Bionovo 10-Q 2010 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

or

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

For the transition period from            to            

Commission File No. 1-33498

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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, 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	x  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at April 30, 2010
Common shares US$.0001 par value	107,618,690

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 and from February 1, 2002 (date of inception) to March 31, 2010	2
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 and from February 1, 2002 (date of inception) to March 31, 2010	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1a.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Removed and Reserved	25
Item 5.	Other Information	25
Item 6.	Exhibits	26
Signatures		27

i

PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Bionovo, Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

	March 31, 2010			December 31, 2009
	(unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	3,366		$	2,799
Short-term investments		8,393			13,135
Receivables		114			251
Prepaid expenses		191			214
Other current assets		126			161
Total current assets		12,190			16,560
Property and equipment, net		6,599			6,197
Patent pending, net		978			822
Other assets		531			570
Total assets	$	20,298		$	24,149
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	724		$	311
Accrued compensation and benefits		340			367
Current portion of lease obligations		403			476
Current portion of notes payable		60			59
Other current liabilities		1,046			823
Total current liabilities		2,573			2,036
Non-current portion of lease obligations		15			96
Non-current portion of notes payable		106			121
Total liabilities		2,694			2,253
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, 190,000,000 shares authorized, 107,618,690 and 107,518,690 shares outstanding at March 31, 2010 and December 31, 2009, respectively		11			11
Additional paid-in capital		78,069			77,704
Accumulated other comprehensive loss		(1	)		(5	)
Accumulated deficit		(60,475	)		(55,814	)
Total shareholders’ equity		17,604			21,896
Total liabilities and shareholders’ equity	$	20,298		$	24,149

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 amounts)

	Three months ended March 31,						Accumulated from February  1, 2002 (Date of inception) to March 31,
	2010			2009			2010
Revenues	$	—		$	—		$	1,180
Operating expenses:
Research and development		3,806			3,601			43,512
General and administrative		852			1,009			18,454
Merger cost					—			1,964
Total operating expenses		4,658			4,610			63,930
Loss from operations		(4,658	)		(4,610	)		(62,750	)
Change in fair value of warrant liability		—			—			831
Interest income		8			54			2,082
Interest expense		(14	)		(33	)		(474	)
Other income (expense), net		3			(79	)		(164	)
Net loss	$	(4,661	)	$	(4,668	)	$	(60,475	)
Basic and diluted net loss per common share	$	(0.04	)	$	(0.06	)	$	(1.23	)
Shares used in computing basic and diluted net loss per share		107,541			76,363			49,163

See accompanying notes to these condensed consolidated financial statements

2

Bionovo, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

	Three Months Ended March 31,						Accumulated from February 1, 2002 (Date of inception) to March 31,
	2010			2009			2010
Cash flows from operating activities:
Net loss	$	(4,661	)	$	(4,668	)	$	(60,475	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		401			382			4,082
Stock-based compensation expense		365			185			4,833
Amortization and accretion of investments		65			19			206
Non-cash compensation for warrants issued		—			—			1,964
Amortization of note discount		—			—			139
Amortization of deferred stock compensation		—			—			16
Change in fair value of warrant liability		—			—			(831	)
Loss on disposal of property and equipment		—			80			113
Noncash adjustment to available-for-sale securities		1			(1	)		—
Changes in assets and liabilities:
Receivables		137			59			(114	)
Prepaid expenses and other current assets		58			367			(317	)
Deposits and other non-current assets		39			(144	)		(499	)
Accounts payable		413			(50	)		724
Accrued compensation and benefits		(27	)		(96	)		340
Other accrued liabilities		223			(12	)		1,046
Net cash used in operating activities		(2,986	)		(3,879	)		(48,773	)
Cash flows from investing activities:
Capital expenditures		(785	)		(269	)		(7,381	)
Acquisition of intangible assets		(173	)		(105	)		(1,139	)
Purchases of available-for-sale securities		(920	)		—			(41,692	)
Proceeds from sales and maturities of investments		5,600			6,500			33,094
Net cash provided by (used in) investing activities		3,722			6,126			(17,118	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net		—			—			67,085
Payments under capital lease obligation		(154	)		(179	)		(2,652	)
Payments under notes payable		(15	)		—			(39	)
Proceeds from exercise of warrants and options		—			—			5,000
Payments of convertible notes payable		—			—			(50	)
Payments for financing costs of convertible notes		—			—			(87	)
Net cash (used in) provided by financing activities		(169	)		(179	)		69,257
Net increase in cash and cash equivalents		567			2,068			3,366
Cash and cash equivalents at the beginning of the period		2,799			3,270			—
Cash and cash equivalents at the end of the period	$	3,366		$	5,338		$	3,366

See accompanying notes to these condensed consolidated financial statements

3

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

1. BUSINESS AND ORGANIZATION

Formation of the Company

The Company’s history began in February 2002 as a private company operating in California. Now Bionovo, Inc. is incorporated in the state of Delaware and was made public through a reverse merger transaction between Bionovo Biopharmaceuticals, Inc.¹ and Lighten Up Enterprises International, Inc.² on April 6, 2005. Immediately following the reverse merger, the Company operated as Lighten Up Enterprises International, Inc. until June 29, 2005 when the Company assumed the name, Bionovo, Inc.

Reverse Merger

On April 6, 2005, Lighten Up Enterprises International, Inc. acquired all the outstanding shares of Bionovo Biopharmaceuticals, Inc. in exchange for 42,112,448 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.

Liquidity

The Company has sustained recurring losses and negative cash flows from operations. At March 31, 2010, the Company had an accumulated deficit of $60.5 million, working capital of $9.6 million and shareholders’ equity of $17.6 million. Over the past years, the Company’s growth has been funded through a combination of private equity, debt, lease financing and public offering. As of March 31, 2010, the Company had $3.4 million in cash and cash equivalents and $8.4 million in short-term securities, for a total of $11.8 million.

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 substantial additional capital to fully pursue its business plan before the end of 2010. 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 2010, 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 our recent public offering, funding we expect to be available to us, and our ability to prioritize spending, we believe we have sufficient cash to meet our 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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or for any other future period.

¹ Bionovo Biopharmaceuticals, Inc. was originally formed as “Bionovo, Inc.” and began operations in the state of California in February 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 Pharmaceuticals, Inc.

² Lighten Up Enterprises International, Inc. was incorporated in Nevada in January of 1998.

4

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

The condensed consolidated balance sheet at December 31, 2009 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, 2009.

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, 2010, the consolidated results of the Company’s operations for the three months ended March 31, 2010 and 2009 and inception to date from February 1, 2002 to March 31, 2010, and the Company’s cash flows for the three months ended March 31, 2010 and 2009 and inception to date from February 1, 2002 to March 31, 2010.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

In fiscal year 2009, the Company discontinued operations of its wholly owned subsidiary. 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 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.

Use of Estimates and Reclassifications

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures. The Company bases its estimates on historical experience and on various other market specific and other relevant 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 may differ significantly from these estimates.

Certain reclassifications of prior period amounts have been made to our consolidated financial statements to conform to the current period presentation

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

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.

5

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

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.

The Company did not recognize any revenue during the first quarter of 2010 and 2009.

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 such costs are charged to expense as incurred.

Development Stage Company

The Company has 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 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, qualifies as a DSE.

Recent Accounting Pronouncements

The 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, 2009.

6

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following table shows supplemental cash flows for the three months ended March 31, 2010 and 2009 and inception to date from February 1, 2002 through March 31, 2010 (in thousands).

	Three Months Ended March 31,				Accumulated from February 1, 2002 (Date of inception) to March 31,
	2010		2009		2010
Supplemental disclosure of cash flow information:
Interest paid	$	15	$	25	$	459
Income taxes paid		—		1		13
Supplemental disclosure of non-cash investing and financing
Non-cash warrant expense for warrants issued	$	—	$	—	$	1,964
Adjustment in warrant liability		—		—		7,030
Conversion of notes payable to common stock		—		—		450
Assets acquired under capital lease		—		—		3,071
Assets acquired under notes payable		—		—		204
Issuance of common stock for services		—		—		165
Issuance of restricted stock for services		52		—		52
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.

7

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

The following is a summary of cash, cash equivalents, and available-for-sale securities at March 31, 2010 and December 31, 2009 (in thousands):

	March 31, 2010
	Cost Basis		Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
Money market funds	$	1,809	$	—		$	1,809
US govt. agency obligations		606		—			606
Corporate notes		951		—			951
Total cash and cash equivalents	$	3,366	$	—		$	3,366
Available-for-sale investments:
US govt. agency obligations	$	4,883	$	—		$	4,883
Corporate notes		3,511		(1	)		3,510
Total available-for-sale	$	8,394	$	(1	)	$	8,393
	December 31, 2009
	Cost Basis		Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	124	$	—		$	124
Money market funds		1,073		—			1,073
Corporate notes		1,602		—			1,602
Total cash and cash equivalents	$	2,799	$	—		$	2,799
Available-for-sale investments:
US govt. agency obligations	$	7,812	$	(5	)	$	7,807
Corporate notes		5,328		—			5,328
Total available-for-sale	$	13,140	$	(5	)	$	13,135

As of March 31, 2010 and December 31, 2009, unrealized loss on available-for-sale securities of approximately $1,000 and $5,000, respectively was included in accumulated other comprehensive income in the accompanying Condensed Consolidated Balance Sheets. There was no realized gain or loss on the sale of available-for-sale securities for the 3 months ended March 31, 2010 or March 31, 2009.

Fair Value Hierarchy

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.

8

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (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, 2010 and December 31, 2009 (in thousands):

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
	Total		(Level 1)		(Level 2)
March 31, 2010
Money market funds	$	1,809	$	1,809	$	—
US government agencies		5,489		—		5,489
US corporate debt		4,461		—		4,461
Total	$	11,759	$	1,809	$	9,950
	Total		(Level 1)		(Level 2)
December 31, 2009
Money market funds		1,073		1,073		—
US government agencies		7,807		—		7,807
US corporate debt		6,930				6,930
Total	$	15,810	$	1,073	$	14,737

5. 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 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

The following is a summary of property and equipment at cost less accumulated depreciation as of March 31, 2010 and December 31, 2009 (in thousands):

	March 31, 2010			December 31, 2009
Office and lab equipment	$	6,752		$	5,967
Leasehold improvements		3,359			3,359
Computer equipment and software		266			266
		10,377			9,592
Less: accumulated depreciation		(3,778	)		(3,395	)
Property and equipment, net	$	6,599		$	6,197

9

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

Leasehold improvements include $0.2 million in gross assets acquired under two notes payable with the lessor of the Company’s headquarters (see note 7, “Notes Payable” for further details). Office and lab equipment include gross assets acquired under capital leases of approximately $1.6 million as March 31, 2010 and December 31, 2009. Amortization of assets under capital leases is included in depreciation expense. For each of the three months ended March 31, 2010 and 2009, the Company recorded depreciation expense of approximately $0.4 million.

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, 2010, the Company had capitalized approximately $1.0 million in patent licensing costs. For the three months ended March 31, 2010 and 2009, the Company recorded amortization expense of approximately $18,000 and $13,000, respectively.

6. OTHER CURRENT LIABILITIES

Other current liabilities include the following as of March 31, 2010 and December 31, 2009 (in thousands):

	March 31, 2010		December 31, 2009
Accrued clinical trial expenses	$	6	$	12
Accrued consulting fees		60		29
Accrued legal fees		122		191
Accrued accounting fees		57		114
Accrued contract testing		281		26
Deferred rent		320		286
Other current liabilities		200		165
Total other current liabilities	$	1,046	$	823

7. NOTES PAYABLE

In January of 2009, the Company relocated to its new headquarters. Related to the relocation, the Company financed leasehold improvements under a 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, 2010 are as follows (in thousands):

	Principal		Interest
2010(1)		45		11
2011		40		9
2012		9		7
2013		9		6
2014		10		6
Thereafter		53		11
Total minimum payments	$	166	$	50

(1) For the nine months ending December 31, 2010

10

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

8. 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, 2010 and 2009. The following table shows the total outstanding securities considered antidilutive and therefore, excluded from the computation of diluted net loss per share (in thousands):

	Three Months Ended March  31,
	2010	2009
Options to purchase common stock	5,916	5,222
Options to purchase common stock - outside plan	103	103
Warrants to purchase common stock	43,245	10,467
Total	49,264	15,792

9. COMPREHENSIVE LOSS

Comprehensive loss includes net loss and other comprehensive income, 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 (deficit). Comprehensive loss and its components are as follows (in thousands):

	Three Months Ended March  31,
	2010			2009
Net loss	$	(4,661	)	$	(4,668	)
Change in unrealized gain (loss) on securities available-for-sale		4			(17	)
Comprehensive loss	$	(4,657	)	$	(4,685	)

10. SHARE-BASED COMPENSATION

Employee Stock Option Plan

In 2005, the board of directors adopted the Stock Incentive Plan, as amended, of Bionovo Biopharmaceuticals and authorized 3,496,788 shares of common stock for issuance under the Plan. In May 2006 and June 2008, shareholders approved increases of 3,000,000 additional shares for the option plan resulting in a total of 9,496,788 shares reserved for issuance under the plan.

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.

11

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (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, 2010 and 2009 (in thousands).

	Three Months Ended March 31,
	2010		2009
Research and development	$	151	$	120
General and administrative		214		65
Total share-based compensation expense	$	365	$	185

There was no capitalized share-based compensation cost as of March 31, 2010 and there were no recognized tax benefits during the three months ended March 31, 2010 and 2009.

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, 2010 and 2009:

	Three Months Ended March 31,
	2010		2009
Dividend yield	0	%	0	%
Expected volatility	149.7	%	122.4	%
Risk-free interest rate	1.48	%	1.40	%
Expected life	2.65 years		3.75 years

Share option activity for the three months ended March 31, 2010 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, 2009	5,110		$	1.67
Granted	820			0.59
Exercised	—			—
Forfeited, expired or canceled	(14	)		4.74
Options outstanding at March 31, 2010	5,916		$	1.52	3.81	$	136
Options exercisable at March 31, 2010	4,472		$	1.35	3.57	$	116
Options exercisable and options expected to vest at March 31, 2010	5,744		$	1.50	3.40	$	127

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Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

Unvested share activity for the three months ended March 31, 2010 was as follows:

	Unvested Number of Shares (in thousands)		Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2009	1,596		$	1.25
Granted	820			0.46
Vested	(958	)		0.53
Forfeited	(14	)		2.84
Unvested balance at March 31, 2010	1,444		$	1.27

As of March 31, 2010, the Company had approximately 3.1 million common shares reserved for future grant under its share option plan and there were no shares exercised during the first three months of 2010.

At March 31, 2010, there was $1.1 million of unrecognized share-based compensation expense related to unvested share options with a weighted average remaining recognition period of 1.6 years.

Restricted Stock

On March 11, 2010, the Company granted 100,000 shares of restricted stock to Lytham Partners, LLC as partial consideration for investor relations services provided to Bionovo, Inc. The shares were issued from the Company’s Stock Incentive Plan and are restricted for 1 year from the date of grant. The restricted stock was recorded based on the grant date fair value of $52,000 and the full amount is included in general and administrative stock compensation for the three months ended March 31, 2010.

11. STOCK WARRANTS

The Company has issued warrants to investors as part of its overall financing strategy. There were no warrants issued for the three months ended March 31, 2010. As of March 31, 2010, there were 43.2 million warrants to purchase Bionovo shares outstanding with a weighted average price of $1.23, a weighted average remaining life of 3.8 years and an aggregate exercise price of $53.4 million.

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 $0.10 to $0.89. The fair value of warrants granted is included in additional paid-in capital along with the proceeds from issuance of common stock.

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Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

The following table summarizes information about all callable warrants outstanding as of March 31, 2010:

Issue Date	Expiration Date	Number Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)
April 2005	April 2010	926	$	0.57	0.02
May 2005	May 2010	402		0.77	0.10
January 2007	January 2012	3,593		2.13	1.81
October 2007	October 2012	7,453		2.50	2.59
October 2009	October 2014	30,871		0.86	4.52
		43,245

12. 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 $1.6 million at March 31, 2010 and December 31, 2009. Amortization of assets under capital leases is included in depreciation expense and accumulated amortization at March 31, 2010 and December 31, 2009 was $0.8 million and $0.7 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 2019. 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 $46,000 per month. Operating lease expense totaled approximately $0.5 million for the three months ended March 31, 2010 and $0.5 million for the same period of 2009.

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

	Capital Leases			Operating Leases
2010 (1)	$	335		$	1,387
2011		94			1,868
2012		7			1,924
2013		—			1,982
2014		—			2,041
Thereafter		—			8,795
Total minimum lease payments	$	436		$	17,997
Less: Amount representing interest		(18	)
Present value of minimum lease payments	$	418
Less: Current portion		(403	)
Obligations under capital lease, net of current portion	$	15

(1) For the nine months ending December 31, 2010

13. 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, 2010. As of March 31, 2010, we had recorded a full valuation reserve for all of our recognized tax benefits.

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Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

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. We have not performed an ownership analysis but it is possible that there has been a change in ownership. In the event we have a change in ownership, as defined, the annual utilization of such carry forwards could be limited and our loss and credit carry forwards may expire unused. Our net operating losses and tax credit carry forwards are more fully described in our 2009 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.

14. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the time of filing of these financial statements with the SEC, and noted there were no events that are subject to recognition or disclosure.

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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, 2009 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. We do not undertake any obligation to update forward-looking statements.

Overview

Our company’s history began in February 2002 as a private company operating in California. Now 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. Immediately following the reverse merger, the Company operated as Lighten Up Enterprises International, Inc. until June 29, 2005 when the Company assumed the name, Bionovo, Inc.

On April 6, 2005, Lighten Up Enterprises International, Inc. acquired all the outstanding shares of Bionovo Biopharmaceuticals, Inc. in exchange for 42,112,448 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.

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 to provide a safe and effective alternative to existing FDA approved therapies that 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 activity, if confirmed in clinical testing, would differentiate Menerba from some existing therapies and other therapies in clinical development. We announced results in 2007 of our completed, multicenter, randomized, double-blinded, placebo-controlled Phase 1 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 lead to a statistically significant reduction in nighttime awakenings when compared to placebo, which represents superior efficacy to existing non-hormonal therapies. We are seeking FDA approval to conduct 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.

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We are also developing Bezielle (previously referred to as “BZL101”), 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 the unique metabolism of cancer cells. Bezielle inhibits glycolysis, a metabolic pathway on which cancer cells rely. Glycolysis inhibition leads to DNA damage and death of cancer cells without harm to normal cells. 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 IRBs at several prestigious breast cancer clinical sites in the U.S. Bionovo is awaiting 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 plan to evaluate Bezielle for the treatment of other forms of cancer, including pancreatic cancer and adjuvant use in breast cancer.

We have a diverse pipeline of additional preclinical drug candidates in both women’s health and cancer, including our second women’s health drug candidate, Seala (formerly referred to as “VG101”), for the treatment of postmenopausal 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 targets herbs and other 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 approval for botanical drugs. This guidance states that applicants may submit reduced documentation of nonclinical (preclinical) safety to support an IND application for initial clinical studies of botanicals. 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 in accordance with this FDA guidance. In addition, we have identified the active chemical components underpinning the mechanism of action for our novel drugs, and in some cases, we have developed synthetic methods of production.

We expect to continue to incur significant operating losses for the foreseeable future, and do not expect to generate profits until and unless our drug candidates have been approved and are being marketed with commercial partners. As of March 31, 2010, we had an accumulated deficit of $60.5 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 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 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.

The Company is primarily engaged in the development of pharmaceuticals, derived from botanical sources, to treat cancer and women’s health. The initial focus of the Company’s research and development efforts will be the generation of products for the treatment of breast and other cancers, and to alleviate the symptoms of menopause. The production and

17

marketing of the Company’s products and its ongoing research and development activities are and will continue to be subject to extensive regulation by numerous governmental authorities in the United States. Prior to marketing in the United States, any drug developed by the Company must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process implemented by the Food and Drug Administration (FDA) under the Food, Drug and Cosmetic Act. The Company has limited experience in conducting and managing the preclinical and clinical testing necessary to obtain regulatory approval. There can be no assurance that the Company will not encounter problems in clinical trials that will cause the Company or the FDA to delay or suspend clinical trials.

The Company’s success will depend in part on its ability to obtain patents and product license rights, maintain trade secrets, and operate without infringing on the proprietary rights of others, both in the United States and other countries. There can be no assurance that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantage resulting in the Company’s transition from Development Stage Enterprise reporting.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these 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.

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;

18

• 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.

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, 2010, 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, 2009, and accordingly did not record a provision for federal income taxes. Deferred tax assets of $21.8 million as of December 31, 2009 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. We have not yet determined whether such an ownership change has occurred. 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.

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, 2009.

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.

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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 on-going 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, 2010 and 2009, we incurred research and development expenses of $3.8 million and $3.6 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.

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Results of Operations

Revenues

We did not recognize any revenue for the periods ended March 31, 2010 and 2009.

Research and Development Expenses

	Three Months Ended March  31,				Change in %
	2010		2009
	(in thousands)
Research and development expenses	$	3,806	$	3,601	6	%

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. The increase of $0.2 million in 2010 from 2009 represents our continued allocation of resources to support the Menerba manufacturing process development.

General and Administrative Expenses

	Three Months Ended March  31,				Change in %
	2010		2009
	(in thousands)
General and administrative expense	$	852	$	1,009	-16	%

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 $0.2 million decrease in G&A expenses in the three months ended March 31, 2010 as compared to the same period in 2009 demonstrates our continued efforts to limit G&A spending while we focus our financial resources on the development of Menerba.

Interest Income, Interest Expense and Other Expense

	Three Months Ended March  31,						Change in %
	2010			2009
	(in thousands)
Interest income	$	8		$	54		-85	%
Interest expense		(14	)		(33	)	-58	%
Other income (expense), net		3			(79	)	-104	%
Total	$	(3	)	$	(58	)	-95	%

Interest income is derived from cash balances and short term investments. The decrease in interest income for the three months ended March 31, 2010 compared to the same period in 2009 reflects a lower interest rate earned on our cash and short term investments.

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 decrease in interest expense for the three months ended March 31, 2010 as compared with the three months ended March 31, 2009 is due to lower outstanding balances due on our leased laboratory equipment. The decrease in other expense is due primarily to approximately $80,000 in loss on fixed asset disposal associated with the move to our new offices in the first quarter of 2009.

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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, 2010 we had cash, equivalents and short term investments of $11.8 million compared to $15.9 million at December 31, 2009. This decrease in cash, cash equivalents and short term investments for the three months ended March 31, 2010 is due to net cash used in operating activities of $3.0 million for the three months ended March 31, 2010 and $1.1 million in expenditures for capital assets, patent costs and payments on our capital lease agreements.

Net cash provided by investing activities was $3.7 million in the first quarter of 2010 compared to net cash provided by investing activities of $6.1 million during the same period in 2009. Cash provided by net short-term investment activities was $4.7 million in the first quarter of 2010 compared to cash provided by net short-term investment activities of $6.5 million during the same period in 2009 due to the use of proceeds from short-term investments to fund operations in both periods. Expenditures for capital assets were $0.8 million during the three months ended March 31, 2010 compared with $0.3 million for the same period of 2009. Spending on capital assets in 2010 included laboratory equipment needed to support our Menerba manufacturing process development efforts. Legal and other costs associated with pending patent application increased by $68,000 for the three months ended March 31, 2010 due to the increase in new patent applications filed with the US Patent office.

Net cash used by financing activities for the first quarters of 2010 and 2009 was due to payments on our capital lease and notes payable obligations and was consistent over both periods.

As of March 31, 2010, we had an accumulated deficit of $60.5 million, working capital of $9.6 million and shareholders’ equity of $17.6 million. We expect that we will need to raise substantial additional capital to fully pursue our business plan before the end of 2010. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs. We are currently pursuing a variety of funding options, including government grants, partnering/co-investment, venture debt and equity offerings.

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, funding we expect to be available to us, and our ability to prioritize spending, we believe we have sufficient cash to meet our operating needs for at least the next 12 months.

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Commitments and Contingencies

Our contractual obligations and future minimum lease payments that are non-cancelable at March 31, 2010 are disclosed in the following table (in thousands).

	Total		2010		2011		2012		2013		2014		2015 and beyond
Operating lease obligations	$	17,997	$	1,387	$	1,868	$	1,924	$	1,982	$	2,041	$	8,795
Notes payable		216		56		49		16		15		16		64
Capital lease obligations		436		335		94		7		—		—		—
Total contractual commitments	$	18,649	$	1,778	$	2,011	$	1,947	$	1,997	$	2,057	$	8,859

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.

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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, 2010, we had cash, cash equivalents and short-term investments of $11.8 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.

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, 2010 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.

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ITEM 1a. RISK FACTORS

There have been no material changes to the risk factors disclosed in our 2009 Annual Report on Form 10-K as filed on March 16, 2010, except as set forth below.

If our securities are removed from NASDAQ listing, you may have more difficulty purchasing and selling our common stock.

Our securities are currently listed and traded on The NASDAQ Capital Market. To maintain our listing, we must meet NASDAQ’s continued listing standards, including minimum stockholders’ equity, number of stockholders, and bid price. As previously disclosed in our filings with the SEC, on September 15, 2009, we received a letter from The NASDAQ Stock Market stating that we were not in compliance with NASDAQ listing rules because we failed to maintain a minimum bid price of $1.00 per share. NASDAQ granted us a period of 180 calendar days, to regain compliance. On March 16, 2010, we received a letter granting us an additional 180 calendar day compliance period. If, at anytime before September 13, 2010, the bid price of the common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ has indicated that it will provide written notification that compliance has been regained.

We intend to use our best efforts to regain compliance with NASDAQ’s minimum bid requirement and expect that our shares will continue to be listed on The NASDAQ Capital Market during this process under the symbol “BNVI.”

There can be no assurance that we will comply with the continued listing standards in the future. If we are delisted from The NASDAQ Capital Market, we may not be able to secure listing on other exchanges or quotation systems. As a result, we believe that investors will have significantly less liquidity and more difficulty purchasing and selling shares of our common stock, which could have a material adverse effect on the market price of our common stock.

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.

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ITEM 6. EXHIBITS

Exhibit Number
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

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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 2010.

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

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