BIONOVO INC - FORM 10-Q

Attached files

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EX-32.1 - BIONOVO INC	v219534_ex32-1.htm
EX-31.1 - BIONOVO INC	v219534_ex31-1.htm
EX-31.2 - BIONOVO INC	v219534_ex31-2.htm
EX-10.1 - BIONOVO INC	v219534_ex10-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________to__________

Commission File No. 001-33498

BIONOVO, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-5526892
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5858 Horton Street, Suite 400 Emeryville, California 94608		(510) 601-2000
(Address of principal executive offices, including zip code)		(Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

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

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

Yes ¨ No þ

As of May 9, 2011, 54,561,312 shares of the registrant’s common stock, par value $0.0001, were outstanding.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 and from February 1, 2002 (date of inception) to March 31, 2011	2
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 and from February 1, 2002 (date of inception) to March 31, 2011	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25

PART II OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1a.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Removed and Reserved	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
Signatures		28

PART 1 – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Bionovo, Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(in thousands, except share data)

	March 31, 2011			December 31, 2010
	(unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	16,718		$	2,638
Short-term investments		6,340			-
Receivables		76			49
Prepaid expenses		795			973
Other current assets		406			396
Total current assets		24,335			4,056
Property and equipment, net		12,116			6,647
Patents pending, net		1,465			1,259
Other assets		1,265			1,020
Total assets	$	39,181		$	12,982

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	613		$	655
Accrued compensation and benefits		537			901
Current portion of capital lease obligations		989			1,055
Current portion of notes payable		27			40
Warrant liability		8,912			1,843
Other current liabilities		5,309			970
Total current liabilities		16,387			5,464
Non-current portion of capital lease obligations		583			836
Non-current portion of notes payable		79			81
Total liabilities		17,049			6,381

Commitments and contingencies

Shareholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued and outstanding		-			-
Common stock $0.0001 par value, 340,000,000 shares authorized, 54,561,312 and 24,530,112 shares outstanding at March 31, 2011 and December 31, 2010, respectively		5			2
Additional paid-in capital		97,383			80,145
Accumulated other comprehensive income (loss)		-			-
Accumulated deficit		(75,256	)		(73,546	)
Total shareholders’ equity		22,132			6,601
Total liabilities and shareholders’ equity	$	39,181		$	12,982

See accompanying notes to these condensed consolidated financial statements

- 1 -

Bionovo, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per share data)

	For the Three Months Ended March 31,						Accumulated from February 1, 2002 (Date of inception) to March 31,
	2011			2010			2011

Revenue	$	65		$	-		$	1,858

Operating expenses:
Research and development		3,883			3,806			58,230
General and administrative		994			852			22,123
Merger cost		-			-			1,964
Total operating expenses		4,877			4,658			82,317

Loss from operations		(4,812	)		(4,658	)		(80,459	)

Other income (expense):
Change in fair value of warrant liability		3,122			-			3,859
Interest income		9			8			2,100
Interest expense		(29	)		(14	)		(550	)
Other expense, net		-			3			(206	)
Total other income (expense)		3,102			(3	)		5,203

Net loss	$	(1,710	)	$	(4,661	)	$	(75,256	)
Basic and diluted net loss per common share	$	(0.04	)	$	(0.22	)	$	(6.39	)

Shares used in computing basic and diluted net loss per share		43,550			21,509			11,786

See accompanying notes to these condensed consolidated financial statements

Bionovo, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flow

(unaudited, in thousands)

	For the Three Months Ended March 31,						Accumulated from February 1, 2002 (Date of inception) to March 31,
	2011			2010			2011
Cash flows from operating activities:
Net loss	$	(1,710	)	$	(4,661	)	$	(75,256	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		584			401			6,046
Stock-based compensation expense		173			365			5,745
Amortization and accretion of investments		11			65			280
Non-cash compensation for warrants issued		-			-			1,964
Amortization of note discount		-			-			139
Amortization of deferred stock compensation		-			-			16
Change in fair value of warrrant liability		(3,122	)		-			(3,859	)
Loss on disposal of property and equipment		-			-			148
Noncash adjustment to available-for-sale securities		-			1			1
Changes in assets and liabilities:
Receivables		(27	)		137			(76	)
Prepaid expenses and other current assets		168			58			(601	)
Deposits and other non-current assets		(246	)		39			(1,236	)
Accounts payable		(42	)		413			613
Accrued compensation and benefits		(364	)		(27	)		537
Other accrued liabilities		(64	)		223			905
Net cash used in operating activities		(4,639	)		(2,986	)		(64,634	)

Cash flows from investing activities:
Capital expenditures		(1,625	)		(785	)		(9,472	)
Proceeds from sale-leaseback transaction		-			-			1,205
Acquisition of intangible assets		(230	)		(173	)		(1,712	)
Proceeds from sales and maturities of investments		-			5,600			41,424
Purchases of available-for-sale securities		(6,351	)		(920	)		(48,043	)
Net cash (used in) provided by investing activities		(8,206	)		3,722			(16,598	)

Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net		27,258			-			96,821
Payments under capital lease obligations		(318	)		(154	)		(3,636	)
Payments under notes payable		(15	)		(15	)		(98	)
Proceeds from exercise of warrants and options		-			-			5,000
Payments of convertible notes payable		-			-			(50	)
Payments for financing costs for convertible notes		-			-			(87	)
Net cash provided by (used in) financing activities		26,925			(169	)		97,950

Net increase in cash and cash equivalents		14,080			567			16,718
Cash and cash equivalents at the beginning of the period		2,638			2,799			-
Cash and cash equivalents at the end of the period	$	16,718		$	3,366		$	16,718

See accompanying notes to these condensed consolidated financial statements

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

1. BUSINESS AND ORGANIZATION

Formation of the Company

Bionovo, Inc. was originally incorporated in California in February of 2002. In March of 2004, it reincorporated in the state of Delaware and in June of 2005 changed its name from Bionovo, Inc. to Bionovo Biopharmaceuticals, Inc. On April 6, 2005, Bionovo Biopharmaceuticals, Inc. became public through a reverse merger with Lighten Up International, Inc. The Company operated as Lighten Up Enterprises International, Inc. until June 29, 2005 when the Company assumed the name Bionovo, Inc. Bionovo, Inc. is incorporated in the state of Delaware and was made public through a reverse merger transaction between Bionovo Biopharmaceuticals, Inc. and Lighten Up Enterprises International, Inc. on April 6, 2005.

Reverse Merger

On April 6, 2005, Lighten Up Enterprises International, Inc. acquired all the outstanding shares of Bionovo Biopharmaceuticals, Inc. in exchange for 8,422,490 restricted shares of its common stock in a reverse triangular merger. The acquisition was accounted for as a reverse merger in which Bionovo Biopharmaceuticals, Inc. was deemed to be the accounting acquirer. Accordingly, the historical financial information presented herein is that of Bionovo Biopharmaceuticals, Inc. (as adjusted for any difference in the par value of each entity’s stock with an offset to capital in excess of par value). Financial information subsequent to the reverse merger is that of the merged entity, Bionovo, Inc.

Reverse Stock Split

On August 27, 2010, the Company filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse split of its common stock at a ratio of one-for-five. The reverse stock split was effective at the close of business on August 31, 2010. All fractional shares created by the reverse stock split were rounded up to the nearest whole share. All historical share and per share amounts have been adjusted to reflect the reverse stock split. The accompanying consolidated financial statements have been retroactively restated to reflect the reverse stock split.

Liquidity

The Company has sustained recurring losses and negative cash flows from operations. Over the past years, the Company has been funded through a combination of private equity, government grants, debt, lease financing and public offerings. At March 31, 2011, the Company had an accumulated deficit of $75.3 million, working capital of $7.9 million, $16.7 million in cash and cash equivalents, $6.3 million in short-term investments and total shareholders’ equity of $22.1 million.

On February 2, 2011, the Company completed an underwritten public offering and issued 30,031,200 shares of its common stock and 15,015,600 warrants at a price of $1.00 per unit, with each unit including one share of common stock and a warrant to purchase one half of one share of Bionovo, Inc. common stock. The warrants are exercisable any time after the closing date and will expire five years from the date of issuance. The offering produced approximately $27.3 million, net of financing costs.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

The Company has experienced and continues to experience operating losses and negative cash flows from operations, as well as an ongoing requirement for substantial additional capital investment. The Company expects that it will need to raise additional capital to fully pursue its business plan before the end of 2011. The Company is currently pursuing a variety of funding options, including government grants, partnering/co-investment, venture debt and equity offerings. There can be no assurance as to the availability or terms upon which such financing and capital might be available. If the Company is not successful in its efforts to raise additional funds by the end of 2011, the Company may be required to delay, reduce the scope of, or eliminate one or more of its development programs. Based on the proceeds of the Company’s recent public offering and the Company’s ability to prioritize spending, the Company believes it has sufficient cash to meet its operating needs for at least the next 12 months.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or for any other future period.

The condensed consolidated balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Bionovo, Inc. Annual Report on Form 10-K for the year ended December 31, 2010.

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the Company’s consolidated financial position as of March 31, 2011, the consolidated results of the Company’s operations for the three months ended March 31, 2011 and 2010 and inception to date from February 1, 2002 to March 31, 2011, and the Company’s cash flows for the three months ended March 31, 2011 and 2010 and inception to date from February 1, 2002 to March 31, 2011.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

In fiscal year 2009, the Company discontinued operations of its wholly owned subsidiary, Bionovo Biopharmaceuticals, Inc. The operations of the Company’s subsidiary were insignificant to the company as a whole and the discontinuance did not have a material impact on the Company’s consolidated financial statements. For years prior to 2010, the consolidated financial statements included the accounts of Bionovo, Inc. and its wholly owned subsidiary. The operations were treated as one operating segment and all inter-company balances and transactions were eliminated.

Development Stage Company

The Company has not generated any significant revenue since inception. Accordingly, the accompanying consolidated financial statements have been prepared using the accounting formats prescribed by the Development Stage Entity Topic of the Financial Accounting Standards Board (FASB) Codification for a development stage enterprise (DSE). Although the Company has recognized some nominal amount of revenue, the Company still believes it is devoting, substantially, all its efforts on developing the business and, therefore, still qualifies as a DSE.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

Use of Estimates and Reclassifications

The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Management makes estimates that affect certain accounts including deferred income tax assets, estimated useful lives of property and equipment, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied to estimates are recognized in the year in which such adjustments are determined.

Revenue Recognition

Revenue is generated from collaborative research and development arrangements, technology licenses, and government grants. Revenue is recognized when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) transfer of technology (intellectual property) has been completed or services have been rendered; (iii) the fee is fixed or determinable, and (iv) collectibility is reasonably assured.

Revenue from technology licenses or other payments under collaborative agreements where the Company has a continuing obligation to perform is recognized as revenue over the expected period of the continuing performance obligation. Revenue on government contracts is recognized on a qualified cost reimbursement basis. Revenue from grants received on a refundable tax credit basis is recognized when awarded.

During the first quarter of 2011, the Company recognized approximately $65,000 in revenue from a National Institutes of Health grant.

Research and Development

Research and development expenses include internal and external costs. Internal costs include salaries and employment related expenses and allocated facility costs. External expenses consist of costs associated with outsourced clinical research organization activities, sponsored research studies, product registration, and investigator sponsored trials. All research and development costs are charged to expense as incurred.

Warrant Liability

In October of 2010 and February of 2011, we issued warrants to purchase Bionovo’s common shares. The Company accounted for these warrants as a liability measured at fair value due to a provision included in the warrant agreements that provides the warrant holders with an option to require the Company (or its successor) to purchase their warrants for cash in an amount equal to their Black-Scholes Option Pricing Model (the “Black-Scholes Model”) value, in the event of a change in control of the Company. The fair value of the warrant liability is estimated using the Black-Scholes Model which requires inputs such as the expected term of the warrants, share price volatility and risk-free interest rate. These assumptions are reviewed on a quarterly basis and changes in the estimated fair value of the outstanding warrants are recognized each reporting period in “Change in fair value of warrant liability” line item under other income (expense) category in the condensed consolidated statements of operations.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements issued applicable to Bionovo, Inc. other than those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following table shows supplemental cash flows for the three months ended March 31, 2011 and 2010 and inception to date from February 1, 2002 through March 31, 2011 (in thousands).

	For the Three Months Ended March 31,				Accumulated from February 1, 2002 (Date of inception) to March 31,
	2011		2010		2011
	(in thousands)
Cash paid during the year for:
Interest paid	$	30	$	15	$	538
Income taxes paid		1		-		14

Supplemental disclosure of non-cash investing and financing:
Initial fair value of warrant liability	$	10,191	$	-	$	11,940
Construction in progress included in other current liabilities		4,403		-		4,403
Non-cash warrant expense for warrants issued		-		-		1,964
Conversion of notes payable to common stock		-		-		450
Assets acquired under capital lease		-		-		5,209
Assets acquired under notes payable		-		-		204
Issuance of common stock for services		-		52		765
Conversion of accrued interest payable		-		-		12
Issuance of common stock with reverse merger		-		-		4

4. CASH, CASH EQUIVALENTS AND INVESTMENTS

As part of our cash management program, the Company maintains a portfolio of marketable investment securities. The securities are investment grade and generally mature within one year and may include tax exempt securities and certificates of deposit. The fair value of substantially all securities is determined by quoted market prices. The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market. The Company maintains its cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced any losses on such accounts. The Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

The following is a summary of cash, cash equivalents, and available-for-sale securities at March 31, 2011 and December 31, 2010 (in thousands):

	March 31, 2011
	Cost		Unrealized		Unrealized		Estimated
	Basis		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	982	$	-	$	-	$	982
Money market funds		2		-		-		2
Corporate notes		15,734		-		-		15,734
Total cash and cash equivalents	$	16,718	$	-	$	-	$	16,718

Available-for-sale investments:
US govt. agency obligations	$	3,011	$	-	$	-	$	3,011
Corporate notes		3,329		-		-		3,329
Total available-for-sale investments	$	6,340	$	-	$	-	$	6,340

	December 31, 2010
	Cost		Unrealized		Unrealized		Estimated
	Basis		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	445	$	-	$	-	$	445
Money market funds		562		-		-		562
US govt. agency obligations		1,631		-		-		1,631
Total cash and cash equivalents	$	2,638	$	-	$	-	$	2,638

As of March 31, 2011 and December 31, 2010, unrealized gains or losses on available-for-sale securities included in accumulated other comprehensive income were $0. There was no realized gain or loss on the sale of available-for-sale securities for the three months ended March 31, 2011 or March 31, 2010.

5. FAIR VALUE

U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs used to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010 (in thousands):

			Fair Value Measurements at Reporting Date Using
March 31, 2011	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	2	$	2	$	-	$	-
US government agencies		3,011		-		3,011		-
Corporate notes		19,063		-		19,063		-
Total	$	22,076	$	2	$	22,074	$	-

December 31, 2010	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	562	$	562	$	-	$	-
US government agencies		1,631		-		1,631		-
Total	$	2,193	$	562	$	1,631	$	-

Financial liabilities carried at fair value as of December 31, 2010 were classified as follows (in thousands):

			Fair Value Measurements at Reporting Date Using
March 31, 2011	Total		(Level 1)		(Level 2)		(Level 3)
Warrant liability	$	8,912	$	-	$	-	$	8,912

December 31, 2010	Total		(Level 1)		(Level 2)		(Level 3)
Warrant liability	$	1,843	$	-	$	-	$	1,843

As discussed in Note 2, “Summary of Significant Accounting Policies,” the fair value of the warrant liability was initially recorded on the grant date and remeasured at March 31, 2011 using the Black-Scholes Model, which requires inputs such as the expected term of the warrants, share price volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop.

The fair value of the warrant liability was estimated using the following assumptions at March 31, 2011, February 2, 2011 (date of grant of February 2011 warrants) and December 31, 2010:

	October 2010 Warrants						February 2011 Warrants
	March 31, 2011			December 31, 2010			March 31, 2011			February 2, 2011
Expected volatility		130	%		126	%		126	%		125	%
Risk-free interest rate		1.99	%		1.91	%		2.13	%		2.10	%
Expected life	4.5 years			4.8 years			4.8 years			5.0 years

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the three month period ended March 31, 2011 (in thousands):

Balance at December 31, 2010	$	1,843
Initial fair value of warrants issued in February 2011		10,191
Net decrease in fair value of warrant liability on remeasurment		(3,122	)
Balance at March 31, 2011	$	8,912

The net decrease in the estimated fair value of the warrant liability was recognized as income under other income (expense) category in the condensed consolidated statements of operations.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

6. PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:

Office and laboratory equipment		3 to 5 years
Computer equipment and software		3 years
Leasehold improvements		Term of lease agreement
Leased equipment		Term of lease agreement

The following is a summary of property and equipment, at cost less accumulated depreciation, at March 31, 2011 and December 31, 2010 (in thousands):

	March 31, 2011			December 31, 2010
Office and lab equipment	$	7,883		$	7,882
Leasehold improvements		3,359			3,359
Computer equipment and software		279			279
Construction in progress		6,186			161
		17,707			11,681
Less: accumulated depreciation		(5,591	)		(5,034	)
Property and equipment, net	$	12,116		$	6,647

Leasehold improvements include $0.2 million in gross assets acquired under two notes payable with the lessor of the Company’s headquarters (see Note 8, “Notes Payable” for further details). Office and lab equipment include gross assets acquired under capital leases of approximately $2.2 million as March 31, 2011 and $3.8 million as of December 31, 2010. The decrease in leased equipment is due to the Company fulfilling its obligations under two capital leases during the first quarter of 2011 resulting in the Company becoming the owner of the equipment. Construction in progress includes approximately $1.8 million in assets acquired with cash and approximately $4.4 million in costs included in other current liabilities. Amortization of assets under capital leases is included in depreciation expense. For the three months ended March 31, 2011 and 2010, the Company recorded depreciation expense of approximately $0.6 million and $0.4 million, respectively.

Intangible assets - Patent Costs

Intangible assets consist of patent licensing costs incurred to date. The Company is amortizing the patent cost incurred to date, over a 15 year period. If the patents are not awarded, the costs related to those patents will be expensed in the period that determination is made. As of March 31, 2011, the Company had capitalized approximately $1.6 million in patent licensing costs. For the three months ended March 31, 2011 and 2010, the Company recorded amortization expense of approximately $26,000 and $18,000, respectively.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

7. OTHER CURRENT LIABILITIES

Other current liabilities include the following as of March 31, 2011 and December 31, 2010 (in thousands):

	March 31, 2011		December 31, 2010
Accrued clinical trial expenses	$	173	$	7
Accrued consulting fees		30		150
Accrued legal fees		96		168
Accrued construction in progress		4,403		9
Deferred rent		449		424
Other current liabilities		158		212
Total other current liabilities	$	5,309	$	970

The $4.4 million included in accrued construction in progress as of March 31, 2011 represents progress billings for lab equipment and leasehold improvements related to the construction of the Company’s new Hayward manufacturing facility.

8. NOTES PAYABLE

In January of 2009, the Company relocated to its new headquarters. Related to the relocation, the Company financed leasehold improvements under two notes payable with the lessor of the building. The first note of $100,000 bears interest at 9.5% and is payable in monthly payments of interest and principal amounting to approximately $1,000 beginning May 1, 2009 and continuing over the remaining lease term with a due date of December 31, 2018. The second note of $104,000 bears interest at 9.5% and is payable in 24 monthly payments of interest and principal amounting to approximately $5,000 beginning August 1, 2009. The future minimum payments as of March 31, 2011 are as follows (in thousands):

	Notes Payable
2011(1)	$	31
2012		16
2013		16
2014		16
2015		16
Thereafter		48
Total minimum payments	$	143
Less: Amount representing interest		(37	)
Present value of minimum payments	$	106
Less: Current portion		(27	)
Non-current portion of notes payable	$	79

(1) For the nine months ending December 31, 2011

9. BASIC AND DILUTED LOSS PER SHARE

Basic net loss per common share is based on the weighted average number of common shares outstanding during the period. Diluted net loss per common share is based on the weighted average number of common shares and other dilutive securities outstanding during the period, provided that including these dilutive securities does not increase the net loss per share.

Potentially dilutive securities are excluded from the calculation of earnings per share if their inclusion is antidilutive. The effect of the options and warrants was antidilutive for the three months ended March 31, 2011 and 2010. The following table shows the total outstanding securities considered antidilutive and therefore, excluded from the computation of diluted net loss per share (in thousands):

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

	Three Months Ended March 31,
	2011		2010
Options to purchase common stock		1,255		1,184
Options to purchase common stock - outside plan		21		21
Warrants to purchase common stock		26,345		8,649
Total		27,621		9,854

10. COMPREHENSIVE LOSS

Comprehensive loss includes net loss and other comprehensive income (loss), which for us is primarily comprised of unrealized holding gains or losses on our available-for-sale securities that are excluded from the statement of operations in computing net loss and reported separately in shareholders’ equity. Comprehensive loss and its components are as follows (in thousands):

	Three Months Ended March 31,
	2011			2010
Net loss	$	(1,710	)	$	(4,661	)
Change in unrealized gain (loss) on securities available-for-sale		-			4
Comprehensive loss	$	(1,710	)	$	(4,657	)

11. SHARE-BASED COMPENSATION

Employee Stock Option Plan

On April 6, 2005, in connection with the completion of the reverse merger, the board of directors assumed and adopted the Stock Incentive Plan, as amended, (the “Plan”) of Bionovo Biopharmaceuticals and 699,358 shares of common stock for issuance under the Plan. In May 2006 and June 2008, the shareholders approved increases of 600,000 of additional shares for the option plan resulting in a total of 1,899,358 shares reserved for issuance under the plan. On May 10, 2011, the shareholders approved an increase of 10,100,642 additional shares for the plan, for a total of 12,000,000.

The Company generally grants stock options to employees and directors at exercise prices equal to the fair market value of the Company's stock at the dates of grant. Stock options are typically granted throughout the year and generally vest four years thereafter and expire five years from the date of the award, unless otherwise specified. The Company recognizes compensation expense for the fair value of the stock options over the requisite service period for each stock option award.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

The following table shows total share-based compensation expense included in the condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010 (in thousands).

	Three Months Ended March 31,
	2011		2010
Research and development	$	59	$	151
General and administrative		114		214
Total share-based compensation expense	$	173	$	365

There was no capitalized share-based compensation cost as of March 31, 2011 and there were no recognized tax benefits during the three months ended March 31, 2011 and 2010.

To estimate the value of an award, the Company uses the Black-Scholes option pricing model. This model requires inputs such as expected life, expected volatility and risk-free interest rate. The forfeiture rate also impacts the amount of aggregate compensation. These inputs are subjective and generally require significant analysis and judgment to develop. While estimates of expected life, volatility and forfeiture rate are derived primarily from the Company’s historical data, the risk-free rate is based on the yield available on U.S. Treasury constant maturity rates with similar terms to the expected term of the stock option awards.

The fair value of share-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011			2010
Dividend yield		0	%		0	%
Expected volatility		152.2	%		149.7	%
Risk-free interest rate		1.07	%		1.48	%
Expected life	2.67 years			2.65 years

Share option activity for the three months ended March 31, 2011 was as follows:

	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2010		1,246		$	6.87
Granted		57			0.78
Exercised		-			-
Canceled or forfeited		(48	)		5.42
Expired		-			-
Options outstanding at March 31, 2011		1,255		$	6.64		3.4	$	-
Options exercisable at March 31, 2011		1,102		$	6.37		3.3	$	-
Options exercisable and options expected to vest at March 31, 2011		1,242		$	6.69		3.4	$	-

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

Unvested share activity for the three months ended March 31, 2011 was as follows:

	Unvested Number of Options (in thousands)			Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2010		189		$	4.83
Granted		57			0.61
Vested		(73	)		1.04
Forfeited		(20	)		2.26
Unvested balance at March 31, 2011		153			5.40

As of March 31, 2011, the Company had approximately 0.5 million common shares reserved for future grant under its share option plan and there were no shares exercised during the first three months of 2011.

At March 31, 2011, there was $0.4 million of unrecognized share-based compensation expense related to unvested share options with a weighted average remaining recognition period of 1.0 years.

Issuance of Stock Options

On March 4, 2011, the Board of Directors, on the recommendation of its compensation committee, approved a company-wide grant to employees of approximately 6.3 million options to purchase common shares at $0.79 per share. On March 22, 2011, the Board of Directors approved a grant to non-employee directors of 0.3 million options to purchase common shares at $0.62 per share. The options will vest 20% upon issuance and the remaining 80% will vest over four years. The purpose of the grants was to improve the level of employee ownership in the Company. All options were granted subject to shareholder approval of a commensurate increase in the number of shares available for the grant of options under the Company’s existing share option plan. On May 10, 2011, the shareholders approved the increase in shares available under the Company’s option plan.

12. STOCK WARRANTS

The Company has issued warrants to investors as part of its overall financing strategy. As of March 31, 2011, there were 26.3 million warrants to purchase Bionovo shares outstanding with a weighted average price of $2.92, a weighted average remaining life of 4.22 years and an aggregate exercise price of $77.0 million.

In connection with the closing of the Company’s February 2, 2011 public offering of common shares, the investors were issued five-year warrants to purchase up to an aggregate 15,015,600 shares of the Company’s common stock at an exercise price of $1.30 per share. The warrant agreements include a provision that provides the warrant holders with an option to require the Company (or its successor) to purchase their warrants for cash in an amount equal to their Black-Scholes value, in the event of a change in control of the Company. The warrants may also be executed on a cashless basis, in accordance with the terms of the warrant.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

The following table summarizes information about all warrants outstanding as of March 31, 2011:

Issue Date	Expiration Date	Number Outstanding (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)
January 2007	January 2012		719		10.62		0.81
October 2007	October 2012		1,491		12.50		1.59
October 2009	October 2014		6,174		4.28		3.52
October 2010	October 2015		2,045		1.64		4.52
February 2011	February 2016		15,916		1.32		4.85
			26,345		2.92		4.22

The estimated fair value of warrants granted in January 2007, October 2007 and October 2009 is included in additional paid-in capital along with the proceeds from issuance of common stock. The estimated fair value of the warrants was calculated using the Black-Scholes valuation model. The following assumptions were used: (i) no expected dividends, (ii) risk free interest rates of 2.2% - 4.0%, (iii) expected volatility of 90% - 187%, and (iv) expected life in the stated life of the warrant. The fair value of the warrants ranged from $0.50 to $4.45.

Warrant Liability

As discussed above and in Note 2, “Summary of Significant Accounting Policies,” the warrants issued in October of 2010 and February of 2011 include provisions that provide the warrant holders with an option to require the Company (or its successor) to purchase their warrants for cash in an amount equal to their Black-Scholes value, in the event of a change in control of the Company. Accordingly, the fair value of the warrants at the issuance date was estimated using the Black-Scholes Model, and the Company initially recorded a warrant liability of $1.7 million for the October 2010 warrants and a liability of $10.2 million for the February 2011 warrants. The Company remeasured the warrant liability, resulting from these two issuances, at March 31, 2011 and recorded a decrease to the warrant liability of approximately $3.1 million with a corresponding entry to the other income category in the Company’s condensed consolidated statement of operations for the three months ended March 31, 2011. Additional disclosures regarding assumptions used in calculating the fair value of the warrant liability are included in Note 5, “Fair Value.”

The public offering completed on February 2, 2011 did not result in a change of control as defined in the warrant agreements or trigger the cash settlement provisions in relation to the warrants issued in the October 2010 financing transaction.

13. LEASES, COMMITMENTS AND CONTINGENCIES

The Company leases certain office and laboratory equipment under agreements that are classified as capital leases. The cost of equipment under capital leases is included in the Balance Sheets as property and equipment and was $2.2 million at March 31, 2011 and $3.8 million as of December 31, 2010. The decrease in leased equipment is due to the Company fulfilling its obligations under two capital leases during the first quarter of 2011 resulting in the Company becoming the owner of the equipment. Amortization of assets under capital leases is included in depreciation expense. Accumulated amortization at March 31, 2011 and December 31, 2010 was $0.4 million and $1.2 million, respectively.

The Company leases its laboratory and office facilities for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2021. The leases provide for increases in future minimum annual rental payments and the agreements generally require the Company to pay executory costs (real estate taxes, insurance, and repairs), which are approximately $53,000 per month. Operating lease expense totaled approximately $0.5 million for the three months ended March 31, 2011 and $0.5 million for the same period of 2010.

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued

In January of 2011, the Company entered into a ten-year, non-cancelable operating lease agreement for a manufacturing facility in Hayward, California. The lease begins April 1, 2011, and the space will be used for clinical manufacturing operations. Monthly rental payments of $18,750 will begin on April 1, 2011 and will increase over the ten-year period. The Company will gradually assume greater space between the first year and the fourth year for a total of 51,472 square feet beginning with the fourth year and through the end of the lease.

Future minimum lease payments under non-cancelable capital and operating leases are as follows (in thousands):

	Capital Leases			Operating Leases
2011(1)	$	793		$	1,639
2012		860			2,390
2013		-			2,669
2014		-			3,103
2015		-			3,294
Thereafter		-			13,774
Total minimum lease payments	$	1,653		$	26,869
Less: Amount representing interest		(81	)
Present value of minimum lease payments	$	1,572
Less: Current portion of capital lease obligations		(989	)
Non-current portion of capital lease obligations	$	583

(1) For the nine months ending December 31, 2011

14. INCOME TAX

We do not have any unrecognized tax benefits and do not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized for the period ended March 31, 2011. As of March 31, 2011, we had recorded a full valuation reserve for all of our recognized tax benefits.

The U.S. Tax Code limits the annual use of net operating loss and tax credit carry forwards in certain situations where changes occur in stock ownership of a company. Due to the financing that occurred in February of 2011, management believes that a change in control has occurred according to Section 382 and 383 of the Internal Revenue Code. Therefore, utilization of the Company’s net operating loss would be limited beginning in 2011. Our net operating losses and tax credit carry forwards are more fully described in our 2010 Annual Report on Form 10-K.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are subject to U.S. federal or state income tax examinations by tax authorities for all years in which we reported net operating losses that are being carried forward for tax purposes. We do not believe there will be any material changes in our tax positions over the next 12 months.

15. SUBSEQUENT EVENTS

As disclosed in Note 11, “Share Based Compensation,” on May 10, 2011, the shareholders approved an increase of 10,100,642 additional shares for the plan, for a total of 12,000,000.

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

The following should be read in conjunction with our consolidated financial statements located in this Quarterly Report and in our Form 10-K for the year ended December 31, 2010 and other documents filed by us from time to time with the Securities and Exchange Commission. Statements made in this Item other than statements of historical fact, including statements about us and our subsidiaries and our respective clinical trials, research programs, product pipeline, current and potential corporate partnerships, licenses and intellectual property, the adequacy of capital reserves and anticipated operating results and cash expenditures, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As such, they are subject to a number of uncertainties that could cause actual results to differ materially from the statements made, including risks associated with the success of research and product development programs, the issuance and validity of patents, the development and protection of proprietary technologies, the ability to raise capital, operating expense levels and the ability to establish and retain corporate partnerships. Reference is made to discussions about risks associated with product development programs, intellectual property and other risks which may affect us under Item 1A, “Risk Factors” above. We do not undertake any obligation to update forward-looking statements.

Overview

Reverse Merger

Reverse Stock Split

In August of 2010, we implemented a 1-for-5 reverse split of our common stock to address The Nasdaq Capital Market’s continuing listing requirement that our stock price exceed $1.00. On September 15, 2010, we were informed by The Nasdaq Capital Market that we had resolved such continuing listing deficiency.

NASDAQ Notice

As of March 14, 2011, the bid price of our common stock has been below $1.00 per share for over 30 consecutive business days and on March 14, 2011, the Company received a letter from The NASDAQ Stock Market stating that it was not in compliance with NASDAQ listing rules because it failed to maintain a minimum bid price of $1.00 per share for the last 30 consecutive business days. NASDAQ granted the Company a period of 180 calendar days to regain compliance. We can provide no assurance that we will be able to regain compliance with NASDAQ’s minimum bid price requirement or comply with the continued listing standards in the future.

Business

We are a clinical stage drug discovery and development company focusing on women’s health and cancer, two large markets with significant unmet needs. Building on our understanding of the biology of menopause and cancer, we design new drugs derived from botanical sources which have novel mechanisms of action. Based on the results of our clinical trials and preclinical studies to date, we believe that we have discovered new classes of drug candidates with the potential to be leaders in their markets.

Our lead drug candidate, Menerba™ (formerly MF-101), represents a new class of receptor sub-type selective estrogen receptor modulator (“SERM”), for the treatment of vasomotor symptoms of menopause, or “hot flashes.” We have designed Menerba to selectively modulate estrogen receptor beta (“ERß”) and we believe it could provide a safe and effective alternative to existing Food and Drug Administration (“FDA”) approved therapies that have been observed to pose a significant risk to women for developing breast cancer, stroke, cardiovascular disease, blood clots and other serious diseases. In preclinical studies, Menerba does not lead to tumor formation in either breast or uterine tissues and it does not increase the risk for clotting. This characteristic, if confirmed in clinical testing, would differentiate Menerba from some existing therapies and other hormone-based therapies in clinical development. We announced the results in 2007 of our completed, multicenter, randomized, double-blinded, placebo-controlled Phase 2 trial, involving 217 women, which showed the higher of two Menerba doses tested was well tolerated and resulted in a statistically significant reduction of hot flashes after 12 weeks of treatment. In addition, treatment with the higher dose of Menerba led to a statistically significant reduction in nighttime awakenings when compared to placebo, which represents superior efficacy to existing non-hormonal therapies in development. We are proceeding with further clinical testing at multiple clinical sites in the U.S. We believe that Menerba’s novel mechanism of action could lead to a more favorable safety profile than currently approved hormone therapies (“HT”) and other therapies under development and testing.

Although we are focusing our resources primarily on the development of Menerba, we have a diverse pipeline of additional clinical and preclinical drug candidates in both women’s health and cancer, which we may pursue if additional funding becomes available. As part of our pipeline, we are developing BezielleTM, an oral anticancer agent for advanced breast cancer. Unlike most other anticancer drugs and drug candidates, which try to control cancer through genomic and proteomic signaling pathways, Bezielle is designed to take advantage of a unique metabolism of cancer cells, with a well-characterized mechanism of action which leads to very selective tumor cell DNA damage and the death of cancer cells, without lasting harm to normal cells. This is accomplished by Bezielle’s secondary inhibition of glycolysis, a metabolic pathway on which cancer cells rely for energy production. Glycolysis inhibition leads to energy collapse in the cells and results in death of cancer cells. Since normal cells do not rely for the most part on glycolysis for energy production, they are not killed by Bezielle. Based on our clinical and pre-clinical studies, we believe that Bezielle may have a preferential effect on hormone-independent cancers, a subset with few treatment options. To date, 48 women with metastatic breast cancer have been treated with Bezielle in two separate Phase 1 clinical trials. As predicted by the mechanism of action, Bezielle had very limited toxicities with an extremely favorable tolerability profile. Moreover, Bezielle showed encouraging clinical activity among a cohort of women with metastatic breast cancer who had been heavily pretreated with other regimens. A Phase 2 trial has been approved by the FDA and the institutional review boards (“IRBs”) at several prestigious breast cancer clinical sites in the U.S. We will need to obtain additional funding to commence this open-label, non-randomized trial in 80 women diagnosed with metastatic breast cancer who have failed no more than two prior chemotherapy regimens. We believe that Bezielle’s novel mechanism of action and favorable tolerability profile could lead to preferential use over existing drugs in the treatment of advanced breast cancer, and potentially in the broader, adjuvant care of breast cancer. We also plan to evaluate Bezielle for the treatment of other forms of cancer, including pancreatic cancer and adjuvant use in breast cancer. We have also prepared an investigational new drug, or IND, application and plan to initiate a Phase 1 trial for our second women’s health drug candidate, SealaTM (formerly VG101), for the treatment of post-menopausal vulvar and vaginal atrophy, or “vaginal dryness.” We have identified or begun preclinical work on other drug candidates for a variety of indications within women’s health and cancer. We have internally discovered and developed all of our drug candidates using our proprietary biological and chemical techniques.

Our drug development process utilizes botanical sources, used in Traditional Chinese Medicine, believed to produce biologically active compounds. We apply our clinical knowledge, experience with natural compounds and knowledge of proper scientific screening tools to isolate and purify botanical compounds and extracts for pharmaceutical development. In June 2004, the FDA released a document to provide drug developers with guidance on the development of botanical drugs. This guidance states that applicants may submit reduced documentation of nonclinical (preclinical) safety to support an investigational new drug application for initial clinical studies of botanicals that have been legally marketed in the U.S. and/or a foreign country as dietary supplements without raising any known safety concerns. The first botanical extract drug developed pursuant to these guidelines was approved by the FDA in October 2006. To date, all of our drug candidates are derived from botanical extracts and are being developed by following this FDA guidance. In addition, we have identified active chemical components underpinning the mechanism of action for all of our drug candidates, and in some cases, we have developed synthetic methods of production.

We expect to continue to incur significant operating losses over the next few years, and do not expect to generate profits until and unless Menerba or one of our other drug candidates has been approved and is being marketed with commercial partners. As of March 31, 2011, we had an accumulated deficit of $75.3 million. Historically, we have funded our operations primarily through private placements and public offerings of our capital stock, equipment lease financings, license fees and interest earned on investments.

We will need to raise and are pursuing additional funds through grants, strategic collaborations, public or private equity or debt financing, or other funding sources. This funding may not be available on acceptable terms, or at all, and may be dilutive to shareholder interests.

Development Stage Company

We have not generated any significant revenue since inception. The accompanying financial statements have, therefore, been prepared using the accounting formats prescribed for a development stage enterprise (“DSE”). Although we have recognized some nominal amount of revenue, we still believe we are devoting, substantially, all our efforts on developing the business and, therefore, still qualify as a DSE.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to clinical trial accruals, income taxes (including the valuation allowance for deferred tax assets), restructuring costs and share-based compensation. Estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

We consider the following accounting policies related to revenue recognition, clinical trial accruals, share-based compensation, income tax and research and development expenses to be the most critical accounting policies, because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.

Revenue Recognition

Our revenues are derived from collaborative research and development arrangements, technology licenses, and government grants.

Revenue is recognized when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) transfer of technology has been completed or services have been rendered; (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.

Revenue from technology licenses or other payments under collaborative agreements where we have a continuing obligation to perform is recognized as revenue over the expected period of the continuing performance obligation.

Revenue on government contracts is recognized on a qualified cost reimbursement basis. Revenue from grants received on a refundable tax credit basis is recognized when awarded.

Accruals

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with selected service providers and make adjustments, if necessary. Examples of estimated accrued expenses include:

fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

fees paid to investigative sites in connection with clinical trials;

fees paid to contract manufacturers in connection with the production of clinical trial materials; and

professional service fees.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

Warrant Liability

In October of 2010 and February of 2011, we issued warrants to purchase our common shares in connection with a registered direct offering and an underwritten public offering, respectively. The Company accounted for these warrants as a liability measured at fair value due to a provision included in the warrant agreement that provides the warrant holders with an option to require the Company (or its successor) to purchase their warrants for cash in an amount equal to their Black-Scholes Option Pricing Model (the “Black-Scholes Model”) value, in the event of a change in control of the Company. The fair value of the warrant liability is estimated using the Black-Scholes Model which requires inputs such as the expected term of the warrants, share price volatility and risk-free interest rate. These assumptions are reviewed on a quarterly basis and changes in the estimated fair value of the outstanding warrants are recognized each reporting period in “Change in fair value of warrant liability” line item under other income (expense) category in the consolidated statements of operations.

Share-Based Compensation

Share-based compensation granted to employees and consultants is recorded based on the fair value at the time of grant. The fair value of stock options and warrants is calculated using the Black-Scholes pricing method on the date of grant. This option valuation model requires input of highly subjective assumptions. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our management’s opinion, the existing model does not necessarily provide a reliable single measure of fair value of our employee stock options.

Income Tax

We file income tax returns in the U.S. federal jurisdiction and the California state jurisdiction. To date, we have not been audited by the Internal Revenue Service or any state income tax jurisdiction. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. As of March 31, 2011, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.

We generated net losses since inception through the year ended December 31, 2010, and accordingly did not record a provision for federal income taxes. Deferred tax assets of $28.8 million as of December 31, 2010 were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding our ability to continue to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our deferred tax assets. Additionally, the future utilization of our NOL carry-forwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.

Due to the financing that occurred in February of 2011, management believes a change in control has occurred according to Section 382 and 383 of the Internal Revenue Code. Therefore, utilization of the Company’s net operating loss would be limited beginning in 2011.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements issued that are applicable to us other that those included with our Annual Report on Form 10-K for the year ended December 31, 2010.

Research and Development Activities

Research and development costs are charged to expense when incurred. The major components of research and development costs include clinical manufacturing costs, pre-clinical and clinical trial expenses, consulting and other third-party costs, salaries and employee benefits, share-based compensation expense, supplies and materials, and facilities costs.

Our cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial sites and clinical research organizations. In the normal course of business, we contract with third parties to perform various clinical trial activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, and the completion of portions of the clinical trial or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical trials are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract. We monitor service provider activities to the extent possible; however, if we underestimate activity levels associated with various studies at a given point in time, we could record significant research and development expenses in future periods.

During the three months ended March 31, 2011 and 2010, we incurred research and development expenses of $3.9 million and $3.8 million, respectively. We expect that research and development expenses will continue to increase as we continue our development of Menerba, Bezielle and other drug candidates.

Most of our product development programs are at an early stage. Accordingly, the successful development of our product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. Product candidates that may appear promising at early stages of development may not reach the market for a number of reasons.

Product candidates may be found ineffective or cause harmful side effects during clinical trials, may take longer to progress through clinical trials than anticipated, may fail to receive necessary regulatory approvals and may prove impracticable to manufacture in commercial quantities at a reasonable cost and with acceptable quality. The lengthy process of seeking FDA approvals requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining regulatory approvals could adversely affect our product development efforts. Because of these risks and uncertainties, we cannot predict when or whether we will successfully complete the development of our product candidates or the ultimate product development cost or whether we will obtain any approval required by the FDA on a timely basis, if at all.

Results of Operations

Revenues

	Three Months Ended March 31,				Change in
	2011		2010		%
	(in thousands)
Revenue	$	65	$	-		*

During the three months ended March 31, 2011, we recognized revenue of approximately $65,000 under a one-year grant from the National Institutes of Health (“NIH”) awarded in 2010. The $65,000 recognized during the three months ended March 31, 2011 represents the final payment under the grant. There was no revenue recognized during the three months ended March 31, 2010.

Research and Development Expenses

	Three Months Ended March 31,				Change in
	2011		2010		%
	(in thousands)
Research and development expenses	$	3,883	$	3,806		2	%

Research and development (R&D) expenses reflect costs for the development of drugs and include salaries, contractor and consultant fees and other support costs, including employee stock-based compensation expense. R&D expenditures during the three months ended March 31, 2011 and 2010 were consistent. However, we expect R&D expenditures to increase during 2011 as we initiate our Phase 1 and Phase 3 clinical trials for Menerba.

General and Administrative Expenses

	Three Months Ended March 31,				Change in
	2011		2010		%
	(in thousands)
General and administrative expense	$	994	$	852		17	%

General and administrative (G&A) expense includes personnel costs for finance, administration, information systems, marketing, professional fees as well as facilities expenses. We do not currently have any dedicated sales support or marketing personnel. Marketing and communications expenses include public relations related to our drug development and clinical trials, participation in conventions and tradeshows, and website related expenses. The $0.1 million increase in G&A expenses in the three months ended March 31, 2011 as compared to the same period in 2010 is primarily related to consulting fees incurred in connection with our investor relations activities supporting our efforts to obtain funding for our development of Menerba.

Other Income (Expense)

	Three Months Ended March 31,						Change in
	2011			2010			%
	(in thousands)
Other income (expense):
Change in fair value of warrant liability		3,122			-			*
Interest income		9			8			13	%
Interest expense		(29	)		(14	)		107	%
Other expense, net		-			3			-100	%
Total other income (expense)	$	3,102		$	(3	)		-103500	%

The change in fair value of warrant liability during the three months ended March 31, 2011 is due to the remeasurement of our warrant liability at March 31, 2011. We did not have any warrant liabilities during the three months ended March 31, 2010. Interest expense includes interest expense from lease agreements for laboratory equipment and two notes payable to finance $0.2 million of leasehold improvements made in 2009. The increase in interest expense for the three months ended March 31, 2011 as compared with the three months ended March 31, 2010 is due to additional capital lease obligations for laboratory equipment entered into in the fourth quarter of 2010.

Income Taxes

We anticipate losses for the current fiscal year and no income tax provision for the current quarter has been provided. In addition, we have substantial net operating loss carry forwards available to offset future taxable income, if any, for federal and state income tax purposes. Our ability to utilize our net operating losses may be limited due to changes in our ownership as defined by Section 382 of the Internal Revenue Code.

Liquidity and Capital Resources

Since our inception, we have incurred losses, and we have relied primarily on leasing, public and private financing to fund our operations.

As of March 31, 2011 we had cash, cash equivalents and short term investments of $23.1 million compared to $2.6 million at December 31, 2010. This increase in cash, cash equivalents and short term investments for the three months ended March 31, 2011 is due to proceeds of $27.3 million from our public offering of February 2011 partially offset by net cash used in operating activities of $4.6 million and $2.2 million in expenditures for capital assets, patent costs and payments on our capital lease agreements and notes payable.

Net cash used in investing activities was $8.2 million in the three months ended March 31, 2011 compared to net cash provided by investing activities of $3.7 million during the same period in 2010. The difference in investing activities is due to the purchase of securities from the funds received in our February 2011 public offering whereas during the three months ended March 31, 2010 we transferred funds from our investments to fund operations. Expenditures for capital assets were $1.6 million during the three months ended March 31, 2011 compared with $0.8 million for the same period of 2010. Spending on capital assets in 2011 included laboratory equipment needed to support our Menerba clinical manufacturing operations at our Hayward, California facility that we leased in 2011. Approximately $4.4 million in accrued construction in progress is expected to be paid in cash during the second quarter of 2011. Legal and other costs associated with pending patent application increased by $57,000 for the three months ended March 31, 2011 compared with the same period of 2010 due to the increase in new patent applications filed with the US Patent office.

Net cash provided by financing activities during the three months ended March 31, 2011 primarily consisted of approximately $27.3 million in proceeds from our 2011 public offering.

Financing Transactions

On February 2, 2011, we closed an underwritten public offering and issued 30,031,200 shares of our common stock and 15,015,600 warrants at a price of $1.00 per unit, with each unit including one share of common stock and a warrant to purchase one half of one share of our common stock. The warrants are exercisable any time after the closing date and will expire five years from the date of issuance. The warrants contain a provision that provides the warrant holders with an option to require us to purchase their warrants for cash in an amount equal to their Black-Scholes Model value, in the event of a change in control of the Company. The offering produced approximately $27.3 million, net of financing costs.

We will need to obtain substantial amounts of cash to achieve our objectives of internally developing drugs, which take many years and potentially significantly more amounts of cash to develop. If we decide to market and commercialize any other drug candidate independently or with a partner, we may need to invest heavily in associated manufacturing, marketing and commercialization costs. Such costs will be substantial and some will need to be incurred prior to receiving marketing approval. We do not currently have adequate internal liquidity to meet these objectives in the long term. To do so, we will need to continue our partnering activities and look to other external sources of liquidity, including the public and private financial markets and strategic partners.

The length of time that our current cash and cash equivalents, short-term investments and any available borrowings will sustain our operations will be based on, among other things, our prioritization decisions regarding funding for our programs, our progress in our clinical and earlier-stage programs, the time and costs related to current and future clinical trials and regulatory decisions, our research, development, manufacturing and commercialization costs (including personnel costs), the progress in our collaborations, costs associated with intellectual property, our capital expenditures, and costs associated with securing any future licensing opportunities. Based on the proceeds of our recent public offering and our ability to prioritize spending, we believe we have sufficient cash to meet our operating needs for at least the next 12 months.

As of March 31, 2011, we had an accumulated deficit of $75.3 million, working capital of $7.9 million, and total shareholders’ equity of $22.1 million.

Notes Payable

In connection with the move to our new headquarters, we financed leasehold improvements under two notes payable with the lessor of the building. The first note of $100,000 bears interest at 9.5% and is payable in monthly payments of interest and principal amounting to approximately $1,000 beginning May 1, 2009 and continuing over the remaining lease term with a due date of December 31, 2018. The second note of $104,000 bears interest at 9.5% and is payable in 24 monthly payments of interest and principal amounting to approximately $5,000 beginning August 1, 2009 and continuing to July 1, 2011. The future minimum payments as of March 31, 2011 are as follows (in thousands):

	Notes Payable
2011(1)	$	31
2012		16
2013		16
2014		16
2015		16
Thereafter		48
Total minimum payments	$	143
Less: Amount representing interest		(37	)
Present value of minimum payments	$	106
Less: Current portion		(27	)
Non-current portion of notes payable	$	79

(1) For the nine months ending December 31, 2011

Commitments and Contingencies

Our contractual obligations and future minimum lease payments that are non-cancelable at March 31, 2011 are disclosed in the following table (in thousands).

	Total		2011		2012		2013		2014		2015		2016 and beyond
Contractual obligations	$	4,403	$	4,403	$	-	$	-	$	-	$	-	$	-
Operating lease obligations		26,869		1,639		2,390		2,669		3,103		3,294		13,774
Notes payable		143		31		16		16		16		16		48
Capital lease obligations		1,653		793		860		-		-		-		-
Total contractual commitments	$	33,068	$	6,866	$	3,266	$	2,685	$	3,119	$	3,310	$	13,822

Off-Balance Sheet Financings and Liabilities

Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity.

Subsequent Events

Increase in Shares Available Under Option Plan

In March of 2011, the Board of Directors approved company-wide grants to employees and non-employee directors of approximately 6.6 million options to purchase common shares. The options will vest 20% upon issuance and the remaining 80% will vest over four years. All options were granted subject to shareholder approval of a commensurate increase in the number of shares available for the grant of options under our existing share option plan. On May 10, 2011, our shareholders approved the increase resulting in a total of 12,000,000 shares available under the plan.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices intended to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

As of March 31, 2011, we had cash, cash equivalents and short-term investments of $23.1 million, consisting of cash, cash equivalents and highly liquid short-term investments. Our short-term investments will likely decline by an immaterial amount if market interest rates increase and, therefore, we believe our exposure to interest rate changes is immaterial. Declines of interest rates over time will, however, reduce our interest income from short-term investments.

The fair market value of our warrant liability is calculated using the Black-Scholes pricing model which requires inputs such as expected life, expected volatility and risk-free interest rate in addition to the fair value of the Company’s stock as of the measurement date. Fluctuations in the Company’s stock price may result in significant fluctuations in the fair value of the warrant liability.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures: We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2011 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Inherent Limitations on Effectiveness of Controls: We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our CEO and our CFO have concluded that these controls and procedures are effective at the “reasonable assurance” level.

Changes in internal controls: There were no significant changes in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1a. RISK FACTORS

There have been no material changes to the risk factors disclosed in our 2010 Annual Report on Form 10-K as filed on March 16, 2011.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. Removed and reserved.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit
Number

3.1		Certificate of Incorporation of the registrant dated as of June 27, 2005. (1)

3.2		Certificate of Amendment of the Certificate of Incorporation of the registrant dated May 9, 2007. (2)

3.3		Certificate of Amendment of the Certificate of Incorporation of the registrant dated July 7, 2010. (3)

3.4		Certificate of Amendment of the Certificate of Incorporation of the registrant dated August 27, 2010. (4)

3.5		Amended and Restated By-Laws of the registrant. (5)

10.1*		Lease Agreement with BMR – Bridgeview Technology Park LLC

31.1*		Certification of Chief Executive Officer, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer and Chief Financial Officer, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith

(1)

Incorporated by reference to the registrant’s Registration Statement on Form SB-2, as amended, initially filed with the SEC on July 5, 2005.

(2)

Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on May 10, 2007.

(3)

Incorporated by reference to the registrant’s Registration Statement on Form S-1, filed with the SEC on July 16, 2010.

(4)

Incorporated by reference to the registrant’s Amendment No. 1 to its Registration Statement on Form S-1, filed with the SEC on January 21, 2011.

(5)

Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on January 7, 2008.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 11th day of May 2011.

	BIONOVO, INC.

	By:	/s/ Isaac Cohen
		Isaac Cohen
		Chairman and Chief Executive Officer

	By:	/s/ Thomas Chesterman
		Thomas Chesterman
		Senior Vice President and Chief Financial Officer

Attached files

BIONOVO INC Reports

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