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
quarter ended March 31, 2009





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 May
13, 2009, there were 32,451,184 shares of the registrant's common stock,
$.001 par value, outstanding.







INDEX





PagePART
      I
                FINANCIAL
      INFORMATION
                4Item
      1.
                Unaudited
      Condensed Financial Statements
                4Unaudited
      Condensed Balance Sheets
                4Unaudited
      Condensed Statements of Operations and Other Comprehensive
      Loss
                5Unaudited
      Condensed Statement of Changes in Stockholders' Deficit
                6Unaudited
      Condensed Statements of Cash Flows
                7Notes
      to Unaudited Condensed Financial Statements
                8Item
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                18Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                25Item
      4T.
                Controls
      and Procedures
                25PART
      II
                OTHER
      INFORMATION
                26Item
      1.
                Legal
      Proceedings
                26Item
      1A.
                Risk
      Factors
                26Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                26Item
      3.
                Defaults
      Upon Senior Securities
                26Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                26Item
      5.
                Other
      Information
                26Item
      6.
                Exhibits
                26Signatures
                27Index
      of Exhibits Filed with this Report
                28




- 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 in our Annual Report on Form 10-K for the year
ended December 31, 2008 (the “2008 Form 10-K”), 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
-


PART
I - FINANCIAL INFORMATION




Item
1. Unaudited Condensed Financial Statements




HANA
BIOSCIENCES, INC.





CONDENSED
BALANCE SHEETS





March 31,
                    2009
                  
                  
                  December 31,
                    2008ASSETS
                  
                  (Unaudited)Current
      assets:Cash
      and cash equivalents
                  
                  $
                  8,479,637
                  
                  
                  $
                  13,999,080Available-for-sale
      securities
                  
                  
                  96,000
                  
                  
                  
                  128,000Prepaid
      expenses and other current assets
                  
                  
                  132,423
                  
                  
                  
                  131,663Total
      current assets
                  
                  
                  8,708,060
                  
                  
                  
                  14,258,743Property
      and equipment, net
                  
                  
                  359,157
                  
                  
                  
                  400,168Restricted
      cash
                  
                  
                  125,000
                  
                  
                  
                  125,000Debt
      issuance costs
                  
                  
                  1,328,662
                  
                  
                  
                  1,361,356Total
      assets
                  
                  $
                  10,520,879
                  
                  
                  $
                  16,145,267LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities
                  
                  $
                  4,393,265
                  
                  
                  $
                  4,225,863Other
      short-term liabilities
                  
                  
                  62,947
                  
                  
                  
                  61,341Warrant
      liabilities, short-term
                  
                  
                  786,419
                  
                  
                  
                  1,450,479Total
      current liabilities
                  
                  
                  5,242,631
                  
                  
                  
                  5,737,683Notes
      payable, net of discount
                  
                  
                  16,995,655
                  
                  
                  
                  16,851,541Other
      long-term liabilities
                  
                  
                  33,606
                  
                  
                  
                  41,775Total
      long term liabilities
                  
                  
                  17,029,261
                  
                  
                  
                  16,893,316Total
      liabilities
                  
                  
                  22,271,892
                  
                  
                  
                  22,630,999Commitments
      and contingencies (Notes 4, 9 and 10):Stockholders'
      deficit:Common
      stock; $0.001 par value:100,000,000
      shares authorized, 32,451,184 and 32,386,130 shares issued and outstanding
      at March 31, 2009 and December 31, 2008,
respectively
                  
                  
                  32,451
                  
                  
                  
                  32,386Additional
      paid-in capital
                  
                  
                  104,824,478
                  
                  
                  
                  104,431,469Accumulated
      other comprehensive income
                  
                  
                  4,000
                  
                  
                  
                  36,000Accumulated
      deficit
                  
                  
                  (116,611,942
                  )
                  
                  
                  (110,985,587
                  )Total
      stockholders' deficit
                  
                  
                  (11,751,013
                  )
                  
                  
                  (6,485,732
                  )Total
      liabilities and stockholders' deficit
                  
                  $
                  10,520,879
                  
                  
                  $
                  16,145,267




See
accompanying notes to unaudited condensed financial statements.


- 4
-


HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS


(Unaudited)





Three Months  Ended
                  March  31,2009
                
                
                2008Operating
      expenses:General
      and administrative
                
                $
                1,107,889
                
                
                $
                1,900,920Research
      and development
                
                
                4,462,194
                
                
                
                4,264,332Total
      operating expenses
                
                
                5,570,083
                
                
                
                6,165,252Loss
      from operations
                
                
                (5,570,083
                )
                
                
                (6,165,252
                )Other
      income (expense):Interest
      income
                
                
                11,582
                
                
                
                170,908Interest
      expense
                
                
                (727,007
                )
                
                
                (249,164
                )Other
      expense, net
                
                
                (4,907
                )
                
                
                (6,062
                )Change
      in fair market value of warrant liabilities
                
                
                664,060
                
                
                
                (9,930
                )Total
      other expense
                
                
                (56,272
                )
                
                
                (94,248
                )Net
      loss
                
                $
                (5,626,355
                )
                
                $
                (6,259,500
                )Net
      loss per share, basic and diluted
                
                $
                (0.17
                )
                
                $
                (0.19
                )Weighted
      average shares used in computing net loss per share, basic and
      diluted
                
                
                32,449,739
                
                
                
                32,181,275Comprehensive
      loss:Net
      loss
                
                $
                (5,626,355
                )
                
                $
                (6,259,500
                )Unrealized
      holding (losses) gains arising during the period
                
                
                (32,000
                )
                
                
                24,000Comprehensive
      loss
                
                $
                (5,658,355
                )
                
                $
                (6,235,500
                )





See
accompanying notes to unaudited condensed financial statements.


- 5
-


HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT


(Unaudited)





Period
from January 1, 2009 to March 31, 2009





Common stock
                                
                                
                                Additional
                                  paid-in
                                
                                
                                Accumulated
                                  Other
                                  Comprehensive
                                
                                
                                Accumulated
                                
                                
                                Total
                                  stockholders'Shares
                                
                                
                                Amount
                                
                                
                                capital
                                
                                
                                income
                                
                                
                                deficit
                                
                                
                                deficitBalance
      at January 1, 2009
                                
                                
                                32,386,130
                                
                                
                                $
                                32,386
                                
                                
                                $
                                104,431,469
                                
                                
                                $
                                36,000
                                
                                
                                $
                                (110,985,587
                                )
                                
                                $
                                (6,485,732
                                )Share-based
      compensation of employees amortized over vesting period of stock
      options
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                379,803
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                379,803Issuance
      of shares under employee stock purchase plan
                                
                                
                                65,054
                                
                                
                                
                                65
                                
                                
                                
                                13,206
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                13,271Unrealized
      loss on available-for-sale securities
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (32,000
                                )
                                
                                
                                
                                
                                
                                
                                (32,000
                                )Net
      loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (5,626,355
                                )
                                
                                
                                (5,626,355
                                )Balance
      at March 31, 2009
                                
                                
                                32,451,184
                                
                                
                                $
                                32,451
                                
                                
                                $
                                104,824,478
                                
                                
                                $
                                4,000
                                
                                
                                $
                                (116,611,942
                                )
                                
                                $
                                (11,751,013
                                )




See
accompanying notes to unaudited condensed financial statements.


- 6
-


HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Three Months Ended March 31,2009
                
                
                2008Cash
      flows from operating activities:Net
      loss
                
                $
                (5,626,355
                )
                
                $
                (6,259,500
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                50,906
                
                
                
                43,572Share-based
      compensation of employees for services
                
                
                379,803
                
                
                
                518,269Amortization
      of discount and debt issuance costs
                
                
                176,808
                
                
                
                63,783Unrealized
      (gain) loss on derivative liability
                
                
                (664,060
                )
                
                
                9,930Changes
      in operating assets and liabilities:(Increase)decrease
      in prepaid expenses and other assets
                
                
                (760
                )
                
                
                64,558Increase(decrease)
      in accrued and other current liabilities
                
                
                167,402
                
                
                
                (1,253,936
                )Net
      cash used in operating activities
                
                
                (5,516,256
                )
                
                
                (6,813,324
                )Cash
      flows from investing activities:Purchase
      of property and equipment
                
                
                —
                
                
                
                (43,458
                )Net
      cash used in investing activities
                
                
                —
                
                
                
                (43,458
                )Cash
      flows from financing activities:Proceeds
      from exercise of warrants and options and issuance of shares under
      employee stock purchase plan
                
                
                13,271
                
                
                
                10,680Payments
      on notes payable and capital leases
                
                
                (16,458
                )
                
                
                (3,313
                )Proceeds
      from lease agreement for equipment
                
                
                —
                
                
                
                —Net
      cash provided by (used in) financing activities
                
                
                (3,187
                )
                
                
                7,367Net
      decrease in cash and cash equivalents
                
                
                (5,519,443
                )
                
                
                (6,849,415
                )Cash
      and cash equivalents, beginning of period
                
                
                13,999,080
                
                
                
                20,795,398Cash
      and cash equivalents, end of period
                
                $
                8,479,637
                
                
                $
                13,945,983Supplemental
      disclosures of cash flow data:Cash
      paid for interest
                
                $
                482,057
                
                
                $
                186,332Supplemental
      disclosures of noncash financing activities:Unrealized
      (loss) gain on available-for-sale securities
                
                $
                (32,000
                )
                
                $
                24,000Equipment
      purchases financed through capital lease
                
                $
                9,895
                
                
                $
                —





See
accompanying notes to unaudited condensed financial
statements.


- 7
-


HANA
BIOSCIENCES, INC.


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS





NOTE
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION





BUSINESS





Hana
Biosciences, Inc. (“Hana,” “we” or the “Company”) is a South San Francisco,
California-based biopharmaceutical company dedicated to developing and
commercializing new and differentiated cancer therapies designed to improve and
enable current standards of care. Our two lead product candidates target large
markets and are in pivotal and/or proof-of-concept clinical trials. We are
developing Marqibo ® for the treatment of acute lymphoblastic leukemia and
lymphomas. Menadione topical lotion is a first-in-class compound that we are
developing for the potential prevention and/or treatment of skin toxicity
associated with epidermal growth factor receptor inhibitors. We have additional
pipeline opportunities that, like Marqibo, we believe may improve delivery and
enhance the therapeutic benefits of well characterized, proven chemotherapies
and enable high potency dosing without increased toxicity.





Our
product candidates consist of the following:




·
            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)
      and metastatic uveal
melanoma.





·
            Menadione, 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) 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
      (NSCLC).





BASIS
OF PRESENTATION AND LIQUIDITY





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, 2009 or any subsequent interim period.





As of
March 31, 2009, the Company has an accumulateddeficit of approximately
$116.6 million, and for the three months ended March 31, 2009, the Company
experienced a net loss of $5.6 million. The Company has financed operations
primarily through equity and debt financing and expects such losses to continue
over the next several years.  The Company currently has a limited supply of
cash available for operations. As of March 31, 2009, the Company had available
$8.6 million in cash and cash equivalents and available-for-sale securities from
which to draw upon.  An additional $5.0 million became available on
April 30, 2009 pursuant to a loan facility.  Another $2.5 million will
become available to the Company if it reaches a clinical development milestone
pursuant to the same loan facility. See Note 4.





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’s continued operations are entirely reliant
upon obtaining additional capital. The Company will be unable to continue the
progression of clinical compounds unless it is able to obtain additional funding
through equity or debt financings or from payments in connection with potential
strategic transactions.  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 to the Company on favorable terms or at all, especially given the
current economic environment which has severely restricted access to the capital
markets. Based on the anticipated use of cash resources between $5.0 million and
$6.0 million per quarter, including any milestones pursuant to the Company’s
license agreements, the Company estimates that it will be able to continue with
planned development activities into the second half of 2009.  If
anticipated costs are higher than planned or if the Company is unable to raise
additional capital, it will have to significantly curtail planned development to
maintain operations through 2009 and beyond.  These conditions raise
substantial doubt as to the Company’s ability to continue as a going
concern.




The
Company has financed operations primarily through equity and debt financing and
expects such losses to continue over the next several years.  The Company's
continued operations will depend on whether it is able to continue the
progression of clinical compounds and obtain additional funding through equity
or debt financings.  The Company can give no assurances that any additional
capital that it is able to obtain will be sufficient to meet its needs.
 The Company does not currently have sufficient capital resources to
complete planned operations through 2009.  If the Company is unable to
raise additional capital, it will likely be forced to curtail its desired
development activities beyond the second half of 2009, which will delay the
development of the Company's product candidates. There can be no assurance that
such capital will be available to the Company on favorable terms or at all. The
Company will need additional financing thereafter until it can achieve
profitability, if ever.





NOTE
2. SIGNIFICANT ACCOUNTING POLICIES





Use
of Management's Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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, 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.




- 8
-


HANA
BIOSCIENCES, INC.





NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS





Loss
Per Share





Basic net
loss per common share is calculated by dividing net loss by the weighted-average
number of common shares outstanding for the period. Diluted net loss per common
share is the same as basic net loss per common share, since potentially dilutive
securities from stock options and stock warrants would have an anti-dilutive
effect because the Company incurred a net loss during each period presented. The
number of shares potentially issuable at March 31, 2009 and 2008 upon exercise
or conversion that were not included in the computation of net loss per share
totaled 13,533,200 and 12,128,150, respectively.





Cash
and Cash Equivalents and Concentration of Risk




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 other comprehensive loss.





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.





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.  If the commitment expires
unexercised, the deferred fee is expensed immediately.





Warrant
Liabilities





On
October 30, 2007, the Company entered into a loan facility agreement with
certain affiliates of Deerfield Management (“Deerfield”). Deerfield has
committed funds to assist with the development of the Company’s product
candidates. Under the agreement, the Company may borrow from Deerfield up to an
aggregate of $30 million, of which $20 million may be drawn down by the Company
in as many as four installments every six months commencing October 30, 2007.
 As additional consideration for the loan, the Company also issued to
Deerfield warrants to purchase shares of the Company’s common stock at an
exercise price of $1.31 per share.  The Company issued similar
warrants to Deerfield on October 14, 2008 upon drawing down funds related to
certain development milestones.  A certain portion of these warrants
included an anti-dilution feature.  This feature requires that, as the
Company issues additional shares of its common stock during the term of the
warrant, the number of shares purchasable under these series is automatically
increased so that they always represent 17.625% of the Company’s then
outstanding common stock.  Pursuant to the agreement, the Company also
entered into a Registration Rights Agreement, so that Deerfield may sell their
shares if the warrants are exercised.  These financing transactions were
recorded in accordance with Emerging Issues Task Force Issue No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock” and related interpretations.  Because
the warrants are redeemable in the event of a change in control or if the
Company’s shares become delisted, the fair value of the warrants based on the
Black-Scholes-Merton option pricing model is recorded as a liability.  The
Company updates its estimate of the fair value of the warrant liabilities in
each reporting period as new information becomes available and any gains or
losses resulting from the changes in fair value from period to period are
included as other income (expense).




Reclassification





Certain
prior year amounts have been reclassified to conform to the current year
presentation.


- 9
-


HANA
BIOSCIENCES, INC.





NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS





NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS




In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements.” SFAS No. 160 requires all entities to report
non-controlling (minority) interests in subsidiaries as equity in the
consolidated financial statements. SFAS No. 160 requires that transactions
between an entity and non-controlling interests are treated as equity
transactions. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008. The Company does not own subsidiaries and as such, adoption
of SFAS No. 160 had no impact on its financial position and results of
operations.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” as an amendment to SFAS No. 133. SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring companies to enhance disclosure about how these instruments and
activities affect their financial position, performance and cash flows. SFAS 161
also improves the transparency about the location and amounts of derivative
instruments in a company’s financial statements and how they are accounted for
under SFAS 133. SFAS 161 is effective for financial statements issued for fiscal
years beginning after November 15, 2008 (the Company’s 2009 fiscal year),
and interim periods within beginning after that date. The adoption of SFAS 161
did not have a material effect on the Company’s financial
statements.





In June
2008, the FASB ratified the consensus reached on EITF Issue No. 07-05,
Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.
EITF Issue No. 07-05 clarifies the determination of whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, which would
qualify as a scope exception under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. EITF Issue No. 07-05 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption for an existing instrument is not
permitted. The adoption of EITF Issue No. 07-05 did not have a material
effect on the Company’s financial statements.


- 10
-


HANA
BIOSCIENCES, INC.





NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS





NOTE
4.  FACILITY LOAN AGREEMENT





On
October 30, 2007, we entered into a Facility Agreement (the “loan agreement”)
with Deerfield under which Deerfield has agreed to loan to us an aggregate
principal amount of up to $30 million. Of the total $30 million funds committed
pursuant to the loan agreement, $20 million is available for disbursement to us
in four installments every six months commencing October 30,
2007.  As of March 31, 2009, we have drawn down $15 million pursuant
to these funds.  The remaining $10 million is subject to
disbursement in three installments upon the achievement of clinical development
milestones relating to our Marqibo and Menadione product candidates, of which we
have drawn down $7.5 million as of March 31, 2009. Deerfield’s obligation to
disburse loan proceeds expires October 30, 2010, and we must repay all
outstanding principal and interest owing under the loan no later than October
30, 2013. We are also required to make quarterly interest payments on
outstanding principal, at a stated annual rate of 9.85%. In accordance with and
upon execution of the loan agreement, we paid a loan commitment fee of $1.1
million to an affiliate of Deerfield.  Our obligations under the loan
are secured by all assets owned (or that will be owned in the future) by us,
both tangible and intangible. The effective interest rate on the $15 million
notes payable for funds available on the six month installments, including
discount on debt, is approximately 17.7%.  The effective interest rate
on the $7.5 million notes payable related to the achievement of development
milestones, including discount on debt, is approximately 11.6%.  As of
March 31, 2009, we had accrued $0.5 million in interest payable that was paid in
April 2009.





As
additional consideration for the loan, on October 30, 2007, we issued to
Deerfield two series of 6-year warrants to purchase an aggregate of 5,225,433
shares of our common stock at an exercise price of $1.31 per share (subject to
adjustment for stock splits, combinations and similar events), which represented
the closing bid price of our common stock as reported on the Nasdaq Global
Market on the issuance date. One series of such warrants initially represented
the right to purchase 4,825,433 shares, which equaled 15% of our currently
issued and outstanding shares of common stock as of October 30, 2007. These
warrants contain an anti-dilution feature so that, as we issue additional shares
of our common stock during the term of the warrant, the number of shares
purchasable under this series is automatically increased so that they always
represent 15% of our then outstanding common stock. The exercise price for any
incremental shares that become purchasable due to this feature remains fixed at
$1.31 per share (subject to adjustment for stock splits, combinations and
similar events).  Pursuant to this anti-dilution feature and as a
result of additional shares of our common stock that we issued following October
30, 2007, this series of warrants represented the right to purchase an aggregate
of 4,867,678 shares of our common stock as of March 31, 2009. The second series
of warrants, representing the right to purchase an aggregate of 400,000 shares,
is identical in form except that it does not contain such anti-dilution feature.
When the Company drew down the $7.5 million of funds conditioned upon the
achievement of clinical development milestones relating to the Marqibo and
Menadione programs on October 14, 2008, it was required to issue to Deerfield
additional warrants to purchase up to an additional 2.625% of its then
outstanding Common Stock, which warrants will contain the same anti-dilution
feature as those issued by the Company on October 30, 2007.  These
warrants represented the right to purchase 851,844 shares of our common stock as
of March 31, 2009.  If the Company draws down the remaining funds
conditioned upon the achievement of clinical development milestones, it will be
required to issue to Deerfield additional warrants to purchase up to an
additional 0.875% of its then outstanding Common Stock, which warrants will
contain the same anti-dilution feature as those issued by the Company on October
30, 2007 and October 14, 2008.





As of
March 31, 2009, we had drawn down $22.5 million of the entire $30 million loan
facility, which represented the entire amount available to us based on
installments and clinical development milestones achieved related to the Marqibo
and Menadione programs.




Fair Value of Warrants. The
aggregate fair values of the warrant series issued upon execution of the loan
agreement, under which an aggregate of the 5,225,433 shares of our common stock
were issuable upon purchase, pursuant to the loan agreement was $5.9 million.
$5.5 million of the total fair value, related to the warrant series to purchase
an aggregate of 4,825,433 shares with an anti-dilution feature, was recorded as
a discount to the note payable. The remaining $0.4 million fair value, relating
to the additional warrant series to purchase an aggregate of 400,000 shares of
common stock, was recorded as a debt issuance cost and is being amortized, using
the interest method, over the life of the loan.   The aggregate fair
values of the warrant series issued when we drew down the funds related to
clinical development milestones, under which an aggregate of the 850,136 shares
of our common stock were issuable upon purchase, pursuant to the loan agreement
was $0.5 million, which was accounted for as a discount to the notes payable in
the balance sheet.  Deerfield can elect a cashless exercise of any
portion of shares outstanding in which case they would receive shares equal to
the net settlement price on the date of exercise.  Additionally,
pursuant to the loan agreement, Deerfield has certain registration rights and we
would be obligated to make penalty payments to Deerfield in the event we were
unable to maintain effective registration with the SEC.





The
Company used a Black-Scholes-Merton option pricing model to obtain the fair
value of these warrants.  In order to estimate the fair value of the
anti-dilution feature, the Company estimated the number of additional shares
potentially purchasable under the warrant agreement using weighted probability
scenarios.  A summary of the assumptions used to estimate the fair
value of the warrants issued pursuant to the execution of the loan agreement as
well as the estimated additional shares purchasable under the warrants pursuant
to the anti-dilution feature as of March 31, 2009 and December 31, 2008 is as
follows:




March 31
                      
                      
                      December 312009
                      
                      
                      2008WarrantsRisk-free
      interest rate
                      
                      
                      1.67
                      %
                      
                      
                      1.52
                      %Expected
      life (in years)
                      
                      
                      4.59
      - 5.54
                      
                      
                      
                      4.83
      - 5.79Volatility
                      
                      
                      116
                      %
                      
                      
                      116.1
                      %Dividend
      yield
                      
                      
                      0
                      %
                      
                      
                      0
                      %Estimated
      fair value of shares issuable under warrants
                      
                      $
                      0.07-0.08
                      
                      
                      $
                      0.14
      - $0.16




- 11
-


HANA
BIOSCIENCES, INC.
 
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


Warrant Liabilities. The fair
value of the warrants issued pursuant to the loan agreement was recorded in
accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.” Accordingly, we determined that the fair value of the
warrants represented a liability because the warrants are redeemable in the
event of a change in control or if the Company’s shares become delisted.
 The fair value of the warrants is recalculated each reporting period with
the change in value taken as income or expense in the “Statement of Operations.”





On March
5, 2009, we received notice that our common stock would be subject
to delisting from the Nasdaq Capital Market as a result of a listing
requirement deficiency, of which we were previously notified on November 19,
2008.  If our common stock is delisted from the Nasdaq Capital Market,
we may be required to redeem the warrants we have issued to Deerfield pursuant
to our October 2007 loan agreement.  Those warrants contain a
provision that would require us to redeem the warrants, at Deerfield’ s
election, in the event our common stock is no longer listed on the Nasdaq or
another national stock exchange.  The redemption price applicable to
the warrants is based upon a Black-Scholes-Merton calculation, as specified in
the warrant agreement.  As of March 31, 2009, the total redemption
price that would be applicable to all of the warrants issued to Deerfield is
approximately $0.8 million, which amount also approximates the fair value of the
warrant liability.  We have classified an amount equal to the
redemption price at March 31, 2009 as a short-term liability due to the
potential risk that, due to our Nasdaq listing status, Deerfield will have the
right to require redemption of these warrants within a one year period from
March 31, 2009.  As the warrant redemption price is based on a
Black-Scholes-Merton calculation, the fair value of this liability is highly
dependent on the price of our common shares and the volatility of our
stock.  If Deerfield elects redemption of these warrants, the actual
redemption price may be materially different from the amount we have estimated
on March 31, 2009.





A summary
of the activity of the fair value of the warrant liability is as
follows:





Beginning
                    Value of
                    Warrant
                    Liabilities
                  
                  
                  Liability
                    Incurred for
                    Warrants Issued
                    Pursuant to the
                    Deerfield
                    Agreement
                  
                  
                  Realized
                    (Gain)/Loss on
                    Change in Fair
                    Value of
                    Warrant
                    Liabilities
                  
                  
                  Ending Fair
                    Value of
                    Warrant
                    Liabilities3
      months ended March 31, 2009
                  
                  $
                  1,450,479
                  
                  
                  $
                  —
                  
                  
                  $
                  (664,060
                  )
                  
                  $
                  786,4193
      months ended March 31, 2008
                  
                  $
                  4,232,355
                  
                  
                  $
                  —
                  
                  
                  $
                  9,930
                  
                  
                  $
                  4,242,285


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. On October 14, 2008 and November 12, 2008, the
Company drew down an additional $12.5 million and $2.5 million, respectively.
 The Company is not required to pay back any portion of the principal
amount until October 30, 2013. Of the $12.5 million borrowed on October 14,
2008, $7.5 million related to development milestones the Company had previously
achieved and was subsequently entitled to draw down additional funds pursuant to
the Deerfield agreement.  These warrants contained an anti-dilution
feature that provided Deerfield with the right to purchase shares of the
Company’s common stock equal to 2.625% of the total shares
outstanding.  Upon issuance of these shares, the fair value of the
warrants was determined and included as additional discount on the debt to
Deerfield.  Because the Company issued the warrants pursuant to the
loan, the Company recognized a discount on the note.  The table below
is a summary of the change in carrying value of the notes payable, including the
discount on debt for the three months ended March 31, 2009 and
2008:





Carrying
                    Value at
                    January 1,
                  
                  
                  Gross
                    Borrowings
                    Incurred
                  
                  
                  Debt
                    Discount
                    Incurred
                  
                  
                  Amortized
                    Discount
                  
                  
                  Carrying
                    Value at
                    March 31,2009Notes
      payable
                  
                  $
                  22,500,000
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  22,500,000Discount
      on debt
                  
                  
                  (5,648,459
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  144,114
                  
                  
                  
                  (5,504,345
                  )Carrying
      value
                  
                  $
                  16,851,541
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  16,995,6552008Notes
      payable
                  
                  $
                  7,500,000
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  7,500,000Discount
      on debt
                  
                  
                  (5,474,376
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  54,346
                  
                  
                  
                  (5,420,000
                  )Carrying
      value
                  
                  $
                  2,025,624
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  2,080,000





A summary
of the debt issuance costs and changes during the periods ending March 31, 2009
and 2008 is as follows:





Deferred
                    Transaction
                    Costs on
                    January 1,
                  
                  
                  Amortized
                    Debt Issuance
                    Costs
                  
                  
                  Deferred
                    Transaction
                    Costs on
                    March 1,2009
                  
                  $
                  1,361,356
                  
                  
                  $
                  (32,694
                  )
                  
                  $
                  1,328,6622008
                  
                  $
                  1,423,380
                  
                  
                  $
                  (9,407
                  )
                  
                  $
                  1,413,973


- 12
-




HANA
BIOSCIENCES, INC.





NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




NOTE
5. STOCKHOLDERS' DEFICIT





Stock Incentive Plans. We
have two stockholder-approved stock incentive plans under which we grant or have
granted options to purchase shares of our common stock and restricted stock
awards to employees: the 2003 Stock Option Plan (the “2003 Plan”) and the 2004
Stock Incentive Plan (the “2004 Plan”). The Board of Directors or the Chief
Executive Officer, to the extent authorized by the Board, is responsible for
administration of the Company’s employee stock incentive plans and determines
the term, exercise price and vesting terms of each option. In general, stock
options issued under the 2003 Plan and 2004 Plan have a vesting period of three
years and expire ten years from the date of grant. We may grant a maximum of
7,000,000 shares for issuance under the 2004 plan and a maximum of 1,410,068
shares under the 2003 plan.





The
Company also has adopted the 2006 Employee Stock Purchase Plan (the “2006 Plan”)
under which the Company's eligible employees may purchase shares of the
Company’s common stock through lump sum payments or payroll deductions. The 2006
Plan is intended to qualify as an “employee stock purchase plan” under
Section 423 of the Internal Revenue Code. As adopted, the 2006 Plan
authorized the issuance of up to a maximum of 750,000 shares of common
stock.





Stock Options. The following
table summarizes information about stock options outstanding at March 31, 2009
and changes in outstanding options in the three months then ended, all of which
are at fixed prices:




Number of
                                                                  Shares Subject
                                                                  to Options
                                                                  Outstanding
                                                                
                                                                
                                                                Weighted Average
                                                                  Exercise Price per
                                                                  Share
                                                                
                                                                
                                                                Weighted Average
                                                                  Remaining
                                                                  Contractual
                                                                  Term
                                                                  (in years)
                                                                
                                                                
                                                                Aggregate
                                                                  Intrinsic
                                                                  ValueOutstanding
      January 1, 2009
                                                                
                                                                
                                                                4,470,871
                                                                
                                                                
                                                                $
                                                                2.36Options
      granted
                                                                
                                                                
                                                                1,225,000
                                                                
                                                                
                                                                
                                                                0.14Options
      cancelled
                                                                
                                                                
                                                                (39,166
                                                                )
                                                                
                                                                
                                                                1.55Options
      exercised
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Outstanding
      March 31, 2009
                                                                
                                                                
                                                                5,656,705
                                                                
                                                                
                                                                
                                                                1.88
                                                                
                                                                
                                                                
                                                                8.31
                                                                
                                                                
                                                                $
                                                                4,865Exercisable
      at March 31, 2009
                                                                
                                                                
                                                                2,331,533
                                                                
                                                                
                                                                $
                                                                3.00
                                                                
                                                                
                                                                
                                                                7.19
                                                                
                                                                
                                                                $
                                                                4,865





Total
share-based compensation expense was approximately $0.3 million and $0.5 million
related to employee stock options recognized in the operating results for the
three months ended March 31, 2009 and 2008, respectively.


- 13
-


HANA
BIOSCIENCES, INC.





NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




The
following table summarizes information about stock options outstanding at March
31, 2009:





Options Outstanding
                                            
                                            
                                            Options ExercisableExercise Price
                                            
                                            
                                            Number of
                                              Shares
                                              Subject to
                                              Options
                                              Outstanding
                                            
                                            Weighted
                                              Average
                                              Exercise
                                              Price
                                            
                                            
                                            Weighted
                                              Average
                                              Remaining
                                              Contractual
                                              Life of
                                              Options
                                              Outstanding
                                            
                                            
                                            Number
                                              of Options
                                              Exercisable
                                            
                                            Weighted
                                              Average
                                              Exercise
                                              Price$ 0.07 - $ 0.14
                                            
                                            
                                            1,255,505
                                            
                                            $
                                            0.14
                                            
                                            
                                            9.6
      yrs
                                            
                                            
                                            70,505
                                            
                                            $
                                            0.07$ 0.21 - $ 1.18
                                            
                                            
                                            2,251,044
                                            
                                            
                                            1.00
                                            
                                            
                                            8.6
      yrs
                                            
                                            
                                            797,544
                                            
                                            
                                            1.02$ 1.33 - $ 2.41
                                            
                                            
                                            1,180,156
                                            
                                            
                                            1.69
                                            
                                            
                                            7.5
      yrs
                                            
                                            
                                            662,488
                                            
                                            
                                            1.68$ 4.51 - $ 10.98
                                            
                                            
                                            970,000
                                            
                                            
                                            6.44
                                            
                                            
                                            7.1 yrs
                                            
                                            
                                            800,996
                                            
                                            
                                            6.31$0.07 - $10.98
                                            
                                            
                                            5,656,705
                                            
                                            $
                                            1.88
                                            
                                            
                                            8.3 yrs
                                            
                                            
                                            2,331,533
                                            
                                            $
                                            3.00





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 750,000 shares of common stock were
initially reserved for issuance under the 2006 Plan.





Through
March 31, 2009, we have issued 198,676 shares under the 2006 Plan. For the three
months ended March 31, 2009 and 2008, the total share-based compensation expense
recognized related to the 2006 Plan under SFAS 123(R) was approximately $43,000
and $50,000, respectively.




Assumptions. The following
table summarizes the assumptions used in applying the Black-Scholes-Merton
option pricing model to determine the fair value of awards granted during the
three months ended March 31, 2009 and 2008, respectively:





Three Months Ended March 31,2009
                                                                                                            
                                                                                                            
                                                                                                            2008Employee
      stock optionsRisk-free
      interest rate
                                                                                                            
                                                                                                            
                                                                                                            1.90
                                                                                                            %
                                                                                                            
                                                                                                            
                                                                                                            2.65
                                                                                                            %Expected
      life (in years)
                                                                                                            
                                                                                                            
                                                                                                            5.5 –
      6.0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            5.5 –
      6.0Volatility
                                                                                                            
                                                                                                            
                                                                                                            0.95
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.9Dividend
      Yield
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            %
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            %Employee
      stock purchase planRisk-free
      interest rate
                                                                                                            
                                                                                                            
                                                                                                            0.27 –
      0.76
                                                                                                            %
                                                                                                            
                                                                                                            
                                                                                                            3.05 –
      3.49
                                                                                                            %Expected
      life (in years)
                                                                                                            
                                                                                                            
                                                                                                            0.5
      - 2
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.5
      - 2Volatility
                                                                                                            
                                                                                                            
                                                                                                            1.30 –
      1.99
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0.75 –
      0.8Dividend
      Yield
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            %
                                                                                                            
                                                                                                            
                                                                                                            —
                                                                                                            %


- 14
-


HANA
BIOSCIENCES, INC.





NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




We
estimate the fair value of each option award on the date of grant using the
Black-Scholes-Merton option-pricing model. As allowed by SFAS No. 123R for
companies with a short period of publicly traded stock history, our estimate of
expected volatility is based on the average expected volatilities of a sampling
of three companies with similar attributes to us, including industry, stage of
life cycle, size and financial leverage as well as our own historical data. As
we have so far only awarded “plain vanilla” options as described by the
SEC’s Staff Accounting Bulletin No. 107 (SAB 107), we used the “simplified
method” for determining the expected life of the options granted. Originally,
under SAB 107, this method was allowed until December 31, 2007.  However,
on December 21, 2007, the SEC issued SEC’s Staff Accounting Bulletin No. 110
(SAB 110), which will allow a Company to continue to use the “simplified method”
under certain circumstances, which we will continue to use as we do not have
sufficient historical data to estimate the expected term of share-based award.
 The risk-free rate for periods within the contractual life of the option
is based on the U.S. treasury yield curve in effect at the time of grant
valuation. SFAS No. 123R does not allow companies to account for option
forfeitures as they occur. Instead, estimated option forfeitures must be
calculated upfront to reduce the option expense to be recognized over the life
of the award and updated upon the receipt of further information as to the
amount of options expected to be forfeited. Based on our historical information,
we currently estimate that 22% annually of our stock options awarded will be
forfeited.





Warrants . As of March 31,
2009, all outstanding warrants were available for exercise. Warrants to acquire
258,927 shares of common stock at $1.85 per share expired in February of 2009.
 Warrants to acquire 892,326 shares of common stock at $1.57 per share
expire in April 2010. Warrants to acquire 864,648 shares of common stock at
$5.80 per share expire in October 2010.  Additionally, the Company has
issued warrants to acquire 6,119,521 shares of common stock to Deerfield in
accordance with the Company’s October 2007 loan agreement.  Certain of
these warrants contain an anti-dilution feature that automatically increases the
number of shares purchasable so that they always represent 17.625% of the
Company’s then outstanding common stock.  The majority of the warrants
issued to Deerfield expire in October 2013 with a smaller portion expiring in
October 2014.  The following table summarizes the warrants outstanding as
of March 31, 2009 and the changes in outstanding warrants in the period then
ended:





Number Of
                                    Shares Subject
                                    To Warrants
                                    Outstanding
                                  
                                  
                                  Weighted-Average
                                    Exercise PriceWarrants
      outstanding January 1, 2009
                                  
                                  
                                  8,123,956
                                  
                                  
                                  $
                                  1.83Warrants
      granted
                                  
                                  
                                  11,466
                                  
                                  
                                  
                                  1.31Warrants
      cancelled
                                  
                                  
                                  (258,927
                                  )
                                  
                                  
                                  1.85Warrants
      outstanding March 31, 2009
                                  
                                  
                                  7,876,495
                                  
                                  
                                  $
                                  1.83




NOTE
6. FAIR VALUE MEASUREMENTS




SFAS No.
157 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 SFAS No. 157 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 SFAS No.
157 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.


- 15
-




HANA
BIOSCIENCES, INC.





NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




In
accordance with SFAS 157, 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 March 31, 2009:





Assets
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalMoney
      market funds
                  
                  $
                  69,031
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  69,031Available-for-sale
      equity securities
                  
                  
                  96,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  96,000Total
                  
                  $
                  165,031
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  165,031





Liabilities
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalWarrant
      liabilities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  786,419
                  
                  
                  $
                  786,419Total
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  786,419
                  
                  
                  $
                  786,419





NOTE
7. AVAILABLE-FOR-SALE SECURITIES





On March
31, 2009, the Company had $96,000 in total marketable securities which consisted
of shares of NovaDel Pharma, Inc. (“NovaDel”) purchased in conjunction with the
Zensana license agreement.





During
the three months ended March 31, 2009, the Company recorded an unrealized loss
of $32,000, compared to an unrealized gain of $24,000 for the three months ended
March 31, 2008.  The following table summarizes the NovaDel shares
classified as available-for-sale securities during the three months ended March
31, 2009 and 2008:





Beginning
                    Value
                  
                  Net
                    Unrealized
                    Gain/(Loss)
                  
                  Gross
                    Realized
                    Gain/(Loss)
                  
                  Ending ValueThree
      months ended March 31, 2009
                  
                  $
                  128,000
                  
                  
                  $
                  (32,000
                  )
                  
                  $
                  —
                  
                  
                  $
                  96,000Three
      months ended March 31, 2008
                  
                  $
                  96,000
                  
                  
                  $
                  24,000
                  
                  
                  $
                  —
                  
                  
                  $
                  120,000





- 16
-


HANA
BIOSCIENCES, INC.





NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS





NOTE
8.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities consist of the following at March 31, 2009 and
December 31, 2008:





March 31,
                        2009
                      
                      
                      December 31,
                        2008Trade
      accounts payable
                      
                      $
                      1,079,518
                      
                      
                      $
                      457,725Clinical
      research and other development related costs
                      
                      
                      2,336,794
                      
                      
                      
                      2,554,374Accrued
      personnel related expenses
                      
                      
                      218,374
                      
                      
                      
                      549,469Interest
      payable
                      
                      
                      546,473
                      
                      
                      
                      478,332Accrued
      other expenses
                      
                      
                      212,106
                      
                      
                      
                      185,963Total
                      
                      $
                      4,393,265
                      
                      
                      $
                      4,225,863





NOTE
9. COMMITMENTS





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 $0.7 million at
March 31, 2009.





The
Company entered into a written employment agreement with its Vice President and
Chief Financial Officer on December 18, 2006. As amended on October 31, 2008,
this agreement provides for an employment term that expires on October 31, 2009.
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 March 31, 2009.





Lease. 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. The total cash payments
due for the duration of the sublease equaled approximately $0.7 million at March
31, 2009.





NOTE
10. 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 four-year period of the
sub-lease.





NOTE
11. SUBSEQUENT EVENT





On May
11, 2009, the Company requested an additional $5.0 million of funds pursuant to
its loan agreement with Deerfield. These funds were available as an installment
of the loan that became available on April 30, 2009.  Pursuant to the
agreement, these funds are to be remitted to the Company within 15 days of the
request.  See Note 4.


- 17
-


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 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
2008 Form 10-K, 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)
      and metastatic uveal
melanoma.




·
            Menadione, 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 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
      (NSCLC).





Revenues





We do not
expect to generate any significant revenue from product sales or royalties in
the foreseeable future. We anticipate that any revenues that we may recognize in
the near future will be related to upfront, milestone development funding
payments received pursuant to strategic license agreements or partnerships and
that we may have large fluctuations of revenue recognized from quarter to
quarter as a result of the timing and the amount of these payments. We may be
unable to control the development of commercialization of these products and may
be unable to estimate the timing and amount of revenue to be recognized pursuant
to these agreements. Revenue from these agreements and partnerships help us fund
our continuing operations. Our revenues may increase in the future if we are
able to develop and commercialize our products, license our technology and/or
enter into strategic partnerships. If we are unsuccessful, our future revenues
will decrease and we may be forced to limit our development of our product
candidates.




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, legal
expenses resulting from intellectual property protection, business development
and organizational affairs and other expenses relating to the acquiring, design,
development, testing, and enhancement of our product candidates, including
milestone payments for licensed technology. We expense our 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;




- 18
-




·
            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.




General
and Administrative Expenses





General
and administrative expenses consist primarily of salaries and related expenses
for executive, finance and other administrative personnel, recruitment expenses,
professional fees and other corporate expenses, including accounting
and 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 condensed unaudited 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 condensed unaudited 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 financial
statements and related disclosures with our Audit Committee of the Board of
Directors. Our critical accounting policies and estimates are described
below.




Share
Based Compensation




Effective
January 1, 2006, we adopted the provisions of SFAS No. 123R requiring that
compensation cost relating to all share-based employee payment transactions be
recognized in the financial statements. We adopted SFAS No. 123R using the
modified prospective method for share-based awards granted after we became a
public entity and the prospective method for share-based awards granted prior to
the time we became a public entity.  As allowed by SFAS No. 123R
for companies with a short period of publicly traded stock history, our estimate
of expected volatility is based on the average expected volatilities of a
sampling of five companies with similar attributes to us, including industry,
stage of life cycle, size and financial leverage as well as our historical
data.  We use the “simplified method” for determining the expected
life of the options granted as permitted under the SEC’s Staff Accounting
Bulletin No. 110 (SAB 110), which will allow a Company to continue to use the
“simplified method” under certain circumstances.  SFAS No. 123R
does not allow companies to account for option forfeitures as they occur.
Instead, estimated option forfeitures must be calculated upfront to reduce the
option expense to be recognized over the life of the award and updated upon the
receipt of further information as to the amount of options expected to be
forfeited. Based on our historical information, we currently estimate that 22%
annually of our stock options awarded will be forfeited.




See Note
5 of our unaudited financial statements included elsewhere in this Form 10-Q
report for further information regarding the SFAS No. 123R
disclosures.





Warrant
Liabilities





On
October 30, 2007, we entered into a loan facility agreement with certain
affiliates of Deerfield Management (“Deerfield”).  As partial consideration
for the loan, we also issued to Deerfield certain warrants to purchase shares of
our common stock.  Certain of these warrants include an anti-dilution
feature.  This feature requires that, as we issue additional shares of our
common stock during the term of the warrant, the number of shares purchasable
under this series is automatically increased so that they always represent a
fixed percentage of our then outstanding common stock.  Because the
warrants are redeemable if certain events occur, we record the fair value of the
warrants as a liability. We update our estimate of the fair value of the warrant
liabilities in each reporting period as new information becomes available and
any gains or losses resulting from the changes in fair value from period to
period are included as an increase or decrease of interest
expense.  See Note 4 of our unaudited financial statements included
elsewhere in this Form 10-Q report for further information regarding the warrant
liabilities.




- 19
-




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.


- 20
-


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.





Recent
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements.” SFAS No. 160 requires all entities to report
non-controlling (minority) interests in subsidiaries as equity in the
consolidated financial statements. SFAS No. 160 requires that transactions
between an entity and non-controlling interests are treated as equity
transactions. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008. The Company does not own subsidiaries and as such, adoption
of SFAS No. 160 had no impact on its financial position and results of
operations.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” as an amendment to SFAS No. 133. SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring companies to enhance disclosure about how these instruments and
activities affect their financial position, performance and cash flows. SFAS 161
also improves the transparency about the location and amounts of derivative
instruments in a company’s financial statements and how they are accounted for
under SFAS 133. SFAS 161 is effective for financial statements issued for fiscal
years beginning after November 15, 2008 (the Company’s 2009 fiscal year),
and interim periods within beginning after that date. The adoption of SFAS 161
did not have a material effect on the Company’s financial
statements.





In June
2008, the FASB ratified the consensus reached on EITF Issue No. 07-05,
Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.
EITF Issue No. 07-05 clarifies the determination of whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, which would
qualify as a scope exception under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. EITF Issue No. 07-05 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption for an existing instrument is not
permitted. The adoption of EITF Issue No. 07-05 did not have a material
effect on the Company’s financial statements.





Results
of Operations





Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008




General and administrative
expenses. For the three months ended March 31, 2009, general and
administrative, or G&A, expense was $1.1 million, as compared to $1.9
million for the three months ended March 31, 2008.  The decrease of
$0.8 million is due to decreased personnel related expenses of $0.4 million,
decreased costs for outside services and professional services of $0.3 million
and decreased allocable expenses of $0.1 million.





The $0.4
million decrease in employee-related expenses includes:





·
            a decrease of $0.3 million in
      employee related share-based compensation expense due to decreased
      valuation of stock options issued to employees as a result of the decrease
      in value of the Company’s stock price
and





·
            a decrease of $0.1 million in
      salary and benefits, due mainly to the reduction in headcount and
      decreased compensation measures.





The $0.3
million decrease in outside services and professional fees
includes:





·
            a decrease of $0.2 million in
      market research on our leading product candidates
    and





·
            a decrease of $0.1 million in
      legal, accounting and other consulting
  fees.





The $0.1
million decrease of allocable expenses is mainly a result of cost reduction
measures undertaken by the Company to decelerate our cash burn.




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 March 31, 2009 and 2008.  The
table also summarizes unallocated costs, which consist of personnel, facilities
and other costs not directly allocable to development programs.





Product candidates ($ in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    Annual %
                      ChangeMarqibo
                    
                    $
                    1,221
                    
                    
                    $
                    878
                    
                    
                    
                    39
                    %Menadione
                    
                    
                    431
                    
                    
                    
                    349
                    
                    
                    
                    23
                    %Brakiva
                    
                    
                    136
                    
                    
                    
                    576
                    
                    
                    
                    -76
                    %Alocrest
                    
                    
                    (13
                    )
                    
                    
                    305
                    
                    
                    
                    N/ADiscontinued/out-licensed
      product candidates
                    
                    
                    5
                    
                    
                    
                    8
                    
                    
                    
                    -38
                    %Total
      third party costs
                    
                    
                    823
                    
                    
                    
                    483
                    
                    
                    
                    70
                    %Allocable
      costs and overhead
                    
                    
                    305
                    
                    
                    
                    412
                    
                    
                    
                    -26
                    %Personnel
      related expense
                    
                    
                    1,349
                    
                    
                    
                    1,174
                    
                    
                    
                    15
                    %Share-based
      compensation expense
                    
                    
                    205
                    
                    
                    
                    79
                    
                    
                    
                    159
                    %Total
      research and development expense
                    
                    $
                    4,462
                    
                    
                    $
                    4,264
                    
                    
                    
                    5
                    %
  - 21
-


Marqibo.
 In the three
months ended March 31, 2009, we continued enrollment in our Phase 2,
registration-enabling, open-label trial in relapsed adult ALL and our pilot
Phase 2 trial in metastic uveal melanoma. We plan to finish enrollment in both
of these trials by mid-2009.  We plan to initiate a confirmatory trial
in the first half of 2010 and we also intend to seek limited approval in the ALL
indication in early 2010, pending the results of our Phase 2 study in relapsed
adult ALL.  We expect to spend approximately $6.7 million on external
project costs relating to Marqibo in 2009, including the amounts expended in the
first quarter of 2009. We estimate that we will need to expend at least an
additional aggregate of approximately $45 million in order for us to obtain full
FDA approval for Marqibo, if ever, which includes milestone payments that would
be owed to our licensor upon FDA approval.  Through of March 31, 2009, we
have spent approximately $9.6 million on the development of
Marqibo.  We expect that it will take approximately three to four
years until we will have completed development and obtained full FDA approval of
Marqibo, if ever.





Menadione. In
the three months ended March 31, 2009, we continued enrollment in our Phase 1
clinical trials in Menadione in cancer patients.  We completed the
healthy volunteer trial in late 2008 and plan to complete the trial in cancer
patients by mid-2009.  We plan to initiate a Phase 2 clinical trial in
cancer patients in mid 2009.  As this drug is early in its clinical
development, both the registrational strategy and total expenditures to obtain
FDA approval are still being evaluated. Including the amounts expended in the
first quarter of 2009, we expect to spend approximately $3.2 million on external
project costs relating to Menadione in 2009, and we estimate that we will need
to expend at least an aggregate of approximately $40 million of additional funds
in order for us to obtain full FDA approval for Menadione, if ever, which
includes milestone payments that would be owed to our licensor upon FDA
approval.  Through of March 31, 2009, we have spent approximately $6.1
million on the development of Menadione.  We expect that it will take
approximately two to three years until we will have completed development and
obtained FDA approval, if ever.





Brakiva. We initiated a Phase 1 clinical trial in November 2008 and
continued enrollment in the three months ended March 31, 2009. We plan to
complete enrollment in this clinical trial in 2009 and expect that we will
expend approximately $0.5 million in 2009, including the amounts expended in the
first quarter of 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 registrational strategy and total
expenditures to obtain FDA approval are still being
evaluated.  Through of March 31, 2009, we have spent approximately
$3.5 million on the development of Brakiva.





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 2009.  Through of March 31, 2009, we have
spent approximately $3.4 million on the development of Alocrest.





Discontinued/Out-licensed
projects.We did not pursue development on our
discontinued/out-license product candidates in the three months ended March 31,
2009.  These include Zensana which was out-licensed in 2007, IPdR and
Talvesta, which were terminated in 2006 and 2007, respectively.  We
may incur only incidental expenses in 2009 related to the continued disposition
of these terminated products.





Other R&D
expenses.Third-party costs related to indirect support of our
clinical trials and product candidates increased in the three months ended March
31, 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 r&d functions including data management,
regulatory and clinical development.  We expect these costs to stay
consistent in 2009 with the totals for 2008 as we finish the rALLy study in
Marqibo and prepare for the Phase 2 study in Menadione and the confirmatory
study for Marqibo.  Allocable costs decreased as a result of
cost-cutting measures pursued by the Company.  We expect these costs
to decrease in 2009 compared to 2008.  Personnel related costs
increased in the three months ended March 31, 2009 and we expect these costs to
remain slightly higher in 2009 due to certain executive positions that have been
filled in later 2008 and early 2009.  Stock compensation expense
increased due to a large credit in the three months ended March 31, 2008 due to
the termination of certain executives with large stock option grants which were
cancelled upon termination.  We expect share-based compensation will
continue to decrease until our stock price increases or the amount of options
issued increases.





Interest income. For the
three months ended March 31, 2009, interest income was less than $12,000
compared to interest income of $0.2 million for the three months ended March 31,
2008. The decrease is a result of decreased cash balances in our interest
bearing accounts as well as decreasing interest rates.





Interest expense. For the
three months ended March 31, 2009, interest expense was $0.7 million as compared
to interest expense of $0.2 million for the three months ended March 31, 2008.
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 warrant liabilities. For the three months ended March 31,
2009, we recognized a gain related to the change in fair market value of the
warrant liabilities, pursuant to the warrants issued to Deerfield as part of the
Facility Loan Agreement (see Note 4) of $0.7 million.  In three months
ended March 31, 2008, we recognized a loss on this warrant liability of
approximately $10,000.  The value of these warrants is largely dependent on
the price of our common stock, and as the stock price is reduced, the value of
these warrants will decrease and our gain on the change in market value will
increase.


- 22
-


Liquidity
and Capital Resources




As of
March 31, 2009, we had aggregate cash and cash equivalents and
available-for-sale securities of $8.6 million. In addition, pursuant to the
Deerfield loan facility, we have $5.0 million in funds that became available to
us on April 30, 2009 and $2.5 million that may become available to us if we
achieve a certain milestone in the development of our product candidate
Menadione.  As of March 31, 2009, we had drawn down $22.5 million of
the total $30 million available under the agreement.





Through
March 31, 2009, we have an accumulated deficit of $116.6
million.  Management expects this deficit to increase in future
periods as we continue to develop our product candidates.  We expect
to incur sizeable expenses in our Marqibo development program as we expect to
complete enrollment in the Phase 2 registration-enabling study in the first half
of 2009.  We also expect to incur considerable expenses in the
development of Menadione as we anticipate the initiation of a Phase 2 clinical
trial in mid 2009.  Our continued operations will depend on whether we
are able to raise additional funds through various potential sources, such as
equity and debt financing. Through March 31, 2009, a significant portion of our
financing has been and will continue to be through private placements of common
stock, preferred stock and debt financing.





We can
give no assurances that any additional capital that we are able to obtain will
be sufficient to meet our needs which raises substantial doubt about our ability
to continue operating as a going concern.  Given the current and
desired pace of clinical development of our product candidates, we estimate that
we will have sufficient cash on hand, together with amounts committed under our
loan facility agreement with Deerfield, to fund clinical development into the
second half of 2009.  We will be forced to raise additional capital in
2009 in order to fund our future development activities, likely by selling
shares of our capital stock or through debt financing. If we are unable to raise
additional capital or enter into strategic partnerships and/or license
agreements, we will be required to cease operations or curtail our desired
development activities, which will delay the development of our product
candidates.  There can be no assurance that such capital will be
available to us on favorable terms or at all, particularly in light of the
general economic conditions, which have severely limited our access to the
capital markets. We will need additional financing thereafter until we can
achieve profitability, if ever.





Current and Future Financing
Needs. We currently do not have enough capital resources to fund our
entire development plan through 2009. Our plan of operation for the year ending
December 31, 2009 is to continue implementing our business strategy, including
the continued development of our four product candidates that are currently in
clinical and preclinical phases.  We expect our principal expenditures
during the next 12 months to include:




·
            operating expenses, including
      expanded research and development and general and administrative
      expenses;




·
            product development expenses,
      including the costs incurred with respect to applications to conduct
      clinical trials in the United States, as well as outside of the United
      States, for our product candidates, including manufacturing, intellectual
      property prosecution and regulatory
  compliance.




As part
of our planned research and development, we intend to use clinical research
organizations and third parties to help perform our clinical studies and
manufacturing. As indicated above, at our current and desired pace of clinical
development of our product candidates, over the next 12 months we expect to
spend approximately between $16.0 million and $18.0 million on clinical
development (including milestone payments of $0.3 million that we expect to be
triggered under the license agreements relating to our product candidates, half
of which can be satisfied through the issuance of new shares of our common stock
at our discretion).  We expect to spend approximately $4.0 million on
general corporate and administrative expenses as well as $0.6 million on
facilities and rent.





We
believe that our cash, cash equivalents and marketable securities, which totaled
$8.6 million as of March 31, 2009, along with the funds available through the
Deerfield agreement, will be sufficient to meet our anticipated operating needs
into the second half of 2009 based upon current operating and spending
assumptions. However, we expect to incur substantial expenses as we continue our
drug development efforts, particularly to the extent we advance our lead
candidate Marqibo through a pivotal clinical study. We cannot guarantee that
future financing will be available in amounts or on terms acceptable to us, if
at all.





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;




·
            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




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·
            costs of increased general and
      administrative expenses.




We have
based our estimate on assumptions that may prove to be wrong. We may need to
obtain additional funds sooner or in greater amounts than we currently
anticipate. Potential sources of financing include strategic relationships,
public or private sales of our stock or debt and other sources. We may seek to
access the public or private equity markets when conditions are favorable due to
our long-term capital requirements. We do not have any committed sources of
financing at this time, and it is uncertain whether additional funding will be
available when we need it on terms that will be acceptable to us, or at
all.  If we raise funds by selling additional shares of common stock
or other securities convertible into common stock, the ownership interest of our
existing stockholders will be diluted.  If we are not able to obtain
financing when needed, we will be unable to carry out our business plan. As a
result, we will have to significantly limit our operations and our business,
financial condition and results of operations would be materially
harmed.


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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
4T. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation as of March 31, 2009, 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 March 31, 2009, 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.


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PART
II - OTHER INFORMATION





Item
1. Legal Proceedings





We are
not involved in any legal proceeding.




Item
1A. Risk Factors





We have
not had any material changes to our risk factors disclosed in response to Item
1A of Part I of our Annual Report on Form 10-K for the year ended December 31,
2008.




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





None





Item
3. Defaults Upon Senior Securities





Not
applicable





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





None




Item
5. Other Information





On May
15, 2009, we issued a press release announcing our financial results for the
three months ended March 31, 2009. A copy of this press release is furnished
herewith as Exhibit 99.1. Pursuant to the rules and regulations of the
Securities and Exchange Commission, such exhibit and the information set forth
therein and in this Item 5 have been furnished and shall not be deemed
“filed” for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), or otherwise subject to liability under that
section nor shall they be deemed incorporated by reference in any filing under
the Securities Act of 1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference in such filing regardless of any
general incorporation language.





Item
6. Exhibits





Exhibit No.
              
              Description31.1
              
              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).99.1
              
              Press
      release of Hana Biosciences, Inc. dated March 15,
  2009.




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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:
      May 15, 2009
              By:
              /s/ Steven R. Deitcher,
    MDSteven
      R. Deitcher, MDPresident
      and Chief Executive OfficerDated:
      May 15, 2009
              By:
              /s/ John P. IparraguirreJohn
      P. Iparraguirre
                Vice
      President, Chief Financial
Officer


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Index
to Exhibits Filed with this Report




Exhibit No.
              
              Description31.1
              
              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).99.1
              
              Press
      release of Hana Biosciences, Inc. dated March 15,
  2009.


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