Bionovo 10Q 2008 Q1 Quarterly report

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, 2008
		or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from _______to_______

Commission File Number 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 375, Emeryville, California 94608 (510) 601-2000

(Address of Principal Executive Offices, Including Zip Code and Telephone Number, Including Area Code)

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

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 o	Accelerated Filer þ	Non- Accelerated Filer o	Smaller Reporting Company o
		(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No þ

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date. The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, was 76,343,101 as of April 30, 2008

		Page
	TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION			3
Item 1.	Financial Statements		3
	Condensed Balance Sheets at March 31, 2008 and December 31, 2007 (unaudited)		3
	Condensed Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)		4
	Condensed Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)		5
	Notes to Unaudited Condensed Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		18
Item 4.	Controls and Procedures		18

PART II: OTHER INFORMATION			19
Item 1.	Legal Proceedings		19
Item 1A.	Risk Factors		19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3.	Defaults Upon Senior Securities		25
Item 4.	Submission of Matters to a Vote of Securities Holders		25
Item 5.	Other Information		25
Item 6.	Exhibits		25
SIGNATURES			25
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Bionovo, Inc

(A Development Stage Company)

Condensed Balance Sheets


	March 31,		December 31,
	2008		2007
	(Unaudited)		(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	19,187,934	$	28,472,485
Short-term investments		10,198,744		4,823,938
Receivables		19,942		285,899
Prepaid expenses and other current assets		530,709		405,381

Total current assets	29,937,329	33,987,703
Property and equipment, net	4,040,105	3,900,248
Other assets and patent pending, net	733,445	277,220

Total assets		$	34,710,879		$	38,165,171
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	206,799		$	299,677
Accrued clinical and costs of other studies			152,444			298,559
Accrued compensation and benefits			553,242			462,485
Current portion of lease obligation			928,252			706,710
Other current liabilities			540,922			949,200
Total current liabilities			2,381,659			2,716,631
Non-current portion of lease obligation			1,018,976			526,346
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; 76,343,101 shares issued and outstanding as of March 31, 2008 and December 31, 2007, respectively			8,166			8,166
Additional paid-in capital			57,980,224			57,659,513
Accumulated other comprehensive income			20,415			4,480
Accumulated deficit			(26,698,561	)		(22,749,965	)
Total shareholders’ equity			31,310,244			34,922,194
Total liabilities and shareholders’ equity	��	$	34,710,879		$	38,165,171

See accompanying notes

Table of Contents

Bionovo, Inc

(A Development Stage Company)

Condensed Statements of Operations

(Unaudited)



							Accumulated from
							February 1,
							2002
							(Date of inception)
	Three months						to
	ended March 31,						March 31,
		2008			2007			2008
Revenues	$	—		$	3,750		$	659,490
Operating expenses:
Research and development		2,387,393			2,788,668			18,179,598
General and administrative		1,822,027			694,921			9,273,794
Merger cost		—			—			1,964,065
Total operating expenses		4,209,420			3,483,589			29,417,457
Loss from operations		(4,209,420	)		(3,479,839	)		(28,757,967	)
Change in fair value of warrant liability		—			—			831,288
Interest income		306,192			149,712			1,374,609
Interest expense		(26,537	)		(14,081	)		(263,554	)
Other income (expense)		(15,575	)		—			129,321
Loss before income tax		(3,945,340	)		(3,344,208	)		(26,686,303	)
Income tax provision		(3,256	)		(800	)		(12,258	)
Net loss	$	(3,948,596	)		(3,345,008	)	$	(26,698,561	)
Basic and diluted net loss per common share	$	(0.05	)	$	(0.05	)	$	(0.70	)
Shares used in computing basic and diluted net loss per common share		76,343,101			61,525,518			37,914,036

See accompanying notes

Table of Contents

Bionovo, Inc

(A Development Stage Company)

Condensed Statements of Cash Flows

(Unaudited)



							Accumulated
							from
							February 1,
							2002
							(Date of
	Three Months						inception) to
	ended March 31,						March 31,
	2008			2007			2008
Cash flows from operating activities:
Net loss	$	(3,948,596	)	$	(3,345,008	)	$	(26,698,561	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		191,573			117,405			1,217,921
Amortization and accretion of investments		5,671			—			435
Non-cash compensation for warrants issued		—			—			1,964,065
Stock based compensation expense		320,711			133,313			2,230,596
Amortization of note discount		—			—			139,084
Amortization of deferred stock compensation		—			—			16,472
Change in fair value of warrant liability		—			—			(831,288	)
Changes in operating assets and liabilities:
Receivables		265,957			—			(18,146	)
Prepaid and other current assets		(125,328	)		(19,167	)		(525,760	)
Other assets		(62,482	)		—			(62,482	)
Accounts payable and accrued expenses		(2,120	)		641,759			861,966
Accrued clinical trial costs		(146,115	)		—			152,443
Deferred revenue		—			(3,750	)		—
Other accrued liabilities		91,700	)		—			921,808
Net cash used in operating activities	$	(3,409,029	)	$	(2,475,448	)	$	(20,631,447	)
Cash flows from investing activities:
Capital expenditures		(283,136	)		(384,150	)		(3,116,474	)
Acquisition of intangible assets		(52,796	)		(2,172	)		(340,759	)
Advance to officers		—			—			(1,796	)
Purchases of available-for-sale investments		(7,059,855	)		(387,600	)		(18,610,893	)
Proceeds from sales and maturities of investments		1,695,313			485,000			8,434,388
Net cash used in investing activities	$	(5,700,474	)	$	(288,922	)	$	(13,635,534	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net		—			17,177,359			49,733,909
Payments under capital lease obligation		(175,048	)		(70,054	)		(1,003,891	)
Proceeds from exercise of warrants and options		—			—			4,862,298
Proceeds from convertible notes payable		—			—			(50,000	)
Payments for financing costs for convertible notes		—			—			(87,401	)
Net cash provided by (used in) financing activities	$	(175,048	)	$	17,107,305		$	53,454,915
Net increase (decrease) in cash and cash equivalents		(9,284,551	)		14,342,935			19,187,934
Cash and cash equivalents at beginning of period		28,472,485			2,571,439			—
Cash and cash equivalents at end of period	$	19,187,934		$	16,914,374		$	19,187,934

Supplemental disclosure of cash flow information:
Interest paid	$	26,537		$	26,597		$	253,090
Income taxes paid	$	750		$	800		$	8,952

Supplemental disclosure of non-cash investing and financing
Non-cash warrant expense for warrants issued	$	—		$	—		$	1,964,065
Adjustment in warranty liability		—			—			7,030,026
Conversion of notes payable to common stock		—			—			450,000
Assets acquired under capital lease		889,219			—			3,049,981
Issuance of common stock for services		—			—			165,000
Conversion of accrued interest payable		—			—			11,697
Issuance of common stock with reverse merger	$	—		$	—		$	4,000

See accompanying notes

Table of Contents

Bionovo, Inc

(A Development Stage Company)

Notes to Condensed Financial Statements


1.	Business

Bionovo, Inc. (“Bionovo” or the “Company”) is a clinical stage drug discovery and development company focusing on cancer and women’s health. Currently, the Company is conducting research and development activity which integrates scientific research with natural substances derived from botanical sources which have novel mechanisms of action. The Company is developing drugs to treat breast and other cancers, and for menopause. 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.

Bionovo, Inc. was incorporated in Nevada on January 29, 1998 under the name Lighten Up Enterprises International, Inc. Bionovo Biopharmaceuticals, Inc. (“Biopharma”), was incorporated and began operations in the State of California in February 2002. BioPharma completed a reverse merger transaction on April 6, 2005 with Lighten Up Enterprises International, Inc. On April 6, 2005, Bionovo, Inc., (formerly known as “Lighten Up Enterprises International, Inc.), acquired all the outstanding shares of BioPharma in a reverse triangular merger (the “Merger”). Effective with the merger, the directors and management of BioPharma thereupon became the directors and management of Bionovo, Inc. which has been considered the acquirer in this transaction, accounted for as a recapitalization. The business of BioPharma is now the sole business of the Company. BioPharma remains a wholly-owned subsidiary of Bionovo, Inc.

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, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or for any other future period.

The condensed consolidated balance sheet at December 31, 2007 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, 2007.


2.	Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include the accounts of Bionovo, Inc. and its wholly owned subsidiaries Bionovo Biopharmaceuticals Inc. Our operations are treated as one operating segment. All significant inter-company balances and transactions have been eliminated.

Use of Estimates

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 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. To date only revenue from technology licenses and grant proceeds have been received.

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 on government contracts is recognized on a qualified cost reimbursement basis.

Technology (Drug) license agreements generally consist of nonrefundable upfront license fees and royalty payments. In accordance with Staff Accounting Bulletin 101 and 104, nonrefundable upfront license fees are recognized over the ten year license term using the straight-line method of accounting when the technology is transferred or accessed, provided that the technology transferred or accessed is not dependent on the outcome of the Company’s continuing research and development efforts.

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. In accordance with SFAS No. 2, “Accounting for Research Development Costs”, all such costs are charged to expense as incurred.

Table of Contents

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Financial Statements - (Continued)

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 by SFAS No. 7 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.

Recent Accounting Pronouncements

Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option under this Statement.

Effective January 1, 2008, the Company adopted EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. The adoption did not have a material impact on the Company’s consolidated results or operations or financial condition.

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable as:

•

Level 1 - Quoted prices in active markets for identical assets or liabilities.

•

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on the Company’s consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective on a prospective basis for all business combinations for which the acquisition date is on after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. We are currently evaluating the effects, if any, that SFAS 141R may have on our financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for us beginning July 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. We are currently assessing the potential impact that adoption of SFAS No. 160 may have on our financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently assessing the potential impact that adoption of SFAS No. 161 may have on our financial statements.


3.	Fair Value

Measurement

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability based upon an exit price model.

Table of Contents

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Financial Statements - (Continued)

Valuation Hierarchy

In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash, cash equivalents and short-term investments) measured at fair value on a recurring basis as of March 31, 2008:


	Level 1		Level 2		Level 3		Total
Money Market funds	$	4,995,229		—			$	4,995,229
Commercial paper		—	$	6,694,155		—		6,694,155
U.S. government agencies		—		16,952,111		—		16,952,111
U.S. corporate debt		—		745,183		—		745,183
Total	$	4,995,229	$	24,391,449	$	—	$	29,386,678


4.	Investments

Cash, Cash Equivalents and Short-Term 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, certificates of deposit, and common stock. 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.

The following table summarizes the Company’s investments, which are all classified as available-for-sale:

	Three months ended March 31,
	2008		2007
Cash equivalents:
Cash and money market fund	$	4,995,229	$	16,914,374
Commercial paper		6,694,155		—
US government obligations		6,753,367		—
Corporate notes		745,183		—
	$	19,187,934	$	16,914,374
Short-term investments:
US government obligations	$	10,198,744		—

As of March 31, 2008 unrealized gain on available-for-sale securities of $20,415 was included in accumulated other comprehensive income in the accompanying unaudited Condensed Consolidated Balance Sheets.


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 (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

As of March 31, 2008, the Company had $4.4 million in lab equipment (of which $2.9 million is leased), $206,000 of computer equipment and software, $81,000 in office furniture and equipment, $298,000 in leasehold improvements and $243,000 in construction-in-process and accumulated depreciation of $1.2 million,.

As of March 31, 2007, the Company had $1.9 million in lab equipment (of which $949,000 is leased), $88,000 in computer equipment and software, $61,000 in office furniture and equipment, and $247,000 in leasehold improvements and accumulated depreciation of $403,000.

For the three months ended March 31, 2008, the Company had $186,000 in depreciation and amortization expense and $117,000 for the same period in 2007.

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, 2008, the Company had capitalized $279,000 in patent licensing costs. For the three months ended March 31, 2008 we recorded amortization expense of $6,000.

Table of Contents

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Financial Statements - (Continued)


6.	Basic and Diluted Loss per Share

In accordance with SFAS No. 128, “Earnings per Share,” the basic loss per share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic net loss per share excludes the dilutive effect of stock options or warrants and convertible notes. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per common share:

	Three months
	ended March 31,
	2008			2007
Numerator:
Net loss	$	(3,948,596	)	$	(3,345,008	)
Denominator:
Weighted average common shares outstanding		76,343,101			61,525,518
Net loss per common share:
Basic and diluted	$	(0.05	)		(0.05	)

The potential shares, which are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive, are as follows:

	Three months
	ended March 31,
	2008		2007
Options to purchase common stock		4,767,921		3,395,254
Options to purchase common stock - Outside plan		103,212		103,212
Warrants to purchase common stock		10,466,633		6,194,309
Potential equivalent shares excluded		15,337,766		9,692,775


7.	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:

	Three months
	ended March 31,
	2008			2007
Net loss	$	(3,948,596	)	$	(3,345,008	)
Other comprehensive income:
Change in unrealized gain on available-for-sale securities		15,935			—
Comprehensive loss	$	(3,932,661	)	$	(3,345,008	)


8.	Stock Compensation

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, of Bionovo Biopharmaceuticals which we refer to as the Plan, and 3,496,788 shares of common stock for issuance under the Plan. In May 2006, shareholders approved an increase of 3,000,000 additional shares for the option 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.

Valuation Assumptions

The compensation expense related to stock options recognized under FAS 123R was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these assumptions can vary over time. The weighted-average assumptions used were as follows:

	Three months
	ended March 31,
	2008			2007
Dividend yield		0.00	%		0.0	%
Annual risk free rate of return		2.8	%		6.0	%
Expected volatility		92.8	%		81.0	%
Forfeiture rate		6.4	%		0.0	%
Expected term (years)		5			5

Table of Contents

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Financial Statements - (Continued)

In estimating the expected term, we considered our historical stock option exercise experience including forfeitures, our post vesting termination pattern and the term of the options outstanding. The annual risk free rate of return was based on the U.S. Treasury constant maturity rates with similar terms to the expected term of the stock option awards. We based our determination of expected volatility on our historical stock price volatility over the expected term.

Employee Stock-Based Compensation

The table below presents information related to stock option activity under the Plan as follows:


							Weighted
	Shares			Number of			Average
	Available			Shares			Exercise
	For Grant			Outstanding			Price
Options outstanding at December 31, 2007		1,369,534			4,750,588			2.09
Options granted		(94,000	)		94,000		$	1.24
Options exercised		—			—			—
Options cancelled or forfeited		76,667			(76,667	)		2.65
Options expired		—			—			—
Options outstanding at March 31, 2008		1,352,201			4,767,921		$	2.07
Options exercisable at March 31, 2008		—			2,254,921			0.87

For the three month period ended March 31, 2008, there were no options exercises and the aggregate intrinsic value of in-the-money stock options outstanding was $1.2 million.

The following table summarizes information about stock options outstanding as of March 31, 2008:


	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range of Exercise Price	Outstanding		Life (In Years)		Price		Exercisable		Price
$0.29 - $1.09		1,902,254		5.23	$	0.62		1,902,254	$	0.62
$1.10 - $2.10		693,667		3.75		1.58		197,667		1.63
$2.20 - $3.20		1,410,000		4.27		2.86		155,000		2.87
$3.30 - $4.30		200,000		9.42		3.94		—		—
$4.30 - $5.08		330,000		4.42		4.40		—		—
$5.10- $5.78		232,000		4.01		5.75		—		—
		4,767,921		4.79	$	2.07		2,254,921	$	0.87

The estimated fair value of grants of stock options and warrants to non-employees of the Company is charged to expense, if applicable, in the financial statements. These options vest in the same manner as the employee options granted under the option plan as described above.

The following table summarizes stock compensation expense related to employee stock options and employee stock based compensation under FAS 123R for the three months ended March 31, 2008 and 2007 which was incurred as follows:

	Three months ended March 31,
	2008			2007
Research and development	$	72,363		$	96,888
General and administrative		248,348			36,425
Stock compensation expense	$	320,711		$	133,313
Effect of earnings per share – basic and diluted		(0.0	)		(0.0	)

Shares Reserved for Future Issuance

The Company has reserved shares of common stock for future issuance as follows:

	Three months ended March 31,
	2008		2007
Stock Option Plan		6,120,122		6,466,788
Stock Option - outside of plan		103,212		103,212
Common stock warrants		10,466,633		6,194,309
		16,689,967		12,764,309

Table of Contents

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Financial Statements - (Continued)


9.	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, 2008 and there were 10.5 million warrants to purchase Bionovo shares outstanding with a weighted average price of $2.58 and an aggregate price of $27,047,091.

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 rate of 4.0%, (iii) expected volatility of 90%, 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 are included in additional paid-in capital along with the proceeds from issuance of common stock.

The following table summarizes information about all callable warrants outstanding as of March 31, 2008:


	Warrants Outstanding						Warrants Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range of Exercise Price	Outstanding		Life (In Years)		Price		Exercisable		Price
$0.50 - $1.00		1,550,489		2.18	$	0.51		1,550,489	$	0.51
$1.50 - $2.00		604,185		4.05		1.50		604,185		1.50
$2.25 - $3.00		2,988,184		4.05		2.25		2,988,184		2.25
$3.25 - $4.00		5,323,775		4.84		3.50		5,323,775		3.50
		10,466,633		4.18	$	2.58		10,466,633	$	2.58


10.	Leases, Commitments and Contingencies

Leases

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 $2.9 million at March 31, 2008 and $949,000 at March 31, 2007. Accumulated amortization of leased equipment at March 31, 2008 was $560,000 and $182,000 for the same period in 2007. Amortization of assets under capital leases is included in depreciation expense.

In March 2008, we entered into a new equipment financing facility for $1.3 million with General Electric Capital Corporation (GE). As of March 31, 2008, we had financed equipment purchases from Agilent Technologies and Applied BioSystems for $519,664 and $350,606 respectively, leaving $430,000 available for future equipment financing. The terms of this agreement required a security deposit of 25% or $217,568 as collateral for the outstanding loan portion.

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 2010. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties. 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 $16,000 per month. Operating lease expense totaled $119,000 at March 2008 and $130,000 at March 31, 2007.

In February 2008, the Company signed a new lease for additional office space at Emeryville, California, with fixed monthly rents of $3,903.

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


	Capital			Operating
Period Ended December 31, 2007	Leases			Leases
2008	$	853,894		$	525,663
2009		725,884			666,280
2010		489,046			470,695
2011 and thereafter		81,871			—
Total minimum lease payments	$	2,150,695		$	1,662,638
Less: Amount representing interest		(203,467	)
Present value of minimum lease payments		1,947,228
Less: Current portion		(928,252	)
Obligations under capital lease, net of current portion	$	1,018,976

Letter of Credit

Merrill Lynch Bank USA has issued a Letter of Credit to the Company, in the approximate aggregate amount of $381,000, to secure our lease of laboratory equipment.

Table of Contents

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Financial Statements - (Continued)


11.	Income Tax

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, or FIN 48, on January 1, 2007. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.

We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, we did 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, 2008.

The Tax Reform Act of 1986 under Section 382, as amended, 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 “Section 382” 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 2007 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 unrecognized tax positions over the next 12 months.

Table of Contents


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 elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 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

We completed a reverse merger transaction on April 6, 2005 with Lighten Up Enterprises International, Inc., or Lighten Up, a Nevada corporation initially formed on January 29, 1998. Until the merger, Lighten Up engaged in the development, publishing, marketing and sale of a cook book of recipes, which we discontinued following the merger and succeeded to the business of Bionovo Biopharmaceuticals, Inc. The directors and management of Bionovo Biopharmaceuticals thereupon became the directors and management of Lighten Up. Bionovo Biopharmaceuticals was considered the acquirer in this transaction, frequently referred to as a “reverse merger” of a shell company, and accounted for as a recapitalization. Bionovo Biopharmaceuticals’ financial statements are the historical financial statements of the post-merger entity, Bionovo, Inc. Accordingly, no goodwill or other adjustment in basis of assets is recorded, the shares of the shell, the legal surviving entity, are treated as issued as of the date of the transaction, and the shares held by the controlling shareholders after the transaction, are treated as outstanding for the entirety of the reporting periods. Bionovo Biopharmaceuticals, Inc. was incorporated and began operations in the State of California in February 2002 and subsequently reincorporated into the State of Delaware in March 2004. Until June 28, 2005, the name of Bionovo Biopharmaceuticals was Bionovo, Inc. On June 29, 2005, we changed our corporate name from Lighten Up Enterprises International, Inc. to Bionovo, Inc. and changed our state of incorporation from Nevada to Delaware. Bionovo Biopharmaceuticals currently remains a wholly-owned subsidiary of 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, MF101, 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 MF101, an orally delivered product, to selectively modulate estrogen receptor beta (ERβ) and to provide a safe and effective alternative to existing FDA-approved therapies that pose a significant risk to the patient for developing breast cancer and other serious diseases. In preclinical studies, MF101 inhibited tumor growth as well as bone resorption known to cause osteoporosis, which is commonly developed during menopause. This activity, if confirmed in clinical testing, would differentiate MF101 from some existing therapies and other therapies in clinical development for hot flashes. In our completed, randomized, placebo-controlled Phase II clinical trial involving 217 patients for which we announced results in June 2007, the higher of two MF101 doses tested was well tolerated and resulted in a statistically significant reduction of hot flashes when compared to placebo at 12 weeks of treatment. We plan to seek approval of the Food and Drug Administration (FDA) to conduct further clinical testing and expect to commence this trial in the third quarter of 2008 at multiple clinical sites in the U.S. We believe that MF101’s novel mechanism of action could lead to a more favorable safety profile than currently approved hormone therapies (HT) and serotonin-norepinephrine reuptake inhibitors (SNRI) therapies that are sometimes used off-label.

We have also identified a potential orally active anti-cancer agent for advanced breast cancer, BZL101. Unlike most other anti-cancer drugs and drug candidates, which try to control cancer through genomic and proteomic signaling pathways, BZL101 is designed to take advantage of the unique metabolism of cancer cells. BZL101 inhibits glycolysis, a metabolic pathway on which cancer cells rely. Glycolysis inhibition leads to DNA damage and death of cancer cells without lasting harm to normal cells. We believe that BZL101 may have a preferential effect on hormone-independent cancers, a subset with few treatment options. We have completed a Phase I clinical trial in 21 patients. No significant adverse events were noted in this trial. We have initiated and are conducting a U.S.-based, Phase I/II clinical trial of BZL101, which will ultimately recruit and treat 100 patients with metastatic breast cancer. In addition, we intend to explore the use of BZL101 on other forms of cancer, including pancreatic cancer and adjuvant use in breast cancer.

We have submitted an investigational new drug, or IND, application and plan to initiate a Phase I clinical trial for our second SERM drug candidate, VG101, for the treatment of post-menopausal vulvar or ”vaginal dryness”.

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 derive botanical compounds and extracts for pharmaceutical development. In June 2004, the FDA released a document to provide drug developers with guidance on submitting IND applications, conducting clinical trials, and seeking approval for botanical drugs. This guidance states that applicants may submit reduced documentation of non-clinical (preclinical) safety and of chemistry, manufacturing and controls 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.

Table of Contents

We expect to continue to incur significant operating losses over at least the next several years, and do not expect to generate profits until and unless our drug candidates have been approved and are being marketed with commercial partners. 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. As of March 31, 2008, we had an accumulated deficit of $26.7 million.

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 by SFAS No. 7 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 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 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.

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 stock-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, stock-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) collectibility is reasonably assured.

Technology license agreements generally consist of nonrefundable upfront license fees and royalty payments. In accordance with Staff Accounting Bulletin 104, nonrefundable upfront license fees are recognized over the license term using the straight-line method of accounting when the technology is transferred or accessed, provided that the technology transferred or accessed is not dependent on the outcome of our continuing research and development efforts.

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.

Table of Contents

Stock-Based Compensation

We record expenses relating to stock options granted to employees based on the fair value at the time of grant. The fair value of stock options and warrants arecalculated 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. Stock-based compensation to outside consultants is recorded at fair market value in general and administrative expense.

Income Tax

Effective January 1, 2007, we adopted the provisions of Financial Accounting Standard Board, Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes, or SFAS 109. The interpretation applies to all tax positions accounted for in accordance with SFAS 109 and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. Subsequent recognition, derecognition and measurement is based on management’s best judgment given the facts, circumstances and information available at the reporting date.

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, 2008, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.

We have generated net losses since inception and accordingly did not record a provision for income taxes. The deferred tax assets 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 carryforwards 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.

Research and Development Activities

In accordance with FASB, Statement of Financial Accounting Standards, or FAS, No. 2, “Accounting for Research and Development Costs,” 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, stock-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 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, 2008, we incurred research and development expenses of $2.4 million. We further expect that research and development expenses will increase over the coming months as we continue development of our drugs.

Results of Operations

Three months ended March 31, 2008 and 2007.

Revenues


	Three months
	ended March 31,				Change in
	2008		2007		Percent
Revenues:
Licensing	$	—	$	3,750		(100	)%
NIH grant		—		—		—	%
Total revenues	$	—	$	3,750		(100	)%

Table of Contents

Revenues consist primarily of licensing fees and proceeds from a US government grant. We did not receive any revenue in the three months ended 2008 compared to $3,750 for the same period in 2007 received from our licensing and technology transfer agreement with United Biotechnology Corporation of Taiwan (UBC). In October of 2007, we terminated the agreement following notice of material breach of the Agreement by UBC and we recognized the remaining deferred revenue of $91,250 in December 2007. We recognize revenues from the NIH grant when earned and payable.

Research and Development Expenses


	Three months
	ended March 31,				Change in
	2008		2007		Percent
Research and development expenses	$	2,387,393	$	2,788,668		(14	)%

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 expenses were $2.4 million for the three months ended March 31, 2008, compared to $2.8 million for the same period in 2007. The decrease of $0.4 million in 2008 from 2007 is due primarily to the decrease in clinical trials expenses related to the development of our lead drug candidates.

For the three months ended March 31, 2008, we recognized $72,363 in employee stock-based compensation expenses charged to R&D expenses compared to $97,000 for the same period in 2007, due to a decrease in options granted to R&D personnel. All costs incurred for research and development are expensed as incurred.

General and Administrative Expenses


	Three months
	ended March 31,				Change in
	2008		2007		Percent
General and Administrative expenses	$	1,822,027	$	694,921		162	%

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 $1.1million increase in G&A expenses in the three months ended March 31, 2008 as compared to the same period in 2007 was primarily due to activities in support of our business including an increase in payroll expenses, increase in facility rental, legal expenses, and Delaware business license fees related to the annual report tax for 2007. For the three months ended March 31, 2008, we recognized $43,000 in marketing and communications expenses charged to G&A expenses, compared to $92,000 for the same period in 2007 reflecting a decrease in attendance of industry sponsored tradeshows.

For the three months ended March 31, 2008, we recognized $248,348 in employee stock-based compensation expenses charged to G&A expenses, compared to $36,000 for the same period in 2007, representing an increase in G&A personnel.

Interest Income, Interest Expense and Other Expense


	Three months
	ended March 31,						Change in
	2008			2007			Percent
Interest income, interest expense and other expense:
Interest income	$	306,192		$	149,712			105	%
Interest expense		(26,537	)		(14,081	)		88	%
Other income (expense), net		(15,575	)		—			(100	)%
Total interest income and expense	$	264,080		$	135,631			95	%

Interest income is derived from cash balances and short term investments. The increase in interest income for the three months ended March 31, 2008 compared to the same period in 2007 reflects a higher average cash balance as a result of our public offering completed in October 2007.

Interest expense includes interest expense from lease agreements for laboratory equipment. The $12,000 increase in interest expense for the three months ended March 31, 2008 compared to the same period in 2007 represents interest on additional capital leases agreements contracted to purchase laboratory equipment.

Other expense is due primarily to GE financing upfront fee of $6,500 and $6,948 to expense an over-accrual of NIH revenue drawdown.

Income Taxes

We anticipate losses for the current fiscal year and no federal income tax provision for the current quarter has been provided. We recorded $3,000 in California state tax provisions for the period ended March 31, 2008. In addition, we have substantial net operating loss carry forwards available to offset future taxable income 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, 2008 we had cash, equivalents and short term investments of $29.4 million, including $381,000 classified as security deposit related to an outstanding letter of credit for our capital lease of laboratory equipment, compared to $17.3 million at March 31, 2007. This increase in cash, cash equivalents and short term investments for the three months ended March 31, 2008 compared to the same period in 2007, is due primarily to our public offering completed in October 2007, which raised aggregate net cash proceeds of $24.0 million, compared to $14.5 million raised in our private investment in public equity (PIPE) completed in January 2007.

Table of Contents

Net cash used in investing activities was $5.7 million in 2008 compared to net cash used in investing activities of $289,000 in 2007. Cash used by net short-term investment activities increased by $5.5 million in 2008 compared to the same period in 2007 due to purchases and maturities of short-term investments exceeding similar instruments in 2007. In 2008 we entered into additional capital lease agreements to purchase laboratory equipment related to our R&D operations. The decrease in capital expenditures for the three months ended March 31, 2008 was due to a decreases in leased equipment. Legal and other costs associated with pending patent application increased by $50,000 for the three months ended March 31, 2008 due to the increase in new patent applications filed with the US Patent office.

Net cash used by financing activities was $175,000 for the three months ended March 31, 2008 compared to net cash provided for the same period in 2007 of $17.1 million. Cash flows in 2007 was driven primarily by proceeds of $14.5 million, net of expenses, raised from our private investment in public equity (PIPE) completed in January 2007 and a call notice on March 9, 2007 to warrant holders for $2.6 million in receipts, offset by lease payments of $70,000 related to our laboratory equipment financing lease.

As of March 31, 2008, we had an accumulated deficit of $26.7 million, working capital of $27.6 million and shareholders’ equity of $31.3 million. Management believes that cash and cash equivalents on hand at March 31, 2008, will be sufficient to enable us to meet our obligations through at least the next year. However, if we change our development plans, we may need additional funds sooner than we expect. In addition, we anticipate that our costs for the MF101 and BZL101 programs will increase over the next few years. While these costs are unknown at the current time, we will need to raise additional capital to continue the program in future periods through and beyond 2009. We intend to seek any required additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other available financing sources.

Commitments and Contingencies

Our contractual obligations and future minimum lease payments that are non-cancelable at December 31, 2007 are disclosed in the following table.


		Total		2008		2009		2010		2011
Unconditional purchase obligations	$	891,595	$	891,595	$		$		$
Operating lease obligations		1,662,638		525,663		666,280		470,695
Capital lease obligations		2,150,695		853,894		725,884		489,046		81,871
Total contractual commitments	$	4,704,928	$	2,271,152	$	1,392,164	$	959,741	$	81,871

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. We do not have any majority-owned subsidiaries.

Recent Accounting Pronouncements

Effective January 1, 2008, the Company adopted SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option under this Statement.

•

Level 1 - Quoted prices in active markets for identical assets or liabilities.

•

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on the Company’s consolidated results of operations and financial condition.

Table of Contents


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, 2008, we had cash, cash equivalents and short-term investments of $29.2 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, 2008 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.

Table of Contents

PART II: OTHER INFORMATION


Item 1.	Legal Proceedings

Not applicable.


Item 1A.	Risk Factors

Stockholders should carefully consider the following risk factors, together with the other information included and incorporated by reference in this Quarterly Report on Form 10-Q. The risks described below may not be the only ones facing our company. We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007, including our consolidated financial statements and related notes.

Risks Relating to Our Business and Industry

We have a history of net losses, which we expect to continue for at least several years and, as a result, we are unable to predict the extent of any future losses or when, if ever, we will become profitable or if we will be able to continue as a going concern.

We have incurred $26.7 million in cumulative net loss from our inception in 2002, and we expect losses to continue for the next several years. Our net loss for the quarter ended March 31, 2008 was $3.9 million. To date, we have only recognized revenues from a technology license and a National Institute of health (“NIH”) grant drawdown. On October 15, 2007, we terminated the UBC Licensing Agreement following notice of material breach of the Agreement by UBC. We do not anticipate generating significant revenues from sales of our products, if approved, for at least several years, if at all. All of our product candidates are in development and none has been approved for commercial sale. We expect to increase our operating expenses over the next several years as we expand clinical trials for our product candidates currently in clinical development, including MF101 and BZL101, advance our other anti-cancer and women’s health product candidates into clinical trials, expand our research and development activities, and seek regulatory approvals and eventually engage in commercialization activities in anticipation of potential FDA approval of our product candidates. Because of the numerous risks and uncertainties associated with developing our product candidates and their potential for commercialization, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to achieve and sustain profitability, the market value of our common stock will likely decline and we may not be able to continue as a going concern.

We have a limited operating history and are considered a development stage company.

We are considered a development stage company for accounting purposes because we have not generated any material revenues to date. Accordingly, we have limited relevant operating history upon which an evaluation of our performance and prospects can be made. We are subject to all of the business risks associated with a new enterprise, including, but not limited to, risks of unforeseen capital requirements, failure of market acceptance, failure to establish business relationships and competitive disadvantages as against larger and more established companies.

Our product development and commercialization involves a number of uncertainties, and we may never generate sufficient revenues from the sale of potential products to become profitable.

We have generated no significant revenues to date. To generate revenue and to achieve profitability, we must successfully develop, clinically test, market and sell our potential products. Even if we generate revenue and successfully achieve profitability, we cannot predict the level of that profitability or whether it will be sustainable. We expect that our operating results will fluctuate from period to period as a result of differences in when we incur expenses and receive revenues from sales of our potential products, collaborative arrangements and other sources. Some of these fluctuations may be significant.

All of our products in development will require extensive additional development, including preclinical testing and human studies, as well as regulatory approvals, before we can market them. We cannot predict if or when any of the products we are developing or those being co-developed with us will be approved for marketing. There are many reasons that we or our collaborative partners may fail in our efforts to develop our potential products, including the possibility that:


	•	preclinical testing or human studies may show that our potential products are ineffective or cause harmful side effects;
	•	the products may fail to receive necessary regulatory approvals from the FDA or foreign authorities in a timely manner, or at all;
	•	the products, if approved, may not be produced in commercial quantities or at reasonable costs;
	•	the potential products, once approved, may not achieve commercial acceptance;
	•	regulatory or governmental authorities may apply restrictions to our potential products, which could adversely affect their commercial success; or
	•	the proprietary rights of other parties may prevent us or our partners from marketing our potential products.

Table of Contents

We intend to build marketing and sales capabilities in the United States and eventually internationally. This is an expensive and time-consuming process and may increase our losses.

Developing the sales force to market and sell our potential products is a difficult, expensive and time-consuming process. In addition to developing a sales force within our company, we will likely rely on third-party distributors to distribute our potential products. The distributors would be responsible for providing many marketing support services, including customer service, order entry, shipping and billing and customer reimbursement assistance. Our anticipated reliance on these third parties means our results may suffer if any of them are unsuccessful or fail to perform as expected. We may not be able to build sales and marketing capabilities sufficient to successfully commercialize our potential products in the territories where they receive marketing approval.

Our drug development programs will require substantial additional future funding which could hurt our operational and financial condition.

Our drug development programs require substantial additional capital to successfully complete them, arising from costs to:


	•	conduct research, preclinical testing and human studies;
	•	establish pilot scale and commercial scale manufacturing processes and facilities; and
	•	establish and develop quality control, regulatory, marketing, sales and administrative capabilities to support these programs.

Our future operating and capital needs will depend on many factors, including:


	•	the pace of scientific progress in our research and development programs and the magnitude of these programs;
	•	the scope and results of preclinical testing and human studies;
	•	the time and costs involved in obtaining regulatory approvals;
	•	the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
	•	competing technological and market developments;
	•	our ability to establish additional collaborations;
	•	changes in our existing collaborations;
	•	the cost of manufacturing scale-up; and
	•	the effectiveness of our commercialization activities.

We base our outlook regarding the need for funds on many uncertain variables. Such uncertainties include regulatory approvals, the timing of events outside our direct control such as negotiations with potential strategic partners and other factors. Any of these uncertain events can significantly change our cash requirements as they determine such one-time events as the receipt of major milestones and other payments.

If additional funds are required to support our operations and we are unable to obtain them on favorable terms, we may be required to cease or reduce further development or commercialization of our potential products, to sell some or all of our technology or assets or to merge with another entity.

Our potential products face significant regulatory hurdles prior to marketing which could delay or prevent sales.

Before we obtain the approvals necessary to sell any of our potential products, we must show through preclinical studies and human testing that each potential product is safe and effective. We have a number of products moving toward or currently in clinical trials. Failure to show any potential product’s safety and effectiveness would delay or prevent regulatory approval of the product and could adversely affect our business. The clinical trials process is complex and uncertain. The results of preclinical studies and initial clinical trials may not necessarily predict the results from later large-scale clinical trials. In addition, clinical trials may not demonstrate a potential product’s safety and effectiveness to the satisfaction of the regulatory authorities. A number of companies have suffered significant setbacks in advanced clinical trials or in seeking regulatory approvals, despite promising results in earlier trials.

The rate at which we complete our clinical trials depends on many factors, including our ability to obtain adequate supplies of the potential products to be tested and patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in patient enrollment may result in increased costs and longer development times. In addition, our collaborative partners may have rights to control product development and clinical programs for products developed under the collaborations. As a result, these collaborators may conduct these programs more slowly or in a different manner than we had expected. Even if clinical trials are completed, we or our collaborative partners still may not apply for FDA approval in a timely manner or the FDA still may not grant approval.

In addition, the manufacturing and marketing of approved potential products is subject to extensive government regulation, including by the FDA, DEA and state and other territorial authorities. The FDA administers processes to assure that marketed products are safe, effective, consistently uniform, of high quality and marketed only for approved indications. Failure to comply with applicable regulatory requirements can result in sanctions up to the suspension of regulatory approval as well as civil and criminal sanctions.

Table of Contents

Failure to obtain regulatory approvals in foreign jurisdictions would prevent us from marketing our products internationally.

We intend to have our product candidates marketed outside the United States. In order to market products in the European Union, Asia and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. We may be unable to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The approval procedure varies among countries and can involve additional and costly clinical testing and data review. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval, including approval of delivery devices for our product candidates. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory agencies in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other foreign countries or by the FDA. The failure to obtain these approvals could harm our business and result in decreased revenues.

Our products, if and when any of them are approved, could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements, or if such products exhibit unacceptable problems.

Any product for which we obtain marketing approval, together with the manufacturing processes, and advertising and promotional activities for such product, will be subject to continued regulation by the FDA and other regulatory agencies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Any adverse effects observed after the approval and marketing of a product candidate could result in the withdrawal of any approved products from the marketplace. Absence of long-term safety data may also limit the approved uses of our products, if any, to short-term use. Later discovery of previously unknown problems with our products or their manufacture, or failure to comply with regulatory requirements, may result in:


	•	restrictions on such products or manufacturing processes;
	•	withdrawal of the products from the market;
	•	voluntary or mandatory recalls;
	•	fines;
	•	suspension of regulatory approvals;
	•	product seizures; or
	•	injunctions or the imposition of civil or criminal penalties.

If we are slow to adapt, or unable to adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements or policies, we may lose marketing approval for them when and if any of them are approved, resulting in decreased revenue from milestones, product sales or royalties.

If our competitors develop and market products that are more effective than our existing product candidates or any products that we may develop, or if they obtain marketing approval for their products before we do, our commercial opportunity will be reduced or eliminated.

The pharmaceutical and biotechnology industry is highly competitive. Pharmaceutical and biotechnology companies are under increasing pressure to develop new products, particularly in view of lengthy product development and regulatory timelines, expiration of patent protection and recent setbacks experienced by several products previously approved for marketing. We compete with many companies that are developing therapies for the treatment of cancer and the symptoms of menopause. Several companies are developing products with technologies that are similar to ours. We also face competition in the field of cancer treatment and therapies for the symptoms of menopause from academic institutions and governmental agencies. Many of our competitors may have greater financial and human resources or more experience in research and development than we have, or both, and they may have established sales, marketing and distribution capabilities. If we or our collaborators receive regulatory approvals for our product candidates, some of our products will compete with well-established, FDA-approved therapies that have generated substantial sales over a number of years. In addition, we will face competition based on many different factors, including:


	•	the safety and effectiveness of our products;
	•	the timing and scope of regulatory approvals for these products;
	•	the availability and cost of manufacturing, marketing and sales capabilities;
	•	the effectiveness of our marketing and sales capabilities;
	•	the price of our products;
	•	the availability and amount of third-party reimbursement; and
	•	the strength of our patent position.

We also anticipate that we will face increased competition in the future as new companies enter our target markets and scientific developments surrounding cancer therapies and drugs for menopause continue to accelerate. Competitors may develop more effective or more affordable products, or may achieve patent protection or commercialize products before us or our collaborators. In addition, the health care industry is characterized by rapid technological change. New product introductions, technological advancements, or changes in the standard of care for our target diseases could make some or all of our products obsolete.

While we are developing BZL101 to minimize many of the adverse side effects associated with the above breast cancer treatments, further clinical testing has yet to be completed, and certain of the above drug therapies may have advantages relative to BZL101,which may include greater efficacy and reduced toxicity.

Our lead product candidate for the treatment of menopausal symptoms, MF101, would be expected to compete with postmenopausal hormone replacement therapy which has been the primary treatment of menopausal symptoms such as hot flashes. Leading hormonal agents include Premarin and Prempro by Wyeth Pharmaceuticals, Cenestin, Estradiol (generic) and Medroxy-Progesterone Acetate by Barr Pharmaceuticals, and Ogen, Provera and Estring by Pfizer. In addition, MF101 may be expected to compete with newer generation anti-depressants used to treat hot flash frequency, such as venlafaxine by Wyeth, fluoxetine by Eli Lilly and paroxetine by Glaxo Smith Kline. The makers of these hormonal agents would compete directly with us relative to MF101.

While we are developing MF101 to minimize many of the risks associated with long-term use of HT indicated in recent studies and further clinical testing has yet to be completed, certain hormone therapies may have advantages relative to MF 101. These advantages may include: greater efficacy and reduced toxicity.

Table of Contents

We will face uncertainty in any commercialization of our product candidates relating to coverage, pricing and reimbursement due to health care reform and heightened scrutiny from third-party payers, which may make it difficult or impossible to sell our product candidates on commercially reasonable terms.

Sales of prescription drugs depend significantly on access to the formularies, or lists of approved prescription drugs, of third-party payers such as government and private insurance plans, as well as the availability of reimbursement to the consumer from these third party payers. These third party payers frequently require drug companies to provide predetermined discounts from list prices, and they are increasingly challenging the prices charged for medical products and services. Our potential products may not be considered cost-effective, may not be added to formularies and reimbursement to the consumer may not be available or sufficient to allow us to sell our potential products on a competitive basis.

In addition, the efforts of governments and third-party payers to contain or reduce the cost of health care will continue to affect the business and financial condition of drug companies such as us. A number of legislative and regulatory proposals to change the health care system have been discussed in recent years, including price caps and controls for pharmaceuticals. These proposals could reduce and/or cap the prices for our potential products or reduce government reimbursement rates for such products. In addition, an increasing emphasis on managed care in the United States has and will continue to increase pressure on drug pricing. We cannot predict whether legislative or regulatory proposals will be adopted or what effect those proposals or managed care efforts may have on our business. The announcement and/or adoption of such proposals or efforts could adversely affect our business.

We expect to rely heavily on collaborative relationships and termination of any of these programs could reduce the financial resources available to us, including research funding and milestone payments.

Our strategy for developing and commercializing many of our potential products, including products aimed at larger markets, includes entering into collaborations with corporate partners, licensors, licensees and others. These collaborations will provide us with funding and research and development resources for potential products. These agreements also will give our collaborative partners significant discretion when deciding whether or not to pursue any development program. Our collaborations may not be successful.

In addition, our collaborators may develop drugs, either alone or with others, that compete with the types of drugs they currently are developing with us. This would result in less support and increased competition for our programs. If any of our collaborative partners breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully, our product development under these agreements will be delayed or terminated.

We may have disputes in the future with our collaborators, including disputes concerning who owns the rights to any technology developed. These and other possible disagreements between us and our collaborators could delay our ability and the ability of our collaborators to achieve milestones or our receipt of other payments. In addition, any disagreements could delay, interrupt or terminate the collaborative research, development and commercialization of certain potential products, or could result in litigation or arbitration. The occurrence of any of these problems could be time-consuming and expensive and could adversely affect our business.

Failure to secure patents and other proprietary rights or challenges to those patents and rights may significantly hurt our business.

Our success will depend on our ability to obtain and maintain patents and proprietary rights for our potential products and to avoid infringing the proprietary rights of others, both in the United States and in foreign countries. Patents may not be issued from any of these applications currently on file, or, if issued, may not provide sufficient protection.

To date, we have filed fifteen patent applications with the United States Patent and Trademark Office as well as in the European Community, Japan and other emerging markets and two patent applications with the Taiwan Intellectual Property Office. Our patent position, like that of many pharmaceutical companies, is uncertain and involves complex legal and technical questions for which important legal principles are unresolved. We may not develop or obtain rights to products or processes that are patentable. Even if we do obtain patents, they may not adequately protect the technology we own or have licensed. In addition, others may challenge, seek to invalidate, infringe or circumvent any patents we own or license, and rights we receive under those patents may not provide competitive advantages to us.

Several drug companies and research and academic institutions have developed technologies, filed patent applications or received patents for technologies that may be related to our business. In addition, we may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our potential products. For example, US patent applications may be kept confidential while pending in the Patent and Trademark Office and patent applications filed in foreign countries are often first published six months or more after filing. Any conflicts resulting from the patent rights of others could limit our ability to obtain meaningful patent protection. If other companies obtain patents with conflicting claims, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not be able to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products.

We may also need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others’ rights. If any of our competitors have filed patent applications in the United States which claim technology we also have invented, the Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology.

If third parties successfully assert that we have infringed their patents and proprietary rights or challenge the validity of our patents and proprietary rights, we may become involved in intellectual property disputes and litigation that would be costly, time consuming, and delay or prevent the development of our product candidates.

The manufacture, use or sale of our potential products may infringe the patent rights of others. Any litigation to determine the scope and validity of such third party patent rights would be time consuming and expensive. If we are found to infringe on the patent or intellectual property rights of others, we may be required to pay damages, stop the infringing activity or obtain licenses covering the patents or other intellectual property in order to use, manufacture or sell our products. Any required license may not be available to us on acceptable terms or at all. If we succeed in obtaining these licenses, payments under these licenses would reduce any earnings from our products. In addition, some licenses may be non-exclusive and, accordingly, our competitors may have access to the same technology as that which is licensed to us. If we fail to obtain a required license or are unable to alter the design of our product candidates to make the licenses unnecessary, we may be unable to commercialize one or more of them, which could significantly affect our ability to achieve, sustain or grow our commercial business.

Table of Contents

If we are unable to protect our trade secrets, we may be unable to protect our interests in proprietary know-how that is not patentable or for which we have elected not to seek patent protection.

In an effort to protect our unpatented proprietary technology, processes and know-how, we require our employees, consultants, collaborators and advisors to execute confidentiality agreements. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information. These agreements may be breached, and we may not become aware of, or have adequate remedies in the event of, any such breach. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

There is a substantial risk of product liability claims in our business. If we are unable to obtain sufficient insurance, a product liability claim against us could adversely affect our business.

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face even greater risks upon any commercialization by us of our product candidates. We have product liability insurance covering our clinical trials at a level appropriate for the industry, which we currently believe is adequate to cover any product liability exposure we may have. Clinical trial and product liability insurance is volatile and may become increasingly expensive. As a result, we may be unable to obtain sufficient insurance or increase our existing coverage at a reasonable cost to protect us against losses that could have a material adverse effect on our business. An individual may bring a product liability claim against us if one of our products or product candidates causes, or is claimed to have caused, an injury or is found to be unsuitable for consumer use. Any product liability claim brought against us, with or without merit, could result in:


	•	liabilities that substantially exceed our product liability insurance, which we would then be required to pay from other sources, if available;
	•	an increase of our product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, or at all;
	•	withdrawal of clinical trial volunteers or patients;
	•	damage to our reputation and the reputation of our products, resulting in lower sales;
	•	regulatory investigations that could require costly recalls or product modifications;
	•	litigation costs; and
	•	the diversion of management’s attention from managing our business.

Our product candidates may have difficulties with market acceptance even after FDA approval.

Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial success of these products will depend on, among other things, their acceptance by physicians, patients, third-party payers and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product candidate that we may develop and commercialize will depend on many factors, including:


	•	our ability to provide acceptable evidence of safety and efficacy;
	•	the prevalence and severity of side effects or other reactions;
	•	the convenience and ease of use;
	•	availability, relative cost and relative efficacy of alternative and competing products and treatments;
	•	the effectiveness of our marketing and distribution strategy;
	•	the publicity concerning our products or competing products and treatments; and
	•	our ability to obtain third-party insurance coverage and adequate payment levels.

If our product candidates do not become widely accepted by physicians, patients, third-party payers and other members of the medical community, it is unlikely that we will ever become profitable.

Claims relating to any improper handling, storage or disposal of biological and hazardous materials by us could be time-consuming and costly.

Our research and development activities in our Denver, Colorado and Emeryville, California facilities involve the controlled storage, use and disposal of hazardous materials. We are subject to government regulations relating to the use, manufacture, storage, handling and disposal of hazardous materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by applicable laws and regulations, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result or we could be penalized with fines, and any liability could exceed the limits of or fall outside our insurance coverage. We may not be able to maintain insurance on acceptable terms, or at all. Further, we could be required to incur significant costs to comply with current or future environmental laws and regulations.

Because we have limited manufacturing experience, we depend on third-party manufacturers to manufacture product candidates for us. If we cannot rely on third-party manufacturers, we will be required to incur significant costs and devote significant efforts to establish our own manufacturing facilities and capabilities.

We do not have any manufacturing experience, nor do we have any manufacturing facilities. We currently rely upon third-party manufacturers to manufacture all clinical quantities of our product candidates. We depend on these third-party manufacturers to perform their obligations in a timely manner and in accordance with applicable governmental regulations. Our third-party manufacturers may encounter difficulties with meeting our requirements, including problems involving:


	•	inconsistent production yields;
	•	poor quality control and assurance or inadequate process controls; and
	•	lack of compliance with regulations set forth by the FDA or other foreign regulatory agencies.

Table of Contents

These contract manufacturers may not be able to manufacture our product candidates at a cost or in quantities necessary to make them commercially viable. We also have no control over whether third-party manufacturers breach their agreements with us or whether they may terminate or decline to renew agreements with us. To date, our third party manufacturers have met our manufacturing requirements, but we cannot assure you that they will continue to do so. Furthermore, changes in the manufacturing process or procedure, including a change in the location where the drug is manufactured or a change of a third-party manufacturer, may require prior FDA review and approval in accordance with the FDA’s current Good Manufacturing Practices, or cGMPs. There are comparable foreign requirements. This review may be costly and time-consuming and could delay or prevent the launch of a product. The FDA or similar foreign regulatory agencies at any time may also implement new standards, or change their interpretation and enforcement of existing standards for manufacture, packaging or testing of products. If we or our contract manufacturers are unable to comply, we or they may be subject to regulatory action, civil actions or penalties.

If we are unable to enter into agreements with additional manufacturers on commercially reasonable terms, or if there is poor manufacturing performance on the part of our third party manufacturers, we may not be able to complete development of, or market, our product candidates.

If we lose the services of our co-founders who serve as directors and officers of our company, our operations could be disrupted and our business could be harmed.

Our business plan relies significantly on the continued services of our co-founders, Isaac Cohen and Mary Tagliaferri. If we were to lose the services of one or both of them, our ability to continue to execute our business plan could be materially impaired. Neither Mr. Cohen nor Dr. Tagliaferri have indicated they intend to leave our company, and we are not aware of any facts or circumstances that suggest either of them might leave us.

Risks Related to Our Common Stock

Volatility of our stock price could adversely affect stockholders.

The market price of our common stock may fluctuate significantly in response to various factors, some of which are beyond our control. During the period from January 1, 2005 to March 31, 2008, the lowest and highest reported trading prices of our common stock on the NASDAQ Capital Market, or for periods before May 29, 2007, as reported on the OTC Bulletin Board, were $0.11 and $6.80. Factors such as the following could cause the market price of our common stock to fluctuate substantially:


	•	the results of research or development testing of our or our competitors’ products;
	•	technological innovations related to diseases we are studying;
	•	new commercial products introduced by our competitors;
	•	government regulation of our industry;
	•	receipt of regulatory approvals by our competitors;
	•	our failure to receive regulatory approvals for products under development;
	•	developments concerning proprietary rights; or
	•	litigation or public concern about the safety of our products.

The stock market in general has recently experienced extreme price and volume fluctuations. In particular, market prices of securities of drug development companies have experienced fluctuations that often have been unrelated or disproportionate to the operating results of these companies. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility might be worse if the trading volume of our common stock is low.

Our principal stockholders have significant voting power and may take actions that may not be in the best interest of other stockholders.

Our officers, directors and principal stockholders control approximately 26% of our currently outstanding common stock. This concentration of ownership may not be in the best interests of all our stockholders. If these stockholders act together, they may be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

Provisions of our certificate of incorporation, bylaws and provisions of applicable Delaware law may discourage, delay or prevent a merger or other change in control that a stockholder may consider favorable.

Pursuant to our certificate of incorporation, our board of directors may issue additional shares of common or preferred stock. Any additional issuance of common stock could have the effect of impeding or discouraging the acquisition of control of us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price for their shares, and thereby protects the continuity of our management. Specifically, if in the due exercise of his/her or its fiduciary obligations, the board of directors were to determine that a takeover proposal was not in our best interest, shares could be issued by our board of directors without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by:


	•	diluting the voting or other rights of the proposed acquirer or insurgent stockholder group;
	•	putting a substantial voting block in institutional or other hands that might undertake to support the incumbent board of directors; or
	•	effecting an acquisition that might complicate or preclude the takeover.

Our certificate of incorporation also allows our board of directors to fix the number of directors in the by-laws. Cumulative voting in the election of directors is specifically denied in our certificate of incorporation. The effect of these provisions may be to delay or prevent a tender offer or takeover attempt that a stockholder may determine to be in his, her or its best interest, including attempts that might result in a premium over the market price for the shares held by the stockholders.

Table of Contents

We also are subject to Section 203 of the Delaware General Corporation Law. In general, these provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless the transaction in which the person became an interested stockholder is approved in a manner presented in Section 203 of the Delaware General Corporation Law. Generally, a “business combination” is defined to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. In general, an ”interested stockholder” is a person who, together with affiliates and associates, owns, or within three years, did own, 15% or more of a corporation’s voting stock. This statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

We do not anticipate paying cash dividends for the foreseeable future, and therefore investors should not buy our stock if they wish to receive cash dividends.

We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

We will need additional capital to conduct our operations and develop our products, and our ability to obtain the necessary funding is uncertain.

We will require substantial capital resources in order to conduct our operations and develop our therapeutic products, and we cannot assure you that our existing capital resources, proceeds from this offering and the exercise of outstanding warrants and interest income will be sufficient to fund our current and planned operations. The timing and degree of any future capital requirements will depend on many factors.

We do not have any committed sources of capital. Additional financing through strategic collaborations, public or private equity financings or other financing sources may not be available on acceptable terms, or at all. The receptivity of the public and private equity markets to proposed financings is substantially affected by the general economic, market and political climate and by other factors which are unpredictable and over which we have no control. Additional equity financings, if we obtain them, could result in significant dilution to shareholders. Further, in the event that additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop and commercialize ourselves. If sufficient capital is not available, we may be required to delay, reduce the scope of or eliminate one or more of our programs, any of which could have a material adverse effect on our business.

A significant number of our shares are eligible for sale and their sale or potential sale may depress the market price of our common stock.

Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock. As of March 31, 2008, we have two effective registration statements registering the resale of up to 71,179,293 shares of our outstanding common stock and shares of common stock issuable upon exercise of warrants, which represents a significant majority of our currently outstanding shares of common stock. As additional shares of our common stock become available for resale in the public market pursuant to that registration statement, and otherwise, the supply of our common stock will increase, which could decrease its price. Some or all of such shares of common stock may be offered from time to time in the open market and these sales may have a depressive effect on the market for our shares of common stock.


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

None.


Item 3.	Defaults Upon Senior Securities

Not applicable.


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

Not applicable.


Item 5.	Other Information

Not applicable.


Item 6.	Exhibits

Table of Contents


Exhibit No.			Description

	2	.1(1)	Agreement of Merger and Plan of Reorganization, dated as of April 6, 2005, among Lighten Up Enterprises International, Inc., LTUP Acquisition Corp. and Bionovo, Inc.
	2	.2(2)	Agreement and Plan of Merger, dated as of June 28, 2005, between Lighten Up Enterprises International, Inc. and Bionovo, Inc.
	3	.1(3)	Certificate of Incorporation of Bionovo, Inc.
	3	.2(4)	Certification of Amendment to Certification of Incorporation of Bionovo, Inc.
	3	.3(5)	Amended and Restated By-Laws of Bionovo, Inc.
	10	.1(6)	Employment agreement dated July 1, 2004, between Bionovo, Inc and Isaac Cohen
	10	.2(6)	Employment agreement dated July 1, 2004, between Bionovo, Inc and Mary Tagliaferri
	31	.1*	Certification of Principal Executive Officer
	31	.2*	Certification of Principal Executive Officer
	32	.1*	Certification of the Chief Executive Officer and the Chief Financial Officer

*		Filed herewith

(1)		Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on April 8, 2005

(2)		Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14C filed with the SEC on June 3, 2005.

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

(4)		Incorporated by reference to the Company’s Current Report on Form 8K filed with the SEC on May 9, 2007.

(5)		Incorporated by reference to the Company’s Current Report on Form 8K filed with the SEC on January 7, 2008.

(6)		Incorporated by reference to the Company’s Current Report on Form 8K filed with the SEC on April 9, 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 9th day of May 2008.

	BIONOVO, INC.

	By:	/s/ Isaac Cohen

		Isaac Cohen
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Thomas Chesterman

		Thomas Chesterman
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Table of Contents

EXHIBIT INDEX


Exhibit No.			Description

	2	.1(1)	Agreement of Merger and Plan of Reorganization, dated as of April 6, 2005, among Lighten Up Enterprises International, Inc., LTUP Acquisition Corp. and Bionovo, Inc.
	2	.2(2)	Agreement and Plan of Merger, dated as of June 28, 2005, between Lighten Up Enterprises International, Inc. and Bionovo, Inc.
	3	.1(3)	Certificate of Incorporation of Bionovo, Inc.
	3	.2(4)	Certification of Amendment to Certification of Incorporation of Bionovo, Inc.
	3	.3(5)	Amended and Restated By-Laws of Bionovo, Inc.
	10	.1(6)	Employment agreement dated July 1, 2004, between Bionovo, Inc and Isaac Cohen
	10	.2(6)	Employment agreement dated July 1, 2004, between Bionovo, Inc and Mary Tagliaferri
	31	.1*	Certification of Principal Executive Officer
	31	.2*	Certification of Principal Executive Officer
	32	.1*	Certification of the Chief Executive Officer and the Chief Financial Officer

*		Filed herewith

(1)		Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC on April 8, 2005

(2)		Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14C filed with the SEC on June 3, 2005.

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

(4)		Incorporated by reference to the Company’s Current Report on Form 8K filed with the SEC on May 9, 2007.

(5)		Incorporated by reference to the Company’s Current Report on Form 8K filed with the SEC on January 7, 2008.

(6)		Incorporated by reference to the Company’s Current Report on Form 8K filed with the SEC on April 9, 2008.

Table of Contents

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Bionovo Inactive 10-Q2008 Q1 Quarterly report

Content analysis