adult acute lymphoblastic leukemia, or ALL, and metastatic uveal
      melanoma.
 
 ·
              Menadione Topical Lotion, a novel
      supportive care product candidate being developed for the prevention
      and/or treatment of the skin toxicities associated with the use of
      epidermal growth factor receptor inhibitors (EGFRI), a type of anti-cancer
      agent used in the treatment of lung, colon, head and neck , pancreatic and
      breast cancer.
 
 ·
              BrakivaTM (topotecan liposomes
      injection), a novel targeted OptisomeTM encapsulated formulation product
      candidate of the FDA-approved anticancer drug topotecan, being developed
      for the treatment of solid tumors including small cell lung cancer and
      ovarian cancer.
 
 ·
              AlocrestTM (vinorelbine liposomes
      injection), a novel, targeted OptisomeTM encapsulated formulation product
      candidate of the FDA-approved anticancer drug
      vinorelbine.
 
 BASIS
OF PRESENTATION
 
 The
accompanying unaudited condensed financial statements of the Company have been
prepared in accordance with U.S. generally accepted accounting principles (GAAP)
for interim financial information and the instructions to Form 10-Q. In the
opinion of the Company’s management, the unaudited condensed financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the Company’s financial
position for the periods presented herein. These interim financial results are
not necessarily indicative of the results to be expected for the full fiscal
year ending December 31, 2010 or any subsequent interim period.
 
 Reverse
Stock Split
 
 On
September 8, 2010, the Company amended its Amended and Restated Certificate of
Incorporation to effect a combination (“Reverse Stock Split”) of the Common
Stock at a ratio of one-for-four.  The Reverse Stock Split was
effective at the close of business on September 10, 2010.  All
historical share and per share amounts have been adjusted to reflect the Reverse
Stock Split.
 
 NOTE
2. SIGNIFICANT ACCOUNTING POLICIES
 
 Use
of Management's Estimates
  The
preparation of financial statements in conformity with GAAP requires management
to make estimates based upon current assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Examples include provisions for deferred
taxes, the valuation of the warrant liabilities and investors’ rights to
purchase shares of Series A-1 and A-2 preferred stock, computation of beneficial
conversion feature, the cost of contracted clinical study activities and
assumptions related to share-based compensation expense. Actual results may
differ materially from those estimates.
 
 Segment
Reporting
  The
Company has determined that it currently operates in only one segment, which is
the research and development of oncology therapeutics and supportive care for
use in humans. All assets are located in the United
States.
  -9-
  Fair
Value of Financial Instruments
 
 Financial
instruments include cash and cash equivalents, marketable securities, and
accounts payable. Marketable securities are carried at fair value. Cash and cash
equivalents and accounts payable are carried at cost, which approximates fair
value due to the relative short maturities of these instruments.  The
fair value of the Company’s notes payable at September 30, 2010 is $13.7
million.
  Cash and Cash Equivalents and
Short-Term Investments
  The
Company considers all highly-liquid investments with a maturity of three months
or less when acquired to be cash equivalents. Short-term investments
consist of investments acquired with maturities exceeding three months and are
classified as available-for-sale. All short-term investments are reported
at fair value, based on quoted market price, with unrealized gains or losses
included in comprehensive loss.
 
 Other-than-Temporary
Impairment Assessment
 
 The
Company reviews its investment portfolio to identify and evaluate investments
that have indications of possible impairment. Factors considered in determining
whether a loss is other-than-temporary include the length of time and extent to
which fair value has been less than the cost basis, the financial condition and
near-term prospects of the investee, credit quality and the Company’s conclusion
that it does not intend to sell an impaired investment and is not more likely
than not to be required to sell the security before it recovers its amortized
cost basis. If the Company determines that the impairment of an investment is
other-than-temporary, the investment is written down with a charge recorded in
other income/(expense).
 
 Debt
Issuance Costs
 
 As
discussed in Note 4, the debt issuance costs relate to fees paid in the form of
cash and warrants to secure a firm commitment to borrow funds.  These fees
are deferred, and if the commitment is exercised, amortized over the life of the
related loan using the interest method.
  Financial
Instruments with Characteristics of Both Equity and Liabilities
 
 The
Company has issued certain financial instruments, including warrants to purchase
common stock and rights to purchase shares of Series A-1 and A-2 Preferred
Stock, which have the characteristics of both equity and
liabilities.  These instruments were evaluated to be classified as
liabilities at the time of issuance and are revalued at fair value from period
to period with the resulting change in value included in other
income/(expense).  See Notes 5 and 8.
  Reclassification
 
 Approximately
$0.1 million and $0.7 million in research and development expenses have been
reclassified as general administrative expenses for the three and nine month
periods ending September 30, 2009 in the Company’s Statement of Operations, to
conform to the current year presentation.
 
 NOTE
3. LIQUIDITY AND CAPITAL RESOURCES
  Liquidity
and Capital Resources
  As of
September 30, 2010, the Company had a stockholders’ deficit of approximately
$35.8 million and an accumulated deficit of $154.8 million.  For the
nine months ended September 30, 2010, we recognized a net loss of $19.7
million.  The Company has financed operations primarily through equity
and debt financing and expects such losses to continue over the next several
years.  As of September 30, 2010, the Company had aggregate cash and cash
equivalents and available-for-sale securities of $27.7 million which the Company
believes will be sufficient for the Company’s working capital needs to continue
operations through 2011.  The Company has drawn down $27.5 million of
long-term debt under the loan facility agreement with Deerfield
Management.  On June 7, 2010, the Company entered into an Investment
Agreement with certain investors pursuant to which it sold 400,000
shares of convertible preferred stock at the stated value of $100 per share, for
gross proceeds of $40 million.
 
 The
Investment Agreement provides that the investors have the right, but not the
obligation, to make additional investments, as follows:
 
 ·
              at any time prior to the
      date the Company receives marketing approval from the U.S. Food and
      Drug Administration for any of its product candidates (“Marketing Approval
      Date”), the Purchasers may purchase up to an additional 0.2 million shares
      of Series A-1 Preferred Stock at a purchase price of $100 per share for an
      aggregate purchase price of $20 million.  See note 5 for further
      discussion; and
 
 ·
              at any time beginning 15 days and
      within 120 days following the Marketing Approval Date, the investors may
      purchase up to an aggregate of 0.4 million shares of Series A-2
      Convertible Preferred Stock at the stated value of $100 per share for an
      aggregate purchase price of $40 million. See note 5 for further
      discussion.
  -10-
  As
described above, the investors have the right, but not the obligation, to
purchase up to an additional $20 million of Preferred Shares prior to the FDA
approval decision on Marqibo. If the investors do not make the additional
investments as described above, we will be required to raise additional capital
from other investors or significantly reduce operations by the end of
2011.
 
 The
Company does not generate any recurring revenue and will require substantial
additional capital before it will generate cash flow from its operating
activities, if ever. The Company can give no assurances that any additional
capital that it is able to obtain, if any, will be sufficient to meet its needs.
Moreover, there can be no assurance that such capital will be available on
favorable terms or at all, especially given the current economic
environment.  If the Company raises additional funds through
collaborations and licensing arrangements, it may be necessary to relinquish
some rights to its technologies, product candidates or products, or grant
licenses on terms that are not favorable to the Company. If the Company raises
additional funds by incurring debt, it could incur significant interest expense
and become subject to covenants that could affect the manner in which it
conducts its business.
 
 The
actual amount of funds the Company will need to operate is subject to many
factors, some of which are beyond its control. These factors include the
following:
 
 ·
              costs associated with conducting
      preclinical and clinical testing of product
    candidates;
 
 ·
              costs of establishing
      arrangements for manufacturing the Company’s product
      candidates;
 
 ·
              payments required under current
      and any future license agreements and
    collaborations;
 
 ·
              costs, timing and outcome of
      regulatory reviews;
 
 ·
              costs of obtaining, maintaining
      and defending patents on the Company’s product candidates;
      and
 
 ·
              costs
      of increased general and administrative
  expenses.
 
 The
Company has based its estimates on assumptions that may prove to be wrong, in
which case, the Company may need to obtain additional funds sooner or in greater
amounts than currently anticipated.
 
 NOTE
4.  FACILITY AGREEMENT
 
 On
October 30, 2007, the Company entered into a Facility Agreement (the “Facility
Agreement”) with certain affiliates of Deerfield Management (collectively,
“Deerfield”), pursuant to which Deerfield agreed to loan to the Company up to
$30 million.  In accordance with and upon execution of the Facility
Agreement, the Company paid a loan commitment fee of $1.1 million to Deerfield
Management.  The Company has drawn down an aggregate of $27.5 million since
October 30, 2007, all of which was outstanding at September 30, 2010. Pursuant
to the Facility Agreement, the Company is required to make quarterly interest
payments on outstanding principal, at a stated annual rate of
9.85%.  Under the original terms of the Facility Agreement, all
outstanding indebtedness was required to be repaid in full on October 30,
2013.  However, on June 7, 2010, the Company and Deerfield entered
into an amendment to the Facility Agreement that, among other terms, extended
the maturity date of the outstanding principal to June 30, 2015.  The
Company deemed this modification unsubstantial as the change in the present
value of cash flows related to the payment of interest and principal was less
than 10%.  The Company’s obligations under the Facility Agreement are
secured by all assets owned (or that will be owned in the future) by the
Company, both tangible and intangible. The effective interest rate on the $27.5
million notes payable, including discount on debt, is approximately
14.54%.
 
 Discount on Debt. The Company
issued certain warrants to Deerfield as part of the Facility
Agreement.  The fair value of these warrants was $6.0 million that was
recorded as a discount on the note payable.  The discount on debt is
being amortized over the life of the loan agreement.  The remaining
debt discount of approximately $4.3 million is being amortized over the
remaining loan period.
 
 Summary of Notes Payable. On
November 1, 2007, the Company drew down $7.5 million of the $30.0 million in
total loan proceeds available under the Facility Agreement. On October 14, 2008
and November 12, 2008, the Company drew down an additional $12.5 million and
$2.5 million, respectively. On May 20, 2009, the Company drew down $5.0 million
that was available pursuant to the terms of the Facility Agreement.  The
Company is not required to pay back any portion of the principal amount until
June 30, 2015.  The table below is a summary of the change in carrying
value of the notes payable, including the discount on debt for the nine months
ended September 30, 2010 and 2009:
  -11-
 
 ($ in
      thousands)
                            
                            Carrying
                              Value at
                              January 1,
                            
                            
                            Gross
                              Borrowings
                              Incurred
                            
                            
                            Debt
                              Discount
                              Incurred
                            
                            
                            Amortized
                              Discount
                            
                            
                            Carrying
                              Value at
                              September 30,2010Notes
      payable
                            
                            $
                            27,500
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            27,500Discount
      on debt
                            
                            
                            (4,903
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            592
                            
                            
                            
                            (4,311
                            )Carrying
      value
                            
                            $
                            22,597
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            23,1892009Notes
      payable
                            
                            $
                            22,500
                            
                            
                            $
                            5,000
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            27,500Discount
      on debt
                            
                            
                            (5,648
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            325
                            
                            
                            
                            (5,323
                            )Carrying
      value
                            
                            $
                            16,852
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            22,177
 
 A summary
of the debt issuance costs and changes during the periods ending September 30,
2010 and 2009 is as follows:




Deferred
                          Transaction
                          Costs on
                          January 1,
                        
                        
                        Period
                          Amortized
                          Deferred
                          Transaction
                          Costs
                        
                        
                        Deferred
                          Transaction
                          Costs on
                          September 30,($
      in thousands)2010
                        
                        $
                        1,194
                        
                        
                        $
                        (256
                        )1
                        
                        $
                        9382009
                        
                        $
                        1,361
                        
                        
                        $
                        (121
                        )
                        
                        $
                        1,240





NOTE
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
 Private
Placement of Preferred Stock
 
 On June
7, 2010, the Company, Warburg Pincus Private Equity X, L.P. and Warburg Pincus X
Partners, L.P. (collectively, “Warburg Pincus”) and Deerfield (together with
Warburg Pincus, the “Purchasers”) entered into an Investment Agreement pursuant
to which the Company issued and sold to the Purchasers an aggregate of 0.4
million shares of its newly-designated Series A-1 Convertible Preferred Stock at
the stated value of $100 per share for an aggregate purchase price of $40
million.
 
 The
Investment Agreement provides that the Purchasers also have the right, but not
the obligation, to make additional investments in the Company as
follows:
  ·
              at any time prior to the
      date the Company receives marketing approval from the U.S. Food and
      Drug Administration for the first of its product candidates (“Marketing
      Approval Date”), the Purchasers may purchase up to an additional 0.2
      million shares of Series A-1 Preferred Stock at a purchase price of $100
      per share for an aggregate purchase price of $20 million (“Additional
      Investment”); and
 
 ·
              at any time beginning 15 days and
      within 120 days following the Marketing Approval Date, the Purchasers may
      purchase up to an aggregate of 0.4 million shares of Series A-2
      Convertible Preferred Stock at the stated value of $100 per share for an
      aggregate purchase price of $40 million (“Subsequent
      Investment”).
 
 The
Investment Agreement required that the Company seek approval of its stockholders
to amend the Company’s certificate of incorporation to:  (i) increase
the authorized number of shares of Common Stock, (ii) effect a reverse split of
its Common Stock at a ratio to be agreed upon with the Purchasers, and (iii)
provide that the number of authorized shares of Common Stock may be increased or
decreased by the affirmative vote of the holders of a majority of the issued and
outstanding Common Stock and preferred stock, voting together as one class,
notwithstanding the provisions of Section 242(b)(2) of the Delaware General
Corporation Law (collectively, the “Stockholder Approval”). These amendments
were approved by stockholders at a special meeting on September 2,
2010.
  Terms
of the Preferred Shares
  The
Series A-1 Preferred Stock have the following material terms (hereafter the
“Series A-1 Revised Terms”) which are revised due to the Company obtaining the
Stockholder Approval on September 2, 2010:




1Includes
approximately $0.1 million expense related to unallocated long-term deferred
transaction costs that were expensed in the nine months ended September 30, 2010
related to termination of the commitment period of funding of the Facility
Agreement.  The commitment period expired in October
2009.
  -12-
 
 ·
              the stated value of the Series
      A-1 Preferred Stock, initially $100 per share, accretes at a rate of 9%
      per annum for a five-year term, compounded quarterly, and following such
      five-year term, the holders are thereafter entitled to cash dividends at
      9% of the accreted stated value per annum, payable
      quarterly;
 
 ·
              each share of Series A-1
      Preferred Stock is convertible into shares of the Company’s Common Stock
      at a conversion price of $0.736 per
  share;
 
 ·
              upon
      a liquidation of the Company, as defined, including a change in control of
      the Company, holders of the Series A-1 Preferred Stock would be entitled
      to receive a liquidation preference per share equal to the greater of (i)
      100% of the then-accreted value of the Series A-1 Preferred Stock and (ii)
      the amount which the holder would have received if the Series A-1
      Preferred Stock had been converted into common stock immediately prior to
      the liquidation; and
 
 ·
              the
      Series A-1 Preferred Stock is not
redeemable.
 
 On
September 10, 2010, the Company and the Purchasers conducted a second closing
pursuant to the terms of the Investment Agreement, which is referred to herein
as the Second Closing. In addition to the Stockholder Approval, the Purchasers’
obligations to complete the Second Closing were subject to a number of customary
closing conditions, including the continued accuracy of the representations and
warranties made by the Company in the Investment Agreement and the Company’s
compliance with its contractual obligations thereunder. At the Second Closing,
the shares of Series A-1 Preferred Stock that were originally sold and issued on
June 7, 2010 automatically became subject to the considerably more
Company-favorable Series A-1 Revised Terms.  In addition, the
Purchasers received an additional 12,562 shares of Series A-1 Preferred Stock
equal to the aggregate accretion of $1.2 million that accrued on the initial 0.4
million shares of Series A-1 Preferred Stock since their issuance date on June
7, 2010.
 
 The terms
of the Series A-2 Preferred Stock are identical to the Series A-1 Revised Terms,
except the conversion price is $1.104 per share.
 
 Upon closing of the initial investment on June 7, 2010, the
Warburg Purchasers received the right to designate five out of nine members
of the Company’s Board of Directors.  The Purchasers also received certain
other rights including registration rights for all securities contemplated in
the Investment Agreement and the right to participate in any future financing
transactions.
 
 The
Purchasers are not permitted to transfer or sell preferred stock until the
earlier of (a) June 7, 2011 for the initial 400,000 shares of Series A-1
Preferred Stock issued on June 7, 2010, and the applicable first anniversary
date of the applicable closing date for the future tranches of shares of Series
A-1 or Series A-2 Preferred Stock, (b) June 7, 2012, or (c) the date following
the first period of 20 consecutive trading days during which the closing price
of the Company’s common stock exceeds 200% of the conversion price. Transfer and
sale restrictions could also lapse upon occurrence of certain other
events.
 
 Additionally,
as a condition to the initial closing under the Investment Agreement, the
Company and Deerfield amended the Facility Agreement.  The maturity date of
the principal outstanding pursuant to the loan under the Facility Agreement was
extended from October 30, 2013 to June 30, 2015.   See Note
4.
 
 Accounting
Treatment
  The
Company has allocated the proceeds from the financing between Series A-1
Preferred Shares and the Purchasers’ rights to purchase additional shares of
Series A-1 and A-2 Preferred Stock in connection with the Additional Investments
and Subsequent Investments.
 
 ·
              Outstanding Series A-1
      Preferred Stock – Due to certain contingent redemption features of
      this instrument, the Company classified the 400,000 shares of Series
      A-1 Preferred Stock sold on June 7, 2010 in the mezzanine section (between
      equity and liabilities) on the accompanying balance sheet.  The
      Company recorded the residual value of these shares as $29.9 million on
      June 7, 2010, net of amounts allocated to the rights to purchase
      additional shares of Preferred Stock and transaction costs of $1.4
      million and $8.7 million allocated to the rights to purchase
      additional Preferred Stock in the future.  When the 400,000
      shares of Preferred Stock were issued on June 7, 2010, approximately
      121,000 shares were convertible due to the limited remaining authorized
      shares of common stock available for conversion.  At the Second
      Closing, the remaining 279,000 shares of Preferred Stock became
      convertible when the reverse stock split and the additional shares of
      common stock were authorized.
 
 ·
              Additional Series A-1
      Preferred Stock Issued During Second Closing –At the Second
      Closing on September 10, 2010, the Company issued an additional 12,562
      shares to the Purchasers to capture the accretion to the stated value of
      the Preferred Stock from June 7, 2010, when the shares were issued through
      the second closing.  The carrying value of the Preferred Stock
      was increased by the estimated fair value of these shares on September 10,
      2010, which was $0.7 million.  The Company reduced shareholder’s
      equity by the same amount.  All of these additional shares were
      convertible upon issuance.
  -13-
  ·
              Rights to Purchase Preferred
      Stock in the
      Additional and Subsequent Investments – The Company determined that
      the Purchasers’ rights to purchase future shares of Preferred Stock in
      connection with the Additional and Subsequent Investments are freestanding
      instruments that are required to be classified as liabilities and carried
      at fair value. The treatment of these instruments as a liability is due to
      certain redemption features of the underlying Preferred Stock.  For
      the three and nine months ended September 30, 2010, the Company recognized
      a $2.8 million loss and a $2.4 million loss, respectively, in other income
      and expense, pursuant to the change in fair value of these rights to
      purchase future shares of Preferred Stock.  See Note 8 for
      further discussion.
  The
following table summarizes the assumptions used in applying the
Black-Scholes-Merton option pricing model to determine the fair value of the
liability related to the rights to purchase  outstanding during the
three and nine months ended September 30, 2010, respectively:
 
 Three Months
                                      Ended
                                      September 30
                                      2010
                                    
                                    
                                    Nine Months
                                      Ended
                                      September 30
                                      2010Rights to purchase future shares of preferred
      stockRisk-free
      interest rate
                                    
                                    
                                    0.3
                                    %
                                    
                                    
                                    0.3 – 0.50
                                    %Expected
      life (in years)
                                    
                                    
                                    1.3
                                    
                                    
                                    
                                    0.9 – 1.5Volatility
                                    
                                    
                                    1.07 – 1.09
                                    
                                    
                                    
                                    1.04 – 1.09Dividend
      Yield
                                    
                                    
                                    8.5
                                    %
                                    
                                    
                                    8.4 – 11.4
                                    %
 
 ·
              Beneficial
      Conversion Feature–
      Because the conversion price of the shares of Preferred Stock was less
      than the fair market price of the Company’s common stock at the date
      Preferred Stock was sold and issued, the in-the-money conversion feature
      (Beneficial Conversion Feature, or BCF) requires separate recognition and
      is measured at the intrinsic value (i.e., the amount of the increase in
      value that preferred stockholders would realize upon
      conversion).  The BCF is limited to the proceeds allocated to
      preferred shares and is initially recorded as a discount to preferred
      shares and included as additional paid-in capital.  Because
      there is not a stated redemption date of the shares of the convertible
      Series A-1 Preferred Stock, the BCF is immediately accreted to the
      Preferred Shares as a deemed preferred stock dividend.  As
      described above, only 121,000 of 400,000 shares of the Preferred Stock
      sold to the Purchasers were convertible on the date of the initial
      investment, June 7, 2010.  A BCF was recognized for these shares
      in the amount of $9.0 million on the initial investment
      date,  On the date of the second closing, the remaining 279,000
      shares of the 400,000 shares became convertible and as such, a BCF of
      $20.9 million was recognized on the Second Closing date of September 10,
      2010.  Through the nine months ended September 30, 2010, we have
      recognized aggregate BCF of $29.9
  million.
 
 ·
              Accretion on
      Preferred Stock -For the period from June 7, 2010 to September 10, 2010 (the date of the
      Second Closing), the 400,000 shares of Series A-1 Preferred Stock accreted
      value to the stated rate of $100 at an annual rate of 12%, compounded
      quarterly.  Upon the Second Closing, the 412,652 shares of
      Series A-1 Preferred Stock accreted value to the stated rate of $100 at an
      annual rate of 9%, compounded quarterly.  The total accreted
      value from June 7, 2010 to September 30, 2010 was $1.5
      million.  The Company will not recognize the value of the
      accretion to the preferred stock until such time that it becomes probable
      that the shares of preferred stock will become redeemable.  The
      accreted value is included, for loss per share purposes only, as a
      dividend to preferred stockholders and the loss attributable to common
      shareholders is increased by the value of the accretion for the
      period.
 
 NOTE 6. STOCKHOLDERS’
DEFICIT
 
 In
connection with the one-for-four reverse stock split we implemented at the close
of business on September 10, 2010, the number of outstanding shares of common
stock and equity awards was proportionately adjusted to reflect the reverse
stock split.  As a result, the number of outstanding shares of common
stock and equity awards was determined by dividing the number of outstanding
shares and equity awards by four.  The per share exercise price of
stock options and warrants was determined by multiplying the exercise price by
four.  All historical share and per share amounts have been adjusted
to reflect the reverse stock split.  All stock options and warrants
were appropriately adjusted to give effect to the Reverse Stock
Split
 
 October
2009 Private Placement of Common Stock
 
 On
October 7, 2009, the Company entered into a securities purchase agreement
pursuant to which it sold in a private placement an aggregate of 13.6 million
units of its securities, each unit consisting of (i) either (a) one share of
common stock, or (b) a seven-year warrant to purchase one share of common stock
at an exercise price of $0.04 per share (a “Series A Warrant”), and (ii) a
seven-year warrant to purchase one-tenth of one share of common stock at an
exercise price of $2.40 (a “Series B Warrant”), which represented the closing
bid price of the Company’s common stock on October 7, 2009.
  -14-
  Pursuant
to the securities purchase agreement, the Company sold 7.7 million units for
$8.5 million, or $1.20 per unit.  These units consisted of shares of common
stock and Series B Warrants, with purchase date fair values of $7.8 million and
$0.6 million, respectively.  The Company also sold 2.8 million units
consisting of Series A Warrants and Series B Warrants for an aggregate purchase
price of $3.2 million, or $1.16 per unit.  The net cash proceeds were
approximately $11.7 million.  The Company also issued 3.2 million
units to Deerfield, consisting of shares of common stock and Series B Warrants,
with purchase date fair values of $3.6 million and $0.3 million,
respectively.  The 3.2 million units issued to Deerfield satisfied a $3.9
million warrant redemption obligation we owed to Deerfield.  All
warrants issued in the offering are classified as liabilities.
 
 Stock
Incentive Plans
  As of
September 30, 2010, the Company had three stockholder approved stock incentive
plans under which it grants or has granted options to purchase shares of our
common stock and restricted stock awards to employees: the 2010 Equity Incentive
Plan (the “2010 Plan”), the 2004 Stock Incentive Plan (the “2004 Plan”) and the
2003 Stock Option Plan (the “2003 Plan”).   The Board of Directors, or
the Chief Executive Officer when designated by the Board, is responsible for
administration of the employee stock incentive plans and determines the term,
exercise price and vesting terms of each option. In general, stock options
issued under all the current plans have a vesting period of three years and
expire ten years from the date of grant. Additionally, the Company has an
Employee Stock Purchase Plan, the 2006 Employee Stock Purchase Plan (the “2006
Plan”).
  On
February 16, 2010, the Company’s Board of Directors adopted the 2010 Equity
Incentive Plan.  Under the 2010 Plan, the Board or a committee appointed by
the Board may award nonqualified stock options, incentive stock options,
restricted stock, restricted stock units, performance awards, and stock
appreciation rights to participants.  Officers, directors, employees or
non-employee consultants or advisors (including our subsidiaries and affiliates)
are eligible to receive awards under the 2010 Plan. The total number of shares
of our common stock available for grants of awards to participants under the
2010 Plan is 2.0 million shares.  The Company intends for all future stock
option awards to be issued under the 2010 Plan, with no additional awards being
issued under the 2003 Plan or 2004 Plan.
 
 Stock
Options. The
following table summarizes information about stock options outstanding at
September 30, 2010 and changes in outstanding options in the nine months then
ended, all of which are at fixed prices:
  Number of
                    Shares Subject
                    to Options
                    Outstanding
                    (in thousands)
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price per
                    Share
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Term
                    (in years)
                  
                  
                  Aggregate
                    Intrinsic
                    Value
                    (in $
                    thousands)Outstanding
      January 1, 2010
                  
                  
                  1,209
                  
                  
                  $
                  7.28Options
      granted
                  
                  
                  1,310
                  
                  
                  
                  0.77Options
      cancelled
                  
                  
                  (205
                  )
                  
                  
                  10.20Options
      exercised
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      September 30, 2010
                  
                  
                  2,314
                  
                  
                  
                  3.34
                  
                  
                  
                  8.02
                  
                  
                  $
                  7Exercisable
      at September 30, 2010
                  
                  
                  826
                  
                  
                  $
                  7.48
                  
                  
                  
                  6.04
                  
                  
                  $
                  3
 
 Employee Stock
Purchase Plan. The 2006 Plan allows employees to contribute a percentage
of their gross salary toward the semi-annual purchase of shares of our common
stock. The price of each share will not be less than the lower of 85% of the
fair market value of our common stock on the last trading day prior to the
commencement of the offering period or 85% of the fair market value of our
common stock on the last trading day of the purchase period. A total of 0.2
million shares of common stock were initially reserved for issuance under the
2006 Plan.
 
 Assumptions. The following table
summarizes the assumptions used in applying the Black-Scholes-Merton option
pricing model to determine the fair value of new awards granted during the three
and nine months ended September 30, 2010 and 2009, respectively:
 
 Three Months Ended September 30,
                      
                      
                      Nine Months Ended September 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Employee stock optionsRisk-free
      interest rate
                      
                      
                      3.00
                      %
                      
                      
                      1.90
                      %
                      
                      
                      3.00
                      %
                      
                      
                      1.90
                      %Expected
      life (in years)
                      
                      
                      5.5 - 5.85
                      
                      
                      
                      5.5 – 6.0
                      
                      
                      
                      5.5 – 5.85
                      
                      
                      
                      5.5 – 6.0Volatility
                      
                      
                      0.85
                      
                      
                      
                      0.85
                      
                      
                      
                      0.85 – 0.95
                      
                      
                      
                      0.85 – 0.95Dividend
      Yield
                      
                      
                      0
                      %
                      
                      
                      0
                      %
                      
                      
                      0
                      %
                      
                      
                      0
                      %Employee stock purchase
planRisk-free
      interest rate
                      
                      
                      0.22 – 0.61
                      %
                      
                      
                      0.27 - 1.11
                      
                      
                      
                      0.20 – 1.14
                      %
                      
                      
                      0.27 - 1.11Expected
      life (in years)
                      
                      
                      0.5 - 2.0
                      
                      
                      
                      0.5 - 2.0
                      
                      
                      
                      0.5 - 2.0
                      
                      
                      
                      0.5 - 2.0Volatility
                      
                      
                      1.18 – 1.89
                      
                      
                      
                      1.73 – 2.45
                      
                      
                      
                      1.18 – 2.12
                      
                      
                      
                      1.30 – 2.45Dividend
      Yield
                      
                      
                      0
                      %
                      
                      
                      0
                      %
                      
                      
                      0
                      %
                      
                      
                      0
                      %
  -15-
  Total
share-based compensation expense was approximately $0.6 million and $1.0 million
related to employee stock options recognized in the operating results for the
nine months ended September 30, 2010 and 2009, respectively.
 
 Common
Stock Warrants
 
 As of
September 30, 2010, the Company had outstanding warrants to purchase an
aggregate of approximately 2.3 million shares of its common stock, all of which
were available for exercise. Warrants to purchase 0.2 million shares of common
stock at $6.28 per share expired on April 22, 2010.  Warrants to
purchase 0.2 million shares of common stock at $23.20 per share expired on
October 24, 2010.  On June 7, 2010, the Company issued a five-year
warrant to purchase 0.1 million shares of common stock at an exercise price of
$0.92 as partial payment for financial advisory services provided in connection
with the transactions contemplated by the June 2010 Investment
Agreement.  At September 30, 2010, there are outstanding Series A
warrants to purchase an aggregate of 0.6 million shares of common stock and
Series B warrants to purchase an aggregate of 1.4 million shares of common stock
in connection with the Company’s October 2009 private
placement.  Additionally, as a result of an anti-dilution provision
contained in the Series B Warrants issued in the Company’s October 2009 private
placement, the exercise price of the Series B Warrants was reduced to $1.20 per
share after giving effect to the issuance of Series A-1 Preferred Stock on June
7, 2010.
 
 The
following table summarizes the warrants outstanding as of September 30, 2010 and
the changes in outstanding warrants in the nine months then
ended:
 
 Number Of
                      Shares Subject
                      To Warrants
                      Outstanding
                      (in thousands)
                    
                    
                    Weighted-Average
                      Exercise PriceWarrants
      outstanding January 1, 2010
                    
                    
                    3,686
                    
                    
                    $
                    2.21Warrants
      granted
                    
                    
                    54
                    
                    
                    
                    0.92Warrants
      exercised
                    
                    
                    (1,264
                    )
                    
                    
                    0.04Warrants
      cancelled
                    
                    
                    (223
                    )
                    
                    
                    6.28Warrants
      outstanding September 30, 2010
                    
                    
                    2,253
                    
                    
                    $
                    2.99
  -16-
  NOTE
7. BASIC NET LOSS PER COMMON SHARE
  
 Basic net
loss per share is based upon the weighted average number of common shares
outstanding during the period. Diluted net income or loss per share is based
upon the weighted average number of common shares outstanding during the period,
plus the effect of additional weighted average common equivalent shares
outstanding during the period when the effect of adding such shares is
anti-dilutive.
 
 Basic and
diluted net loss per share was determined as follows:
 
 Three Months Ended
                    
                    
                    Nine Months EndedSeptember 30,
                    
                    
                    September 30,(in
      $ thousands, except per share amounts)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      loss
                    
                    $
                    (7,920
                    )
                    
                    $
                    (5,667
                    )
                    
                    $
                    (19,717
                    )
                    
                    $
                    (19,144
                    )Deemed
      dividend to preferred shareholders, additional accretion
                    
                    
                    (1,153
                    )
                    
                    
                    —
                    
                    
                    
                    (1,469
                    )
                    
                    
                    —Deemed
      dividend to preferred shareholders, BCF
                    
                    
                    (20,907
                    )
                    
                    
                    —
                    
                    
                    
                    (29,898
                    )
                    
                    
                    —Net
      loss applicable to Common Stock
                    
                    
                    (29,980
                    )
                    
                    
                    (5,667
                    )
                    
                    
                    (51,084
                    )
                    
                    
                    (19,144
                    )Weighted
      average shares used in computing net loss per share, basic and
      diluted
                    
                    
                    21,234
                    
                    
                    
                    8,145
                    
                    
                    
                    20,570
                    
                    
                    
                    8,124Net
      loss per share, basic and diluted
                    
                    $
                    (1.41
                    )
                    
                    $
                    (0.68
                    )
                    
                    $
                    (2.48
                    )
                    
                    $
                    (2.36
                    )
 
 The
securities in the table below were excluded from the computation of diluted net
loss per common share for the nine months ended September 2010 and 2009 because
such securities were anti-dilutive during the periods presented:
 
 (in
      thousands)
                  
                  2010
                  
                  
                  2009Warrants
                  
                  
                  2,253
                  
                  
                  
                  439Stock
      options
                  
                  
                  2,314
                  
                  
                  
                  1,296Convertible
      redeemable preferred stock
                  
                  
                  56,350
                  
                  
                  
                  —Total
                  
                  
                  60,917
                  
                  
                  
                  1,735
 
 NOTE
8. WARRANT LIABILITIES
 
 The
Company had outstanding warrants to purchase 2.3 million and 0.4 million shares
of common stock that were classified as liabilities on the balance sheet as of
September 30, 2010 and 2009, respectively.  The fair value of the
warrants classified as liabilities was $0.7 million and $3.9 million on
September 30, 2010 and 2009, respectively.  During the nine months
ended September 30, 2010 and 2009, the Company recognized a loss of $0.1 million
and $2.4 million related to the revaluation of the warrant
liabilities.
 
 The
warrants outstanding as of September 30, 2010 that were classified as
liabilities were issued to various investors pursuant to the October 2009
private placement.  The Company classified these warrants as
liabilities based on certain cash settlement provisions available to the warrant
holders upon certain reorganization events in the equity structure, including
mergers.  Specifically, in the event the Company is acquired in an all cash
transaction, a transaction whereby it ceases to be a publicly held entity under
Rule 13e-3 of the Securities Exchange Act of 1934, or a reorganization involving
an entity not traded on a national securities exchange, the warrant holders may
elect to receive an amount of cash equal to the value of the warrants as
determined in accordance with the Black-Scholes-Merton option pricing model with
certain defined assumptions.  At any time when the resale of the warrant
shares is not covered by an effective registration statement under the
Securities Act of 1933, the warrant holders can elect a cashless exercise of all
or any portion of shares outstanding under a warrant, in which case they would
receive a number of shares with a value equal to the intrinsic value on the date
of exercise of the portion of the warrant being exercised.  Additionally,
warrant holders have certain registration rights and the Company would be
obligated to make penalty payments to them under certain circumstances if we
were unable to maintain effective registration of the shares underlying the
warrants with the SEC.
 
 The
warrants outstanding as of September 30, 2009 that were classified as
liabilities were issued to Deerfield pursuant to the Facility
Agreement.  These warrants to Deerfield were redeemed and the
redemption obligation satisfied by issuing to Deerfield securities in connection
with the October 2009 private placement.
 
 On May
20, 2010, the Company issued approximately 1.5 million shares of its common
stock pursuant to the exercise of a Series A Warrant issued pursuant to the
October 2009 securities purchase agreement, realizing total proceeds of
approximately $0.1 million.
  -17-
  Assumptions. The following table
summarizes the assumptions used in applying the Black-Scholes-Merton option
pricing model to determine the fair value of the liability related to 2warrants outstanding
during the three and nine months ended September 30, 2010 and 2009,
respectively:
 
 Three Months Ended September 30,
                        
                        
                        Nine Months Ended September 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Warrant liabilitiesRisk-free
      interest rate
                        
                        
                        1.91
                        %
                        
                        
                        2.75
                        %
                        
                        
                        1.91 - 3.28
                        %
                        
                        
                        1.20 – 2.75
                        %Expected
      life (in years)
                        
                        
                        6.02
                        
                        
                        
                        4.14 – 5.10
                        
                        
                        
                        6.02 - 6.52
                        
                        
                        
                        4.14 – 5.42Volatility
                        
                        
                        0.92
                        
                        
                        
                        2.31
                        
                        
                        
                        0.92 - 0.99
                        
                        
                        
                        1.16 – 2.31Dividend
      Yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %
                        
                        
                        0
                        %
                        
                        
                        0
                        %
 
 For
additional details on the change in value of these liabilities, see Note
9.  Changes in the Company’s stock price or volatility would result in
a change in the value of the warrants and impact the Statement of Operations. A
10% increase in the Company’s stock price would cause the fair value of the
warrants and the warrant liability to increase by approximately 10%.
 
 NOTE
9. FAIR VALUE MEASUREMENTS
  ASC 820
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures about fair
value measurements. Fair value is defined under ASC 820 as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under ASC 820 must maximize the
use of observable inputs and minimize the use of unobservable inputs. The
standard describes a fair value hierarchy based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value which are the following:
  •
              Level 1 - Quoted prices in active
      markets for identical assets or
  liabilities;
 
 •
              Level 2 - Inputs other than Level
      1 that are observable, either directly or indirectly, such as quoted
      prices for similar assets or liabilities; quoted prices in markets that
      are not active; or other inputs that are observable or can be corroborated
      by observable market data for substantially the full term of the assets or
      liabilities; and
 
 •
              Level 3 - Unobservable inputs
      that are supported by little or no market activity and that are
      significant to the fair value of the assets or
      liabilities.
  The
following table represents the fair value hierarchy for our financial assets and
liabilities held by the Company measured at fair value on a recurring
basis:
 
 As of September
      30, 2010 (in thousands)
                              
                              Level 1
                              
                              
                              Level 2
                              
                              
                              Level 3
                              
                              
                              TotalAssetsAvailable-for-sale
      equity securities
                              
                              
                              64
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              64Available-for-sale
      debt securities
                              
                              
                              —
                              
                              
                              
                              18,982
                              
                              
                              
                              —
                              
                              
                              
                              18,982Total
                              
                              $
                              64
                              
                              
                              $
                              18,982
                              
                              
                              $
                              —
                              
                              
                              $
                              19,046LiabilitiesWarrant
      liabilities
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              $
                              692
                              
                              
                              $
                              692Right
      to purchase future Series A-1 and A-2 preferred stock
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              6,239
                              
                              
                              
                              6,239Total
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              6,931
                              
                              
                              $
                              6,931
 
 As of December
      31, 2009 (in thousands)
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    TotalAssetsAvailable-for-sale
      equity securities
                    
                    
                    68
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    68Total
                    
                    $
                    68
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    68LiabilitiesWarrant
      liabilities
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    2,146
                    
                    
                    $
                    2,146Total
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    2,146
                    
                    
                    $
                    2,146




2As of
September 30, 2009, all warrant liabilities recognized related to the warrants
issued to Deerfield pursuant to the Loan Facility Agreement transacted in
October 2007.  As of September 30, 2010, all warrant liabilities
recognized related to warrants issued as part of the October 2009 Private
Placement.
  -18-


A summary
of the activity of the fair value of the Level 3 liabilities is as
follows:





Beginning
                                  Value of
                                  Level 3
                                  Liabilities
                                
                                
                                Additional
                                  Level 3
                                  Liabilities
                                  Incurred
                                
                                
                                Liabilities
                                  extinguished
                                
                                
                                Net
                                  (Gain)/Loss on
                                  Change in Fair
                                  Value of
                                  Level 3
                                  Liabilities
                                
                                
                                Ending Fair
                                  Value of
                                  Level 3
                                  LiabilitiesNine
      months ended September 30, 2010: (in thousands)Warrant
      liabilities
                                
                                $
                                2,146
                                
                                
                                $
                                —
                                
                                
                                $
                                (1,488
                                )
                                
                                $
                                34
                                
                                
                                $
                                692Right
      to purchase additional Series A preferred stock tranches
                                
                                
                                —
                                
                                
                                
                                8,670
                                
                                
                                
                                —
                                
                                
                                
                                (2,431
                                )
                                
                                
                                6,239Total
      level 3 liabilities
                                
                                $
                                2,146
                                
                                
                                $
                                8,670
                                
                                
                                $
                                (1,488
                                )
                                
                                $
                                (2,397
                                )
                                
                                $
                                6,931Nine
      months ended September 30, 2009: (in thousands)Warrant
      liabilities
                                
                                $
                                1,451
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                2,449
                                
                                
                                $
                                3,900Three
      months ended September 30, 2010: (in thousands)Warrant
      liabilities
                                
                                $
                                1,041
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                (349
                                )
                                
                                $
                                692Right
      to purchase additional Series A preferred stock tranches
                                
                                
                                9,048
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (2,809
                                )
                                
                                
                                6,239Total
      level 3 liabilities
                                
                                $
                                10,089
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                (3,158
                                )
                                
                                $
                                6,931Three
      months ended September 30, 2009: (in thousands)Warrant
      liabilities
                                
                                $
                                3,608
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                292
                                
                                
                                $
                                3,900





NOTE 10. AVAILABLE-FOR-SALE
SECURITIES





On
September 30, 2010, the Company had $21 million in total marketable securities
which consisted of equity and debt investments.  All the Company’s
debt investments are in U.S. government securities.  The following
table summarizes the equity investment classified as available-for-sale
securities during the nine months ended September 30, 2010 and
2009:





Beginning
                        Fair
                        Value
                      
                      
                      Net
                        Unrealized
                        Gain/(Loss)
                      
                      
                      Gross
                        Realized
                        Gain/(Loss)
                      
                      
                      Ending Fair
                        Value(in
      thousands)Nine
      months ended September 30, 2010
                      
                      $
                      68
                      
                      
                      $
                      4
                      
                      
                      $
                      —
                      
                      
                      $
                      64Nine
      months ended September 30, 2009
                      
                      $
                      128
                      
                      
                      $
                      (24
                      )
                      
                      $
                      —
                      
                      
                      $
                      104





During
the three months September 30, 2010, the Company purchased approximately $21.0
million in U.S. government securities with contractual maturities less than
twelve months.  Of the $21.0 million securities purchased, $2.0
million were classified as cash equivalents in the condensed Balance Sheet as of
September 30, 2010 because the maturity dates of these securities were less than
three months from the purchase date.  $19.0 million of the debt
securities were classified as available-for-sale securities.  The
change in fair value of the debt securities from the purchase date through
September 30, 2010 was inconsequential.  The Company did not possess
any such securities at December 31, 2009.





NOTE
11.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities consist of the following at September 30, 2010
and December 31, 2009:


-19-





($
      in thousands)
                      
                      September 30,
                        2010
                      
                      
                      December 31,
                        2009Trade
      accounts payable
                      
                      $
                      826
                      
                      
                      $
                      1,009Clinical
      research and other development related costs
                      
                      
                      1,239
                      
                      
                      
                      1,232Accrued
      personnel related expenses
                      
                      
                      1,012
                      
                      
                      
                      980Interest
      payable
                      
                      
                      683
                      
                      
                      
                      683Accrued
      other expenses
                      
                      
                      264
                      
                      
                      
                      123Total
                      
                      $
                      4,024
                      
                      
                      $
                      4,027





NOTE
12. COMMITMENTS





Lease Agreements. The Company
entered into a three year sublease, which commenced on May 31, 2006, for
property at 7000 Shoreline Court in South San Francisco, California, where the
Company’s executive offices are located. In May 2008, the Company and its
sublessor entered into an amendment to the sublease agreement, which increased
the term of the lease from three years to four years. Effective June 24, 2009,
the Company entered into a further amendment to the sublease, which extended the
term of the lease through March 2011 and reduced the monthly lease payments from
$2.80 per square foot to $2.45 per square foot for the eleven month period from
July 2009 through May 2010 and reduced the lease payments from $2.90 per square
foot to $1.95 per square feet for the ten month period from June 2010 through
March 2011.  The total cash payments due for the duration of the sublease
equaled approximately $0.2 million at September 30, 2010.





Employment Agreements. On
June 6, 2008, the Company entered into a new employment agreement with its
President and Chief Executive Officer. This agreement provides for an employment
term that expires in December 2010. The minimum aggregate amount of gross salary
compensation to be provided for over the remaining term of the agreement
amounted to approximately $0.1 million at September 30, 2010.





NOTE
13. RESTRICTED CASH





On May
31, 2006, the Company entered into a sublease agreement relating to its South
San Francisco, CA offices. The sublease required the Company to provide a
security deposit in the amount of $125,000. To satisfy this obligation the
Company obtained a $125,000 letter of credit with the sublessor as the
beneficiary in case of default or failure to comply with the sublease
requirements. In order to obtain the letter of credit, the Company was required
to deposit a compensating balance of $125,000 into a restricted money market
account with its financial institution. This compensating balance for the letter
of credit will be restricted for the entire period of the
sub-lease.





NOTE 14. LICENSE
AGREEMENT





Pursuant
to an Amended and Restated License Agreement dated April 30, 2007, as amended
effective May 27, 2009 (the “License Agreement”), between the Company and
Tekmira Pharmaceuticals Corporation (“Tekmira”), the Company holds exclusive,
worldwide rights to develop and commercialize three oncology drug candidates,
Marqibo, Brakiva, and Alocrest.  On September 20, 2010, the Company
and Tekmira entered into Amendment No. 2 to the License Agreement (the
“Amendment”), which amends the License Agreement as follows:





·
            The Company’s maximum aggregate
      obligation for milestone payments to Tekmira for all three product
      candidates was decreased from $37.0 million to $19.0
      million.  All of the affected milestone payment obligations
      relate to amounts triggered by the achievement of regulatory milestones
      for the Company’s Marqibo drug
candidate.





·
            The Amendment modified the
      royalty rates payable by the Company for net sales of Marqibo by
      eliminating a tiered royalty rate structure based upon the amount of net
      sales and instead provides for a single royalty rate without regard to the
      amount of net sales.





·
            In consideration of the
      foregoing, the Company agreed to make a one-time payment to Tekmira of
      $5.75 million.




The $5.75
million payment to Tekmira was recognized as expense in the Condensed Statement
of Operations for the three and nine months ended September 30,
2010.


-20-


Item
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




The following discussion of our
financial condition and results of operations should be read in conjunction with
the unaudited condensed financial statements and the notes to those statements
included elsewhere in this Quarterly Report on Form 10-Q. This discussion
includes forward-looking statements that involve risks and uncertainties. As a
result of many factors, such as those set forth under “Risk Factors” in Item 1A
of Part I of the 2009 Form 10-K and in Item 1A of Part II of our Form 10-Q for
the quarter ended March 31, 2010, our actual results may differ materially from
those anticipated in these forward-looking statements .





Overview





We are a
biopharmaceutical company dedicated to developing and commercializing new,
differentiated cancer therapies designed to improve and enable current standards
of care.  We currently have four product candidates in various stages
of development:




·
            Marqibo® (vincristine sulfate
      liposomes injection), a novel, targeted OptisomeTM encapsulated formulation
      product candidate of the FDA-approved anticancer drug vincristine, being
      developed for the treatment of adult acute lymphoblastic leukemia
      (“ALL”).





·
            Menadione Topical Lotion, a novel
      supportive care product candidate, being developed for the prevention
      and/or treatment of the skin toxicities associated with the use of
      epidermal growth factor receptor inhibitors, a type of anti-cancer agent
      used in the treatment of certain
cancers.





·
            BrakivaTM (topotecan liposomes
      injection), a novel targeted OptisomeTM encapsulated formulation product
      candidate of the FDA-approved anticancer drug topotecan, being developed
      for the treatment of solid tumors including small cell lung cancer and
      ovarian cancer.





·
            AlocrestTM (vinorelbine liposomes
      injection), a novel, targeted OptisomeTM encapsulated formulation product
      candidate of the FDA-approved anticancer drug vinorelbine, being developed
      for the treatment of solid tumors such as non-small-cell lung
      cancer.





Revenues





We do not
expect to generate any significant revenue from product sales or royalties in
the foreseeable future.   We may have revenues in the future only
if we are able to develop and commercialize our products, license our technology
and/or enter into strategic partnerships. If we are unsuccessful, our ability to
generate future revenues will be significantly diminished.




Research
and Development Expenses





Research
and development expenses, which account for the bulk of our expenses, consist
primarily of salaries and related personnel costs, fees paid to consultants and
outside service providers for laboratory development, manufacturing, and other
expenses relating to the acquiring, design, development, testing, and
enhancement of our product candidates, including milestone payments for licensed
technology. We expense research and development costs as they are
incurred.





While
expenditures on current and future clinical development programs are expected to
be substantial, particularly in light of our available resources, they are
subject to many uncertainties, including the results of clinical trials and
whether we develop any of our drug candidates with a partner or independently.
As a result of such uncertainties, we cannot predict with any significant degree
of certainty the duration and completion costs of our research and development
projects or whether, when and to what extent we will generate revenues from the
commercialization and sale of any of our product candidates. The duration and
cost of clinical trials may vary significantly over the life of a project as a
result of unanticipated events arising during clinical development and a variety
of factors, including:





·
            the number of trials and studies
      in a clinical program;





·
            the number of patients who
      participate in the trials;





·
            the number of sites included in
      the trials;





·
            the rates of patient recruitment
      and enrollment;





·
            the duration of patient treatment
      and follow-up;





·
            the costs of manufacturing our
      drug candidates; and





·
            the costs, requirements, timing
      of, and the ability to secure regulatory
  approvals.


-21-





General
and Administrative Expenses





General
and administrative expenses consist primarily of salaries and related expenses
for executive, business development, finance and other administrative personnel,
recruitment expenses, professional fees and other corporate expenses, including
accounting, legal fees related to patents and other general legal
activities.





Share-based
Compensation





Share-based
compensation expenses consist primarily of expensing the fair-market value of a
share-based award over the vesting term.  This expense is included in our
operating expenses for each reporting period.





Critical
Accounting Policies





The
accompanying discussion and analysis of our financial condition and results of
operations are based on our unaudited condensed financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. We believe there are certain accounting policies that
are critical to understanding our unaudited condensed financial statements, as
these policies affect the reported amounts of expenses and involve management’s
judgment regarding significant estimates. We have reviewed our critical
accounting policies and their application in the preparation of our unaudited
condensed financial statements and related disclosures with the Audit Committee
of our Board of Directors. Our critical accounting policies and estimates are
described below.




Share-Based
Compensation




We have
adopted revised authoritative guidance related to stock-based compensation under
FASB ASC TOPIC 718 “Compensation – Stock Compensation.”  We have
adopted a Black-Scholes-Merton model to estimate the fair value of stock options
issued and the resultant expense is recognized in the statement of operations
each reporting period.  See Note 6 of our unaudited condensed
financial statements included elsewhere in this Form 10-Q for further
information regarding the required disclosures related to share-based
compensation.





Liabilities
Related to Financial Instruments





We have
issued certain warrants and rights to purchase future shares of Series A-1 and
A-2 Preferred Stock that have characteristics of both equity and
liabilities.  These instruments were evaluated to be classified as
liabilities at the time of issuance and are revalued at fair value from period
to period with the resulting change in value included in the Statement of
Operations.





Licensed
In-Process Research and Development




Licensed
in-process research and development relates primarily to technology,
intellectual property and know-how acquired from another entity. We evaluate the
stage of development as well as additional time, resources and risks related to
development and eventual commercialization of the acquired technology. As we
historically have acquired non-FDA approved technologies, the nature of the
remaining efforts for completion and commercialization generally include
completion of clinical trials, completion of manufacturing validation,
interpretation of clinical and preclinical data and obtaining marketing approval
from the FDA and other regulatory bodies. The cost in resources, probability of
success and length of time to commercialization are extremely difficult to
determine. Numerous risks and uncertainties exist with respect to the timely
completion of development projects, including clinical trial results,
manufacturing process development results and ongoing feedback from regulatory
authorities, including obtaining marketing approval. Additionally, there is no
guarantee that the acquired technology will ever be successfully commercialized
due to the uncertainties associated with the pricing of new pharmaceuticals, the
cost of sales to produce these products in a commercial setting, changes in the
reimbursement environment or the introduction of new competitive products. Due
to the risks and uncertainties noted above, we will expense such licensed
in-process research and development projects when incurred. However, the cost of
acquisition of technology is capitalized if there are alternative future uses in
other research and development projects or otherwise based on internal review.
All milestone payments will be expensed in the period the milestone is reached.





Clinical
Study Activities and Other Expenses from Third-Party Contract Research
Organizations




Much of
our research and development activities related to clinical study activity are
conducted by various third parties, including contract research organizations,
which may also provide contractually defined administration and management
services. Expense incurred for these contracted activities are based upon a
variety of factors, including actual and estimated patient enrollment rates,
clinical site initiation activities, labor hours and other activity-based
factors. On a regular basis, our estimates of these costs are reconciled to
actual invoices from the service providers, and adjustments are made
accordingly.


-22-




Results
of Operations
 
 Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009


General and administrative
expenses. For the three months ended September 30, 2010, general and
administrative, or G&A, expense was $1.3 million, as compared to $0.9
million for the three months ended September 30, 2009.  The increase
of $0.4 million is due to increased personnel related expenses of $0.1 million,
increased outside services and professional fees of $0.2 million and increased
costs for allocable expenses of $0.1 million.





The $0.1
million increase in employee-related expenses includes an increase of expenses
related to incentive compensation as well as increased salary expense, offset
partially by lower stock-based compensation expense.





The $0.2
million increase in professional fees and outside services related mainly to
increased legal fees and accounting costs related to our proxy filings and
special shareholder meeting in September 2010.





Research and development
expenses. The following table summarizes our R&D expenses incurred
for preclinical support, contract manufacturing for clinical supplies and
clinical trial services provided by third parties, as well as milestone payments
for in-licensed technology for each of our current major product development
programs for the three months ended September 30, 2010 and 2009.  The
table also summarizes unallocated costs, which consist of personnel, facilities
and other costs not directly allocable to development programs.





Product candidates ($
      in thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        Annual %
                          ChangeMarqibo
                        
                        $
                        6,842
                        
                        
                        $
                        1,518
                        
                        
                        
                        351
                        %Menadione
      Topical Lotion (MTL)
                        
                        
                        16
                        
                        
                        
                        (81
                        )
                        
                        
                        N/ABrakiva
                        
                        
                        13
                        
                        
                        
                        100
                        
                        
                        
                        (87
                        )%Alocrest
                        
                        
                        4
                        
                        
                        
                        9
                        
                        
                        
                        (56
                        )%Total
      third party development costs
                        
                        
                        661
                        
                        
                        
                        561
                        
                        
                        
                        18
                        %Allocable
      costs and overhead
                        
                        
                        261
                        
                        
                        
                        245
                        
                        
                        
                        6
                        %Personnel
      related expense
                        
                        
                        1,169
                        
                        
                        
                        958
                        
                        
                        
                        22
                        %Share-based
      compensation expense
                        
                        
                        37
                        
                        
                        
                        198
                        
                        
                        
                        (81
                        )%Total
      research and development expense
                        
                        $
                        9,003
                        
                        
                        $
                        3,507
                        
                        
                        
                        156
                        %




Marqibo.Marqibo costs increased by $5.3 million in the three months ended
September 30, 2010 compared to the same period in 2009. The main cause of the
increased costs is a $5.75 million payment we made to Tekmira Pharmaceuticals in
September 2010 as part of the amendment made to our license agreement in
exchange for a reduction in aggregate future milestones of $18 million and an
adjustment to the royalty rates to be paid on our product candidates licensed
from Tekmira. This increase was partially off-set by decreased manufacturing and
clinical costs as enrollment of our Phase 2 clinical trial in adult Philadelphia
chromosome negative ALL patients in second relapse, or those who have progressed
following two prior lines of anti-leukemia therapy or, rALLy trial, was
completed in December 2009. We have spent approximately $8.3 million to date in
2010, including the $5.75 million paid to Tekmira to amend the license
agreement. We expect to spend an additional $3.7 million on Marqibo in 2010 for
an aggregate spend of $12.0 million in 2010. We estimate that we will need to
expend at least an additional $6 million of external project costs in 2011 to
attempt to obtain accelerated approval that would permit us to sell Marqibo to a
limited segment of the market. Based upon a pre-NDA follow-up meeting
with the FDA completed on November 8, 2010, we and the FDA agreed that we would
simultaneously submit all modules of our proposed NDA as a complete, original,
new drug application, as opposed to initiating a partial, rolling submission by
the end of 2010.  We do not anticipate that this change will affect
the timing of submission completion, review nor potential
approval.  We anticipate submitting the complete NDA during the first
half of 2011.  If we receive accelerated approval, we will need to
conduct a confirmatory Phase 3 trial to receive full FDA approval to sell
Marqibo to a larger segment of the market. We anticipate initiating a
confirmatory Phase 3 trial of Marqibo in ALL as early as the fourth quarter
of 2011. We estimate that the additional external costs to run the trials
needed to obtain full FDA approval are approximately $62 million. We are in
discussions with certain cooperative groups that may decide to fund some of the
clinical costs of the confirmatory trial, which may reduce the aggregate amount
estimated we will need to spend to obtain full FDA approval for Marqibo.
External costs include drug production, clinical trial costs, data management
and supporting activities not provided by our full-time employees. These costs
are impacted by the size and duration of the clinical trials. We expect that it
will take several years until we will have completed development and obtained
full FDA approval of Marqibo, if ever.
 
 MTL.In
the three months ended September 30, 2010, MTL costs decreased by $0.1 million
compared to the same period in 2009, due largely to completion of enrollment in
a Phase 1 study in cancer patients in December 2009. We have
analyzed data from the recently completed the MTL Phase 1
program.  The Phase 1 program has successfully demonstrated
that MTL is generally safe and well-tolerated.  The dose limiting
toxicity, skin irritation and redness, was only observed at the 0.2% lotion
strength.  The apparent maximum tolerated lotion strength is
0.1%.   MTL applied twice daily at all strengths, including the
highest lotion strength tested (0.2%) resulted in no appreciable systemic
exposure. As this drug is early in its clinical development, both the
registration strategy and total expenditures to obtain FDA approval are still
being evaluated. However, we expect to spend approximately $1 million on
external project costs relating to MTL in 2010, and while we are still
evaluating the development plan for MTL following completion of our Phase 1
study, we estimate that we will need to expend at least an aggregate of
approximately $55 million of additional funds on external costs in order for us
to obtain full FDA approval for MTL, if ever. External costs include drug
manufacture, clinical trial costs, data management and supporting activities not
provided by our full-time employees. Our strategy is to seek a partner to
enhance and accelerate the future development of MTL.




Brakiva. In the three months ended September 30, 2010, Brakiva costs
decreased by $0.1 million compared to the same period in 2009. We are
exploring options for further development of Brakiva beyond the phase 1
trial. As this drug is early in its clinical development, both the
registration strategy and total expenditures to obtain FDA approval are still
being evaluated.


-23-





Alocrest. We completed enrollment in a Phase 1 clinical trial in early 2008.
This Phase 1 trial was designed to assess safety, tolerability and preliminary
efficacy in patients with advanced solid tumors. We are currently exploring
options for the continued development of Alocrest and do not expect to incur
significant project costs in 2010.





Other R&D
expenses. Third-party costs related to indirect support of our
clinical trials and product candidates increased by $0.1 million in the three
months ended September 30, 2010 compared to the same period in 2009. These
costs are not directly allocable to an individual product candidate and
primarily relate to outside services and professional fees related to indirect
support of our research and development functions including data management,
regulatory and clinical development. The main increase in costs was due to
increased costs in safety, data management and other clinical related
services.





Personnel
related costs increased by $0.2 million in the three months ended September 30,
2010 compared to the same period in 2009, due to increased accruals for
incentive compensation which was partially offset by decreased stock-based
compensation.  We expect personnel costs to increase slightly in 2010
as we continue to acquire the workforce necessary to submit our NDA for Marqibo
to the FDA.





Interest expense. For the
three months ended September 30, 2010 and September 30, 2009, interest expense
was $0.9 million.





Gain or loss on change in fair
market value of liabilities re-measured at fair value. The Company has
certain financial instruments that are recorded as liabilities. The Company
re-measures the fair value of these liabilities at each reporting period with
the subsequent gain or loss recognized in the Statement of Operations. For
the three months ended September 30, 2010, we recorded a gain related to these
liabilities of $3.2 million, compared to a loss of $0.3 million for the same
period in 2009. The value of these liabilities is largely dependent on the price
of our common stock, and as the stock price increases or decreases, the value of
these instruments will increase or decrease in relation. See Notes 5,6, 7
and 8 in the Notes to the Unaudited Condensed Financial Statements for
additional details.





Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009




General and administrative
expenses. For the nine months ended September 30, 2010, G&A expense
was $4.3 million, as compared to $3.5 million for the nine months ended
September 30, 2009.  The increase of $0.8 million is due to increased
personnel related expenses of $0.3 million and increased administrative and
allocated costs of $0.5 million.





The $0.3
million increase in employee-related expenses includes an increase of expenses
related to incentive compensation as well as increased salary
expense.





The $0.5
million increase in administrative and allocated expenses was mainly related to
insurance costs incurred as part of the June 7, 2010 Investment Agreement and
changes to the composition of our Board of Directors.





Research and development
expenses. The following table summarizes our R&D expenses incurred
for preclinical support, contract manufacturing for clinical supplies and
clinical trial services provided by third parties, as well as milestone payments
for in-licensed technology for each of our current major product development
programs for the nine months ended September 30, 2010 and 2009.  The
table also summarizes unallocated costs, which consist of personnel, facilities
and other costs not directly allocable to development programs.





Product candidates ($
      in thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        Annual %
                          ChangeMarqibo
                        
                        $
                        8,344
                        
                        
                        $
                        4,097
                        
                        
                        
                        104
                        %MTL
                        
                        
                        55
                        
                        
                        
                        492
                        
                        
                        
                        (89
                        )%Brakiva
                        
                        
                        2
                        
                        
                        
                        (176
                        )
                        
                        
                        N/AAlocrest
                        
                        
                        11
                        
                        
                        
                        2
                        
                        
                        
                        450
                        %Total
      third party development costs
                        
                        
                        1,873
                        
                        
                        
                        1,687
                        
                        
                        
                        11
                        %Allocable
      costs and overhead
                        
                        
                        762
                        
                        
                        
                        859
                        
                        
                        
                        (11
                        )%Personnel
      related expense
                        
                        
                        3,729
                        
                        
                        
                        3,294
                        
                        
                        
                        13
                        %Share-based
      compensation expense
                        
                        
                        191
                        
                        
                        
                        446
                        
                        
                        
                        (57
                        )%Total
      research and development expense
                        
                        $
                        14,967
                        
                        
                        $
                        10,701
                        
                        
                        
                        40
                        %





Marqibo.
 Marqibo costs
increased by $4.2 million in the nine months ended September 30, 2010 compared
to the same period in 2009.  The main cause of the increased costs is
a $5.75 million payment we made to Tekmira Pharmaceuticals in September
2010 as part of the amendment made to our license
agreement.  This increase was partially off-set by $1.1 million in
decreased manufacturing and clinical costs as enrollment of our rALLy trial was
completed in December 2009.





MTL.
 In the nine months ended September 30, 2010, MTL costs decreased by $0.4
million in compared to the same period in 2009, due largely to completion of
enrollment in a Phase 1 study in cancer patients in December
2009.


-24-





Brakiva. In the nine months ended September 30, 2010, Brakiva costs
increased by $0.2 million in compared to the same period in 2009, due to a large
credit to expenses in 2009 as certain previously accrued expenses were
negotiated away.  This was offset partially by lower manufacturing and
clinical trial costs as the enrollment in the Phase 1 clinical study
decelerated.




Alocrest. We completed enrollment in a Phase 1 clinical trial in early 2008.
This Phase 1 trial was designed to assess safety, tolerability and preliminary
efficacy in patients with advanced solid tumors. We are currently exploring
options for the continued development of Alocrest and do not expect to incur
significant project costs in 2010.





Other R&D
expenses. Third-party costs related to indirect support of
our clinical trials and product candidates increased by $0.2 million in the nine
months ended September 30, 2010 compared to the same period in
2009.  These costs are not directly allocable to an individual product
candidate and primarily relate to outside services and professional fees related
to indirect support of our research and development functions including data
management, regulatory and clinical development.  The main increase in
costs was due to increased costs in safety, data management and other clinical
related services.





Personnel
related costs increased by $0.4 million in the nine months ended September 30,
2010 compared to the same period in 2009, due to increased accruals for
incentive compensation.   We expect personnel costs to increase
slightly in 2010 as we continue to put in place the resources necessary to
submit our NDA for Marqibo to the FDA.





A
share-based compensation expense decreased by $0.3 million as the fair value of
our stock options issued in recent periods has continued to
decrease.  We expect this expense to continue to decrease unless we
issue a larger amount of options or the fair value of the options
increases.





Interest expense. For the
nine months ended September 30, 2010, interest expense was $2.9 million as
compared to interest expense of $2.5 million for the nine months ended September
30, 2009.  The increase resulted from a larger average balance
outstanding on our loan facility with Deerfield.  We originally
entered into this loan agreement in October 2007.





Gain or loss on change in fair
market value of liabilities re-measured at fair value. The Company has
certain financial instruments that are recorded as liabilities.  The
Company re-measures the fair value of these liabilities at each reporting period
with the subsequent gain or loss recognized in the Statement of
Operations.  For the nine months ended September 30, 2010, we recorded
a net gain related to these liabilities of $2.4 million, compared to a loss of
$2.4 million for the same period in 2009.  The value of these liabilities
is largely dependent on the price of our common stock, and as the stock price
increases or decreases, the value of these instruments will increase or decrease
in relation.  See Notes 5,6 and 8 in the Notes to the Unaudited
Condensed Financial Statements for additional details.





Liquidity
and Capital Resources




As of
September 30, 2010, we had a stockholders’ deficit of approximately $35.8
million and an accumulated deficit of $154.8 million.  For the nine
months ended September 30, 2010, we recognized a net loss of $19.7 million. We
have financed operations primarily through equity and debt financing and expect
such losses to continue over the next several years.  As of September 30,
2010, we had aggregate cash and cash equivalents and available-for-sale
securities of $27.7 million which we believe to be sufficient for our working
capital needs to continue operations through 2011.  We have drawn
down $27.5 million of long-term debt under the loan facility agreement with
Deerfield Management, with the entire balance due in June 2015.  On
June 7, 2010, we entered into an Investment Agreement with certain investors
pursuant to which we sold 0.4 million shares of convertible preferred stock at
the stated value of $100 per share, for gross proceeds of $40
million.





The
Investment Agreement provides that the investors have the right, but not the
obligation, to make additional investments, as follows:





·
            at any time prior to the
      date we receive marketing approval from the U.S. Food and Drug
      Administration for any of our product candidates (“Marketing Approval
      Date”), the Purchasers may purchase up to an additional 0.2 million shares
      of Series A-1 Preferred Stock at a purchase price of $100 per share for an
      aggregate purchase price of $20 million (“Additional Investment”);
      and





·
            at any time beginning 15 days and
      within 120 days following the Marketing Approval Date, the investors may
      purchase up to an aggregate of 0.4 million shares of Series A-2
      Convertible Preferred Stock at the stated value of $100 per share for an
      aggregate purchase price of $40
  million.





During
2011 we anticipate achieving potential milestones for Marqibo.  These
milestones include completing of our NDA submission, meeting with the
Oncology Drug Advisory Committee, and receiving a decision from the FDA on the
approvability of Marqibo. We will need to raise additional capital to develop
and commercialize Marqibo after achieving these milestones.  As
described above, the investors have the right, but not the obligation, to
purchase up to an additional $20 million of preferred shares prior the FDA
approval decision on Marqibo. If the investors do not make the additional
investments as described above, we anticipate that we will be required
to raise additional capital from other investors or significantly reduce
operations by the end of 2011.


-25-





We do not
generate any recurring revenue and will require substantial additional capital
before we will generate cash flow from our operating activities, if ever. We can
give no assurances that any additional capital that we are able to obtain, if
any, will be sufficient to meet our needs. Moreover, there can be no assurance
that such capital will be available to us on favorable terms or at all,
especially given the current economic environment.  If we raise
additional funds through collaborations and licensing arrangements, we may be
compelled to relinquish some rights to our technologies, product candidates or
products, or grant licenses on terms that are not favorable to us. If we raise
additional funds by incurring debt, we could incur significant interest expense
and become subject to covenants in the related transaction documentation that
could affect the manner in which we conduct our
business.





The
actual amount of funds we will need to operate is subject to many factors, some
of which are beyond our control. These factors include the
following:





·
            costs associated with conducting
      preclinical and clinical testing of our product
      candidates;





·
            costs of establishing
      arrangements for manufacturing our product
    candidates;





·
            payments required under our
      current and any future license agreements and
      collaborations;





·
            costs, timing and outcome of
      regulatory reviews;





·
            costs of obtaining, maintaining
      and defending patents on our product candidates;
  and





·
            costs of increased general and
      administrative expenses.





We have
based our estimate on assumptions that may prove to be wrong, in which case, we
may need to obtain additional funds sooner or in greater amounts than we
currently anticipate.





Off-Balance Sheet
Arrangements




We do not
have any “off-balance sheet agreements,” as that term is defined by SEC
regulation.





Item
3.  Quantitative and Qualitative Disclosures About Market Risk




Not
applicable.




Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation as of September 30, 2010, under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, which are defined under SEC rules as
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within required time periods. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of such date, our disclosure controls and procedures were
effective.





Limitations
on the Effectiveness of Controls





Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefit of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Hana have been detected. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.




Changes
in Internal Controls Over Financial Reporting





During
the quarter ended September 30, 2010, there were no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.


-26-


PART
II - OTHER INFORMATION





Item
1. Legal Proceedings




None.




Item
1A.  Risk Factors





Not
applicable




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





None.





Item
3. Defaults Upon Senior Securities





Not
applicable





Item
4. [Removed and Reserved]





Item
5. Other Information





None


-27-





Item
6. Exhibits





Exhibit No.
                  
                  Description3.1
                  
                  Amended
      and Restated Certificate of Incorporation of Hana Biosciences, Inc., as
      amended.10.14
                  
                  Amendment
      No. 2 dated September 20, 2010 to Amended and Restated License Agreement
      dated April 30, 2007 between Hana Biosciences, Inc. and Tekmira
      Pharmaceuticals Corp.++31.1
                  
                  Certification
      of Chief Executive Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
                  
                  Certification
      of Chief Financial Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).32.1
                  
                  Certification
      of Chief Executive Officer and Chief Financial Officer, as required
      by Section 1350 of Chapter 63 of Title 18 of the United States Code (18
      U.S.C. 1350).




++   Certain
portions of this exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 of the Exchange Act. The entire exhibit
has been separately filed with the Commission


-28-


SIGNATURES




In
accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




HANA
      BIOSCIENCES, INC.Dated:
      November 12, 2010
                  By:
                  /s/ Steven
      R. Deitcher, MDSteven
      R. Deitcher, MDPresident
      and Chief Executive OfficerDated:
      November 12, 2010
                  By:
                  /s/ Craig
      W. CarlsonCraig
      W. CarlsonVice
      President, Chief Financial
Officer




-29-


Index
to Exhibits Filed with this Report




Exhibit No.
                  
                  Description3.1
                  
                  Amended
      and Restated Certificate of Incorporation of Hana Biosciences, Inc., as
      amended.10.1
                  
                  Amendment
      No. 2 dated September 20, 2010 to Amended and Restated License Agreement
      dated April 30, 2007 between Hana Biosciences, Inc. and Tekmira
      Pharmaceuticals Corp.++31.1
                  
                  Certification
      of Chief Executive Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
                  
                  Certification
      of Chief Financial Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).32.1
                  
                  Certification
      of Chief Executive Officer and Chief Financial Officer, as required
      by Section 1350 of Chapter 63 of Title 18 of the United States Code (18
      U.S.C. 1350).





++   Certain
portions of this exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 of the Exchange Act. The entire exhibit
has been separately filed with the Commission.


-30-