UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2011

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 No. 001-33498

 

BIONOVO, INC.

(Exact name of registrant as specified in its charter)

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

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $0.0001 par value		OTCQB

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of 1934). Yes o No þ

The aggregate market value of the voting stock held by non-affiliates of the Registrant based upon the last trade price of the common stock reported on The NASDAQ Capital Market** on June 30, 2011 was approximately $34.9 million.*

As of March 23, 2012, 80,326,361 shares of the registrant’s common stock, par value $0.0001, were outstanding.

TABLE OF CONTENTS

TABLE OF CONTENTS

PART I
Item 1. Business			1
Item 1A. Risk Factors			14
Item 1B. Unresolved Staff Comments			28
Item 2. Properties			28
Item 3. Legal Proceedings			28
Item 4. Mine Safety Disclosures			28
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			29
Item 6. Selected Financial Data			31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			42
Item 8. Financial Statements and Supplementary Data			43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			70
Item 9A. Controls and Procedures			70
Item 9B. Other Information			70
PART III
Item 10. Directors, Executive Officers, and Corporate Governance			71
Item 11. Executive Compensation			71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			80
Item 13. Certain Relationships and Related Transactions, and Director Independence			82
Item 14. Principal Accountant Fees and Services			83
PART IV
Item 15. Exhibits and Financial Statement Schedules			84
INDEX TO FINANCIAL STATEMENTS			84
INDEX TO EXHIBITS			84
SIGNATURES			88

TABLE OF CONTENTS

PART I

Forward Looking Statements

Statements made in this document other than statements of historical fact, including statements about us and the future of our respective clinical trials, research programs, product pipelines, 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. When used in this Annual Report the words “anticipate,” “objective,” “may,” “might,” “should,” “could,” “can,” “intend,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan” or the negative of these and similar expressions identify forward-looking statements. These statements reflect our current views with respect to uncertain future events and are based on imprecise estimates and assumptions and subject to risk and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. While we believe our plans, intentions and expectations reflected in those forward-looking statements are reasonable, these plans, intentions or expectations may not be achieved. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Annual Report for a variety of reasons, including those set forth in Item 1A “Risk Factors” and elsewhere in this Annual Report.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the risk factors and other cautionary statements set forth in this Annual Report. Other than as required by applicable securities laws, we are under no obligation, and we do not intend, to update any forward-looking statement, whether as result of new information, future events or otherwise.

The following should be read in conjunction with our consolidated financial statements located elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2011 and other documents filed by us from time to time with the Securities and Exchange Commission.

Item 1. Business

Overview

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

Our lead drug candidate, Menerba^TM (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 Menerba to selectively modulate estrogen receptor beta (ERβ) and we believe it could provide a safe and effective alternative to the existing Food and Drug Administration (“FDA”) approved therapies that pose a significant risk to women for developing breast cancer, stroke, cardiovascular disease, blood clots and other serious diseases. Hot flashes (or hot flushes) are a brief experience of body surface temperature irregularity resulting in fever like redness, sweating and prickly sensation that lasts from 4 to 10 minutes. The experience may be accompanied by other symptoms such as anxiety, irritability, palpitations, blushing, panic, a sensation of loss of control, along with significant physical and emotional distress. Recently it has been suggested that women experiencing hot flashes are at higher risk for coronary heart disease, Type 2 diabetes, osteoporosis and early dementia, while at lower risk for breast cancer. Although not life threatening, hot flashes should be viewed as a marker of health decline and risk factor for aging diseases in women. In preclinical studies, Menerba does not lead to tumor formation in either breast or uterine tissues and it does not increase the risk for clotting. This characteristic, if confirmed in clinical testing, would differentiate Menerba from some existing therapies and other hormone-based therapies in clinical development. We announced in 2007 the results of our completed, multicenter, randomized, double-blinded, placebo-controlled Phase 2 trial, involving 217 women, which showed the higher of two Menerba doses tested was well tolerated and resulted in a statistically significant reduction of hot flashes after 12 weeks of treatment. In addition, treatment with the higher of the two doses of Menerba led to a statistically significant

TABLE OF CONTENTS

reduction in night time awakenings when compared to placebo, which represents superior efficacy to existing non-hormonal therapies in development. In 2011 we announced the results of two tolerability studies with doses higher and similar to the higher dose in the Phase 2 study. In both studies significant reduction in hot flashes was observed as well as significant reduction in night time awakening. We believe that Menerba’s novel mechanism of action could lead to a more favorable safety profile than currently approved hormone therapies (HT). Following FDA guidance, we launched the first of two Phase 3 clinical trials required for New Drug Application (“NDA”) submission. The Phase 3, randomized, double-blinded, placebo-controlled clinical trial was planned for 1,200 postmenopausal women with moderate to severe hot flashes at approximately 50 clinical sites in the U.S. This clinical trial has been suspended until we obtain additional financing. We plan to complete testing involving the approximately 280 patients who have already enrolled in the trial, if we are able to obtain adequate financing. If we do not obtain additional financing in the near future, we do not expect that any of our clinical trials will continue.

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

We have also prepared an investigational new drug, or IND, application and plan to initiate a Phase 1 trial for our second women’s health drug candidate, Seala^TM (formerly VG101), for the treatment of post-menopausal vulvar and vaginal atrophy, or “vaginal dryness.” We have identified or begun preclinical work on other drug candidates for a variety of indications within women’s health and cancer. We have internally discovered and developed all of our drug candidates using our proprietary biological and chemical techniques.

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

TABLE OF CONTENTS

have identified active chemical components underpinning the mechanism of action for all of our drug candidates, and in some cases, we have developed synthetic methods of production.

We expect to continue to incur significant operating losses over the next few years, and do not expect to generate profits until and unless Menerba or one of our other drug candidates has been approved and is being marketed with commercial partners. As of December 31, 2011, we have an accumulated deficit of $87.2 million since our inception in February of 2002. Since February 2002, we have conducted five well-controlled human clinical trials evaluating Menerba for menopausal vasomotor symptoms. With over 300 patient exposures, all clinical studies to date have demonstrated excellent safety and tolerability. The Phase 2 study demonstrated Menerba’s statistically superior efficacy compared to placebo at clinically meaningful levels. All studies have consistently shown a clear dose response.

Bionovo launched the first of two Phase 3 clinical trials in October 2011. This randomized, placebo controlled trial was planned at 50 clinical sites across the US and total enrollment was planned to include 1,200 patients. This clinical trial has been suspended until we obtain additional financing. The primary aim of the study is to measure the safety and efficacy of Menerba compared to placebo in reducing the frequency of moderate to severe hot flashes among healthy postmenopausal women after 12 weeks of treatment. The availability of any top line safety and efficacy data from the Phase 3 trial will depend on our ability to obtain adequate financing. If we do not obtain additional financing in the near future, we do not expect that any of our clinical trials will continue.

Formation of the Company

Bionovo, Inc., (“the Company”) was originally incorporated in California in February of 2002. In March of 2004, it reincorporated in the state of Delaware and in June of 2005 changed its name from Bionovo, Inc. to Bionovo Biopharmaceuticals, Inc. On April 6, 2005, Bionovo Biopharmaceuticals, Inc. became public through a reverse merger with Lighten Up International, Inc., whereby Lighten Up Enterprises International, Inc. acquired all the outstanding shares of Bionovo Biopharmaceuticals, Inc. in exchange for 8,422,490 restricted shares of its common stock in a reverse triangular merger. The acquisition was accounted for as a reverse merger in which Bionovo Biopharmaceuticals, Inc. was deemed to be the accounting acquirer. The Company operated as Lighten Up Enterprises International, Inc. until June 29, 2005 when the Company assumed the name Bionovo, Inc. The historical financial information presented herein is that of Bionovo Biopharmaceuticals, Inc. (as adjusted for any difference in the par value of each entity’s stock with an offset to capital in excess of par value). Financial information subsequent to the reverse merger is that of the merged entity, Bionovo, Inc.

Bionovo, Inc. is incorporated in the state of Delaware.

NASDAQ Voluntary Delisting

On March 14, 2011, we received a letter from The NASDAQ Stock Market stating that we were not in compliance with NASDAQ listing rules because we failed to maintain a minimum bid price of $1.00 per share for the last 30 consecutive business days. NASDAQ granted us a period of 180 calendar days to regain compliance. On September 14, 2011, NASDAQ informed us that we had been granted an additional 180 calendar days, or until March 12, 2012 to regain compliance. On February 7, 2012, we filed a Form 25 with the Securities and Exchange Commission (the “SEC”) to effect the voluntary delisting of our common stock from The NASDAQ Capital Market and our common stock began trading on the OTCQB under the trading symbol “BNVI”.

Liquidity and Going Concern

We have sustained recurring losses and negative cash flows from operations. At December 31, 2011, we had an accumulated deficit of $87.2 million, working capital deficit of $2.6 million and shareholders’ equity of $11.0 million. Over the past years, we have been funded through a combination of private equity, debt, lease financing and public offerings. As of December 31, 2011, we had $2.5 million in cash and cash equivalents and $0.5 million in short-term investments, for a total of $3.0 million.

We have experienced and continue to experience operating losses and negative cash flows from operations, as well as an ongoing requirement for substantial additional capital investment. We expect that we

TABLE OF CONTENTS

will need to raise substantial additional capital to continue our operations beyond April 15, 2012. We are currently pursuing a variety of funding options, including equity offerings, partnering/co-investment, venture debt and commercial licensing agreements for our products. On February 8, 2012, we filed a registration statement on Form S-1 with the SEC (File No. 33-179429), as amended, to register the offering of an aggregate of up to $25 million in convertible preferred stock and warrants to purchase shares of common stock. We expect that the terms and conditions of this potential offering, if consummated, will change. There can be no assurance as to the availability or terms upon which such financing and capital might be available. If we are not successful in our efforts to raise additional funds by April 15, 2012, we may be required to further delay, reduce the scope of, or eliminate one or more of our development programs or discontinue operations altogether.

As a result, we will likely file for bankruptcy or seek similar protection. Moreover, it is possible that our creditors may seek to initiate involuntary bankruptcy proceedings against us, which would force us to make defensive voluntary filing(s) of our own. If we restructure our debt or file for bankruptcy protection, it is very likely that our common stock and preferred stock will be severely diluted if not eliminated entirely.

Development Stage Company

We have not generated any significant revenue since inception. Accordingly, the accompanying financial statements have been prepared using the accounting formats prescribed for a Development Stage Enterprise (DSE). Although we have recognized some nominal amount of revenue, we still believe that we are devoting substantially all our efforts toward developing the business and, therefore, still qualify as a DSE.

Business Strategy

Our goal is to achieve a position of sustainable leadership in the biopharmaceutical industry. Our strategy consists of the following key elements:

Integrate Scientific Discoveries with Natural Substances Used in Traditional Chinese Medicine (TCM)

For more than 2,000 years, Chinese people have used TCM for the prevention and treatment of disease. Many significant drugs and therapies have been derived from botanical sources, such as aspirin and taxol, and some from botanicals used in TCM, such as ephedrine. We seek to apply advances in science, technology and analytical methodology for natural products to the botanicals used in TCM for the discovery and development of new drugs. We intend to continue to integrate cutting edge scientific discoveries and modern medicine with our expertise in natural substances used in TCM to discover and screen novel formulations derived from botanicals. This approach differs from traditional pharmacognosy (used in the discovery of taxol) and from opportunistic testing of marketed nutritional supplements (used in the development of fish oil).

Develop Products Focused on Women’s Health and Cancer

We have intentionally directed our focus on initial medical applications with urgent needs and very large potential markets. With this strategy, even a small market penetration should result in relatively substantial revenue streams. Under this strategy, we have initially directed our attention to the design of drugs to target women’s health and cancer.

There are approximately 30 million women in the U.S. suffering from menopausal symptoms such as hot flashes and vaginal dryness. To date, pharmaceutical interventions offered for women suffering from menopausal symptoms are often deemed unsatisfactory, or they have significant undesirable side effects. We have developed Menerba, Seala and other compounds in our pipeline by relying in part on what we believe to be our novel system for the assessment of selective estrogen receptors ((α) and (§)) modulators, or SERMs, their downstream co-regulatory proteins and their transcriptional outcome as well as cytotoxic agents.

According to the American Cancer Society (ACS) 2012 Cancer Facts and Figures, cancer is the second leading cause of death in the U.S. There remain unmet needs and current treatments remain ineffective and inadequate for some populations. We have developed Bezielle to address the market for advanced breast cancer, which we believe is approximately 500,000 – 600,000 patients at any given time. We also perceive that this opportunity has been enhanced because the FDA regulatory requirements for approval of cancer drugs have been modified based on the urgent need for safe and effective treatments of this disease. We intend to continue to target this significant market opportunity.

TABLE OF CONTENTS

Foster Academic and Industry Collaborations

We have developed research and development relationships with various faculty members at the University of California at San Francisco (UCSF), the University of California at Berkeley (UCB), the University of California at Davis (UCD), University of Texas MD Anderson Cancer Center at Houston, and the University of Colorado Health Sciences College (UCHSC). We also have an active Scientific Advisory Board (SAB) and Medical Advisory Board (MAB). These collaborations provide access to leading intellectual and physical resources, and we believe will augment funding for academic development and accelerate technology transfer of promising innovations. We intend to continue our collaborations in order to leverage the intellectual resources of other major research centers by seeking additional academic collaborations.

We will also seek strategic scientific collaborations with other biotechnology and pharmaceutical companies in order to expand and accelerate the process to product development. We believe this will enhance our research and development capabilities as well as provide potential sales channels for our products. We plan to investigate whether specific biotech and pharmaceutical companies may need our proprietary technology or potential products, and if so, endeavor to reach licensing and development agreements.

Diversify Application of Drug Candidates for Extended Indications

We believe many of our initial drug candidates may have efficacy for more than one indication. Anticancer therapeutics, for example, may apply to a wide range of oncological applications. Similarly, hormonally-active drugs could potentially be used to treat or prevent some forms of cancer or osteoporosis. Accordingly, we intend to pursue alternative applications for our drug candidates, when deemed appropriate, to increase our chances of commercial success.

Manufacturing

In 2011, we completed installing equipment and commissioning of a pilot manufacturing plant for clinical trial supply for Menerba. This facility will not be sufficient for the commercial manufacture of the drug. We intend to outsource the commercial manufacturing of our drug products to qualified contract manufacturers or to commercial partners. For the manufacture of clinical drug material, we use a combination of internal and external manufacturing resources, determined by our assessment of cost and quality. We strive to continuously assess the best practices and adjust our supply chain accordingly.

Scientific Discovery Platforms

Screening Philosophy

A useful strategy for the discovery of biologically active compounds from plants utilizes information about the traditional medicinal use of these botanical agents. An advantage to this strategy over random screening is that the extensive clinical tradition and literature may allow for some rationalization with respect to the biological potential for their reputed use. As an example, experimental antineoplastic (inhibiting or preventing the growth or development of malignant cells) agents derived from botanicals have been under study in China since the mid-fifties. Agents discovered through this effort include: campothecin (“CPT”) and hydroxycampothecin (“OPT”) from CAMPOTHECA ACUMINATA Decne, Harringtonine and homoheringtonine from several species of CEPHALOTAXUS, Indirubin from BAPHICACANTHES CUSIA Bremek and INDIGOFERA TINCTORIA L. and Kanglaite from COIX LACHRYMA-JOBI L.

We believe that we have a strategic advantage for drug development based on our extensive clinical knowledge and experience with natural compounds and our unique knowledge of the proper scientific tools for screening. This combination accelerates identification of promising compounds. Instead of creating massive screens, we select the most likely candidate compounds for our target areas of women’s health and cancer and test them for efficacy and toxicity with state of the art screening models such as estrogen receptor regulation or induction of cancer cell death.

Our clinical knowledge also accelerates the preclinical testing due to the longstanding anecdotal knowledge regarding the toxicities of these agents. The shorter time to clinic provides an opportunity to realize major savings and prolong the exploitation of the patent.

This approach provides a new rational paradigm for drug discovery, whereby the prior known use of a compound for the indication coupled with our understanding of the molecular mechanism significantly reduces

TABLE OF CONTENTS

the amount of guess work necessary in other linear approaches where it is unclear whether there is in fact a relationship between the molecular target and the indication.

Scientific Discovery Platform I: Hormone Replacement Therapy and Selective Estrogen Receptor Modulators

Over 300 plants synthesize compounds that interact with estrogen receptors (ER), known as phytoestrogens. Elucidating how phytoestrogens regulate ER transcriptional and cell proliferation pathways could have a profound impact on women. For example, phytoestrogens may decrease the risk of some cancers that are common in postmenopausal women. In fact, lower rates of breast, endometrial and colon cancers are generally observed in countries that have a high consumption of phytoestrogens in their diet.

Our goal is to identify compounds effective at preventing or treating breast cancer as well as potential compounds for desired hormone activity. We have tested multiple species used in TCM for their ability to regulate transcriptional activity in the presence of ERα or ERβ. Many of the herbs showed selective activity on the two ERs. In these studies, we identified the herbs that selectively regulate ERα or ERβ and result in different transcriptional activity as well as in tissue selectivity.

These studies have the potential to identify natural selective SERMs, such as the drug tamoxifen, which may be used, with FDA approval, to prevent and treat breast cancer. In addition, we anticipate these studies will provide leads that do not increase the risk of breast cancer. Other indications for estrogenic compounds or SERMs are osteoporosis, obesity, autoimmune disorders, cardiovascular disease prevention, arthritis and menopausal symptomatic management (such as hot flashes, insomnia, vaginal dryness and decreased libido).

Scientific Discovery Platform II: Anticancer Drugs

A number of Chinese medicinal herbs have traditionally been used to prevent and treat cancer. These herbal preparations are purported to have many biological effects including direct anti-proliferative effects on cancer cells, anti-mutagenic activity, and other signaling pathways such as nuclear receptor regulation resulting in prevention of growth or death.

Aqueous and organic extracts of multiple Chinese medicinal botanical species historically used for the treatment of illness have been evaluated for antiproliferative activity on five breast cancer cell lines. Our results indicate that many of the species have significant growth inhibitory effects on various cancer cells in vitro. Furthermore, in vivo tests of some of the extracts in a mouse xenograph model show a significant inhibition of tumor formation with oral administration, with no toxicity or compromise to the mice activity including fluid and food intake.

Pharmacology and Manufacturing Consistency

After assessing the functional activity of whole herb extracts in our established assay systems, we aim to isolate anticancer and estrogenic compounds from the extracts to identify their chemical structure and to evaluate their pharmacodynamic and pharmacokinetic properties.

Bionovo developed novel technologies and assays for the qualification, characterization and process control for the manufacturing of its botanical drug products. To date, the company’s chemistry, manufacturing and controls (CMC) portion of Menerba’s IND application was reviewed and released for Phase 3 clinical testing by the FDA.

Clinical Trials Design

Many companies with good science suffer from a lack of sufficient clinical knowledge, poor clinical trials design expertise or limited access to reputable clinical facilities to conduct their early trials. Since our approach to drug design relies heavily on clinical experience and expertise in our respective fields, we emphasize sound clinical trial design as one of our strengths.

All of our drug trials follow traditional methods for assessment as well as auxiliary clinical and objective measures in order to strengthen our primary and secondary claims.

Scientific Consultants

We use consultants to provide us with expert advice and consultation on our scientific programs and strategies. They also serve as contacts for us throughout the broader scientific community. We have consulting

TABLE OF CONTENTS

agreements with a number of academic scientists and clinicians, who collectively serve as our SAB and MAB. These individuals serve as key consultants with respect to our product development programs and strategies. They possess expertise in numerous scientific fields, including chemistry, pharmacology, cancer, estrogen receptor biology, clinical drug testing, and regulatory compliance.

We retain each consultant according to the terms of a consulting agreement. Under such agreements, we pay them a consulting fee. In addition, some consultants hold options to purchase our common stock, subject to the vesting requirements contained in the consulting agreements. Certain consultants may receive compensation arising from business development transactions they initiate. Our consultants are employed by institutions other than ours, and therefore may have commitments to, or consulting or advisory agreements with, other entities or academic institutions that may limit their availability to us.

Research and Development

Our pre-clinical research is conducted at our main office in Emeryville, California with some research work also conducted at our facility in Hayward, California and at UCSF, UCB, UCD, and UCHSC. During the fiscal years ended December 31, 2011, 2010 and 2009, we incurred research and development expenses of $20.5 million, $14.6 million and $12.5 million, respectively. We further expect that research and development expenses will increase as and when we continue development of our drugs.

Intellectual Property and Patent Protection

Patent protection is important to our business. The patent position of companies in the pharmaceutical field generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. Therefore, we cannot be certain that any patent applications relating to our products or processes will result in patents being issued, or that the resulting patents, if any, will provide protection against competitors who successfully challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business, or are able to circumvent our patent position. It is possible that other parties have conducted or are conducting research and could make discoveries of compounds or processes that would precede any of our discoveries. Finally, there can be no assurance that others will not independently develop similar pharmaceutical products which will compete against ours, or cause our drug product candidates and compounds to become obsolete. At present, we have about 140 patent applications pending in the United States Patent and Trademark Office, as well as under the Patent Cooperation Treaty and in the European Patent Office, Japan, and other markets. Two patents for Bezielle (US 7482029 B1, issued March 29, 2006 and US 8110228, issued February 7, 2012) are entitled “Composition for Treatment of Menopause.” “Estrogenic Extracts of Morus alba and Uses Thereof” (US 7815949 B1, issued October 19, 2010), and “Estrogenic extracts of Ligustrum lucidum ait. of the oleaceae family and uses thereof” (US 8092841, issued January 10, 2012) are patents that cover separate components of Menerba. Another patent (US 7700136), for Bezielle, entitled “Scutellaria barbata Extract for the Treatment of Cancer”, was issued on April 20, 2010.

Our competitive position is also dependent upon unpatented trade secrets. We have a policy of requiring our employees, consultants and advisors to execute proprietary information and invention assignment agreements upon commencement of employment or consulting relationships with us. These agreements will provide that all confidential information developed or made known to the individual during the course of their relationship with us must be kept confidential, except in specified circumstances. However, we cannot assure you that these agreements will provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure of confidential information. Further, invention assignment agreements executed by consultants and advisors may conflict with, or be subject to, the rights of third parties with whom such individuals have employment or consulting relationships. In addition, we cannot assure you that others will not independently develop equivalent proprietary information and techniques or otherwise gain access to our trade secrets, that such trade secrets will not be disclosed, or that we can effectively protect our rights to unpatented trade secrets.

We may be required to obtain licenses to patents or proprietary rights of others. We cannot assure you that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to us or at all. If we do not obtain such licenses, we could encounter delays in product market introductions while we attempt to design around such patents, or could find that the development,

TABLE OF CONTENTS

manufacture, or sale of products requiring such licenses could be foreclosed. Litigation may be necessary to defend against claims of infringement asserted against us by others, assert claims of infringement to enforce patents issued to us or exclusively licensed to us, to protect trade secrets or know-how possessed by us, or to determine the scope and validity of the proprietary rights of others. In addition, we may become involved in oppositions in foreign jurisdictions, reexaminations declared by the United States Patent and Trademark Office, or interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions with respect to our patent applications or those of our licensors. Litigation, opposition, reexamination or interference proceedings could result in substantial costs to and diversion of effort by us, and may have a material adverse impact on us. In addition, we cannot assure you that our efforts to maintain or defend our patents will be successful.

Government Regulation and Environmental Issues

The development, manufacturing, marketing, and distribution of drug products are extensively regulated by the FDA in the U.S. and similar regulatory agencies in other countries.

Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture, and expected marketing of our drug product candidates and in our ongoing research and development activities. The nature and extent to which such regulation will apply to us will vary depending on the nature of any products developed. We anticipate that all of our drug product candidates will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage, and record-keeping related to such products and their marketing. The process of obtaining these approvals and the subsequent compliance with the appropriate federal statutes and regulations requires substantial time and financial resources. Any failure by us or our collaborators to obtain, or any delay in obtaining, regulatory approval could adversely affect the marketing of any products developed by us, our ability to receive product revenues, and our liquidity and capital resources.

The steps ordinarily required before a new drug may be marketed in the U.S., which are similar to steps required in most other countries, include:

Preclinical tests include laboratory evaluation of product chemistry, formulation and toxicity, as well as animal studies. The results of preclinical testing are submitted to the FDA as part of an IND application. A 30-day waiting period after the filing of each IND application is required prior to commencement of clinical testing in humans. At any time during the 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials until the FDA authorizes trials under specified terms.

The IND application process may be extremely costly and substantially delay development of our drug product candidates. Moreover, positive results of preclinical tests will not necessarily indicate positive results in subsequent clinical trials. The FDA may require additional animal testing after permitting earlier clinical trials with respect to an IND and prior to Phase 3 trials. These additional studies are customary for drugs intended for use by healthy populations. The FDA uses the results of these tests to determine whether to permit additional clinical trials or to put the IND on clinical hold. Our menopausal drug, Menerba, is being (and in the future may be) subjected to such studies, which may delay or damage our ability to complete trials and obtain a marketing license.

If the FDA decides not to place the IND on clinical hold, and, consequently, to permit additional clinical trials, clinical trials to support NDAs are typically conducted in three sequential phases, although the phases may overlap. During Phase 1, clinical trials are conducted with a small number of subjects to assess

TABLE OF CONTENTS

metabolism, pharmacokinetics, pharmacological actions, various dosage levels, and safety, including potential side effects associated with increasing doses. Phase 2 usually involves studies in a limited patient population to:

If a compound is found to be potentially effective and to have an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical trial sites. Our lead drug candidate Menerba has successfully completed Phase 2 and is currently in Phase 3 clinical testing at multiple clinical sites in the U.S.

After successful completion of the required clinical trials, an NDA is generally submitted. The NDA contains scientific and clinical data, which is intended to demonstrate that the drug is safe and effective for its proposed indication(s). An NDA also includes an extensive description of the chemistry, manufacturing and control plans (CMC). The FDA may request additional information before accepting the NDA for filing, in which case the NDA must be resubmitted with the additional information. Once the submission has been accepted for filing, the FDA reviews the NDA and either informs the applicant of its decision or requests additional information or clarification. FDA requests for additional information or clarification often significantly extend the review process. The FDA may refer the NDA to an appropriate advisory committee for review, evaluation and recommendation as to whether the NDA should be approved, although the FDA is not bound by the recommendation of an advisory committee.

If the FDA evaluations of the application and the manufacturing facilities are favorable, the FDA may issue an approval. They may also issue a Complete Response letter (CR), wherein they outline conditions that must be met for approval and/or deficiencies in the submission.

Sales outside the United States of products we develop will also be subject to regulatory requirements governing human clinical trials and marketing for drugs. The requirements vary widely from country to country, but typically the registration and approval process takes several years and requires significant resources. In most cases, if the FDA has not approved a product for sale in the United States, the product may only be exported for sale outside of the United States if it has been approved for sale in any one of the following: the European Union, Canada, Australia, New Zealand, Japan, Israel, Switzerland and/or South Africa. There are specific FDA regulations that govern this process.

We are also subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research work. We cannot accurately predict the extent of government regulation that might result from future legislation or administrative action.

Manufacturing

In 2011, we established a cGMP facility at our location in Hayward, California for production of drug material used in our clinical trials. We currently have no commercial manufacturing capabilities. To date, using manufacturing processes we have designed and tested in-house, we have engaged domestic and foreign manufacturers experienced in FDA Good Manufacturing Practices (or GMP) for drug production, for the supply of our product candidates and other compounds, for our pre-clinical research and development activities and clinical trials.

In order to successfully commercialize our drug product candidates, we, or third parties with whom we contract, must be able to manufacture products in commercial quantities in compliance with the FDA’s current GMP (or cGMP) at acceptable costs and in a timely manner. As we do not own a cGMP manufacturing

TABLE OF CONTENTS

facility with commercial manufacturing capacity, we expect to contract with third parties to provide us with cGMP production capacity when appropriate.

Marketing and Sales

We currently have no sales activities, and no employees engaged in selling any of our products, as we have not received FDA approval to do so. Marketing activities are related to website design and attendance at industry tradeshows and conferences, where we promote the results of our research activities.

Competition

Competition in the pharmaceutical and biotechnology industries is intense. Our competitors include pharmaceutical companies and biotechnology companies, as well as universities and public and private research institutions. In addition, companies that are active in different but related fields represent substantial competition for us. Many of our competitors have significantly greater capital resources, larger research and development staffs and facilities and greater experience in drug development, regulation, manufacturing and marketing than we do. These organizations also compete with us to recruit qualified personnel, attract partners for joint ventures or other collaborations, and license technologies that are competitive with ours. To compete successfully in this industry we must identify novel and unique drugs or methods of treatment and then complete the development of those drugs as treatments in advance of our competitors.

The drugs that we are attempting to develop will have to compete with existing therapies. In addition, a large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. Other companies have products or drug candidates in various stages of pre-clinical or clinical development to treat diseases for which we are also seeking to discover and develop drug candidates. Some of these potential competing drugs are further advanced in development than our drug candidates and may be commercialized earlier.

Our lead product candidate for the treatment of menopausal symptoms, Menerba, 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, Menerba may be expected to compete with anti-depressants used off-label to treat hot flash frequency, such as fluoxetine by Eli Lilly and paroxetine by GlaxoSmithKline. In addition, Depomed may be continuing to develop gabapentin extended release for the treatment of menopausal hot flashes. Pfizer is also pursuing the development of conjugated equine estrogen plus bazedoxifene and Noven is pursuing the development of paroxetine for the treatment of menopausal hot flashes. The makers of these agents would compete directly with us relative to Menerba.

We believe that Menerba’s novel mechanism of action could lead to a more favorable safety profile than currently approved hormone therapies (HT) and other therapies under development and testing, although further clinical testing has yet to be completed to demonstrate this. Certain hormone replacement therapies may still have advantages relative to Menerba. These advantages may include lower pricing and greater efficacy.

We believe we possess the competitive advantage of using unique technologies with extracts that are considered to be safe and tolerable in humans. We also believe that finding lead drugs that are orally tolerable and potentially safe from the start of the discovery process provides an advantage in the pharmaceutical development process.

Company Information

We were incorporated in Delaware in 2005. Our principal executive offices are located at 5858 Horton Street, Suite 400, Emeryville, California 94608, and our main telephone number is (510) 601-2000. Investors can obtain access to our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and all amendments to these reports, free of charge, on our website at http://www.bionovo.com as soon as reasonably practicable after such filings are electronically filed with the SEC.

TABLE OF CONTENTS

We have adopted a code of ethics, which is part of our Code of Business Conduct and Ethics that applies to all of our employees, including our principal executive officers. This code of ethics is posted on our website.

Employees

On March 9, 2012, the Company announced a reduction of over 90% of its workforce. As of March 23, 2012, the Company had 5 remaining employees, all at a reduced salary rate.

Properties

The Company leases approximately 32,000 square feet of laboratory and office facilities located at 5858 Horton Street, Suite 400, Emeryville, CA 94608, under a long-term, non-cancelable operating lease agreement that expires in December of 2018. The lease provides for increases in future minimum annual rental payments and the agreement requires the Company to pay executory costs (real estate taxes, insurance, and repairs).

The Company leases a facility in Hayward, California under a ten year, non-cancelable operating lease agreement that expires in March of 2021. Monthly rental payments of $18,750 began on April 1, 2011 and will increase over the ten-year period. The Company will gradually assume greater space between the first year and the fourth year for a total of 51,472 square feet beginning with the fourth year and through the end of the lease.

Legal Proceedings

From time to time, we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not at this time a party, as plaintiff or defendant, to any legal proceedings that, individually or in the aggregate, would be expected to have a material adverse effect on our business, financial condition or results of operation.

Executive Officers and Directors

The following persons are our directors and executive officers as of March 23, 2012:

Name		Age		Position
Isaac Cohen, O.M.D.,L.Ac.(1)(2)		49		Chairman, Chief Executive Officer, Chief Scientific Officer and Director
Mary Tagliaferri, M.D., L.Ac(2)		46		President, Chief Medical Officer, Chief Regulatory Officer and Director
J. David Boyle II		58		Senior Vice President and Chief Financial Officer
George Butler, Ph.D(2)(3)(4)		64		Director
Louis Drapeau, M.B.A.(1)(2)(3)(4)		68		Director, Lead Independent Director
Robert Farrell(2)(3)(4)		62		Director

Isaac Cohen, O.M.D., L.Ac., is a co-founder of Bionovo Pharmaceuticals, Inc. (“Bionovo Pharmaceuticals”), and has served as its Chairman, Chief Executive Officer, and Chief Scientific Officer and as a director since February 2002. He became Bionovo, Inc.’s Chairman, Chief Executive Officer and Chief Scientific Officer and a Director in April 2005. Dr. Cohen has been a Guest Scientist at the University of California, San Francisco (UCSF) Cancer Research Center and UCSF Center for Reproductive Endocrinology since 1996. Dr. Cohen was in private practice at The American Acupuncture Center, located in Berkeley, California from 1989 – 2005. As co-founder and Chief Scientific Officer, Mr. Cohen provides an essential creative core and scientific rigor to the Board.

Mary Tagliaferri, M.D., L.Ac., is a co-founder of Bionovo Pharmaceuticals, and has served as its Chief Regulatory Officer, Chief Medical Officer, Secretary and Treasurer and as a director since February 2002. She

TABLE OF CONTENTS

became Vice President, Chief Medical Officer, Chief Regulatory Officer, Secretary and Treasurer of Bionovo, Inc. in April 2005, and a director effective in May 2005. She became President of Bionovo, Inc. in addition to continuing her functions as the Company’s Chief Medical Officer, Chief Regulatory Officer, Secretary, Treasurer and Director in May 2007. Dr. Tagliaferri conducted translational research at the University of California, San Francisco from 1996 to 2002. Dr. Tagliaferri, as co-founder and Chief Medical Officer, provides an essential creative core and medical rigor to the Board.

J. David Boyle II has served as our Senior Vice President and Chief Financial Officer since January 4, 2012. He previously served as the Senior Vice President and Chief Financial Officer of AVI BioPharma, Inc. (“AVI”), a position he held since August 2008, and served as AVI’s Interim Chief Executive Officer and President from April 2010 until December 2010. Mr. Boyle also previously served as AVI’s Secretary from September 2008 to April 2010. Prior to his employment at AVI, Mr. Boyle worked for both XOMA Ltd., a biopharmaceutical company in the field of therapeutic antibody discovery and development, and Polycom, Inc., a worldwide high technology communications company. Mr. Boyle served as Chief Financial Officer of XOMA Ltd. from July 2005 to August 2008. Prior to his position as Chief Financial Officer, Mr. Boyle served as Vice President, Financial Operations of XOMA Ltd. from January 2005 to July 2005. Mr. Boyle joined XOMA Ltd. in January 2005 from Polycom, Inc. where he served from March 2002 to December 2004, most recently, as Vice President, Finance. Prior to his employment with Polycom, Inc., Mr. Boyle worked for Salix Pharmaceuticals, Ltd. in the U.S. and for Ares Serono Group both in the U.S. and Switzerland. Mr. Boyle holds a B.A. degree from Catholic University.

George Butler, Ph.D., has been a director since March 11, 2008. Currently, Dr. Butler serves as the Chairman and President of SingEval (Singapore) Pte. Ltd., a drug development company based in Singapore and the US. Dr. Butler was formerly the vice president, Customer Relationships, Global Development of AstraZeneca, plc, a global pharmaceutical company. Prior to this, he was Vice President, Head of Regulatory Affairs. Prior to his time at AstraZeneca, Dr. Butler was Vice President and Head of Regulatory Affairs with Novartis AG. Dr. Butler has over 30 years of healthcare research and business experience, primarily in a development environment in multiple biopharmaceutical companies and has also been active for many years in advancing Asian-Western development/regulatory single programs. Dr. Butler is an independent and unaffiliated director, and serves on our Audit Committee and our Compensation and Nominations Committee. Dr. Butler provides a valuable insight into regulatory affairs, healthcare research and drug development.

Louis Drapeau, M.B.A., has been a director since March 14, 2008. Mr. Drapeau has served as the Chief Financial Officer of InSite Vision since October 1, 2007 and as its Chief Executive Officer from November 2008 to December 1, 2010. Prior to InSite Vision, he served as Chief Financial Officer, Senior Vice President, Finance, at Nektar Therapeutics, a biopharmaceutical company headquartered in San Carlos, California from January 2006 to August 2007. Prior to Nektar, Mr. Drapeau served as Acting Chief Executive Officer from August 2004 to May 2005 and as Senior Vice President and Chief Financial Officer from August 2002 to August 2005 for BioMarin Pharmaceutical Inc, a pharmaceutical company. Previously, Mr. Drapeau spent more than 30 years at Arthur Andersen. Mr. Drapeau also serves on the boards of Intermune, Inc., a pharmaceutical company, AmpliPhi Biosciences, a biotechnology company, and Bio-Rad Laboratories, a life science and clinical diagnosis company. From 2006 to 2008, Mr. Drapeau served on the board of directors of Inflazyme Pharmaceuticals, a biotechnology company whose stock is traded on the Toronto stock exchange. Mr. Drapeau is an independent and unaffiliated director, serves as the chair of our Audit Committee and is our lead independent director. Mr. Drapeau meets the qualifications as a “Financial Expert”, according to the definition in Item 407 (d)(5)(ii) on Regulation S-K. As such, in the opinion of the Board, Mr. Drapeau provides valuable financial expertise to the Board.

Robert Farrell has been a director since January 5, 2012. Mr. Farrell held the positions of Executive Vice President and CFO of Titan Pharmaceuticals, Inc. from 1996 – 2009 and was appointed President and CEO of Titan in December 2008, a position that he held through 2009. Prior to Titan Pharmaceuticals, from 1991 – 1996, Mr. Farrell served as Corporate Group Vice President and CFO of Fresenius USA, a pharmaceutical manufacturing and medical device company focused on the treatment of end-stage renal disease. Mr. Farrell holds an undergraduate degree from the University of Notre Dame and received his J.D. degree from the University of California. Mr. Farrell is an independent and unaffiliated director, and serves on our Audit Committee and our Compensation and Nominations Committee. We believe that Mr. Farrell’s

TABLE OF CONTENTS

professional background, experience in the healthcare field, including his prior senior leadership positions at other medical and biotech related companies, make him well qualified as a member of our board.

Scientific Advisory Board

We have assembled a scientific advisory board that includes several prominent scientific and product development advisors who provide expertise, but except for Isaac Cohen are employed elsewhere on a full-time basis, in the areas of women’s health including menopause, breast cancer, cell biology, immunology, hormonal and metabolic disorders, biostatistics and pharmaceutical development. As of March 23, 2012, the board consisted of the following individuals:

Name		Affiliation		Area of Expertise
Len Bjeldanes, Ph.D.		University of California, Berkeley		Molecular Toxicology/Bioactive Compound Isolation and Identification
Paul Pui-Hay But, Ph.D.		Food and Drug Authentication Laboratory Ltd., Hong Kong		Botanical Authentication and Chinese Medicine Quality Control
Uwe Christians M.D., Ph.D.		University of Colorado		Pharmacology
Isaac Cohen O.M.D., L.Ac.		Bionovo, Inc.		Herbology, Pharmacology, Cell Biology and Pharmaceutical Development
Gary L. Firestone, Ph.D.		University of California, Berkeley		Molecular and Cell Biology
Richard Gless, Ph.D.		Arete Therapeutics		Chemical Research Management
Bert W. O’Malley, M.D.		Baylor College of Medicine		Molecular and Cell Biology, Nuclear Receptor Regulation
Moshe Rosenberg, D.Sc.		University of California, Davis		Microencapsulation Properties of Proteins, Lipids and Carbohydrates
Terry Speed, Ph.D.		University of California, Berkeley		Bioinformatics
Zung Vu Tran, Ph. D.		University of Colorado		Biostatistics and Bioinformatics
Richard Weiner, Ph.D.		University of California, San Francisco		Neuroendocrinology, Cancer
Ethan Weiss, M.D.		University of California, San Francisco		Cardiology

Medical Advisory Board

We have assembled a medical advisory board that includes several prominent clinical and scientific advisors who provide expertise, but except for Mary Tagliaferri are employed elsewhere on a full-time basis, in the areas of women’s health, cancer treatment, and related areas. These individuals provide critical guidance in our planning and execution of clinical trials for our drug candidates. As of March 23, 2012, the board consisted of the following individuals:

Name		Affiliation		Area of Expertise
Mary Cushman, M.D.		University of Vermont		Hematology, Epidemiology
Marco Gambacciani, M.D.		Santa Chiara University Hospital		Menopause
Steven Goldstein, M.D.		New York University		Menopause, Uterine Safety
Deborah Grady, M.D.		University of California, San Francisco		Menopause
James Pickar, M.D.		Columbia University		Menopause
Mary Tagliaferri, M.D., L.Ac.		Bionovo, Inc.		Menopause, Breast Cancer
Debasish Tripathy, M.D.		University of Southern California		Breast Cancer
Wulf H. Utian, M.D.		Rapid Medical Research, Inc.		Gynecological Endocrinology
Ethan Weiss, M.D.		University of California, San Francisco		Cardiology
Janet Wittes, Ph.D.		Statistics Collaborative, Inc.		Clinical Biostatistics

TABLE OF CONTENTS

Item 1A. Risk Factors

Stockholders should carefully consider the following risk factors, together with the other information included and incorporated by reference in this Annual Report on Form 10-K. 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.

Risks Relating to Our Business and Industry

Our cash and other sources of liquidity may not be adequate to fund our operations beyond April 15, 2012. We require substantial additional capital to continue our operations, which may not be available on commercially acceptable terms. We cannot be certain that funds will be available and, if they are not available, we may not be able to continue as a going concern which may result in actions that could adversely impact our stockholders.

We have projected that cash on hand will be sufficient to allow us to continue operations until April 15, 2012. As a result of insufficient cash flow, on March 9, 2012, we announced that we reduced our workforce by over 90%. As of March 23, 2012, our cash on hand was only approximately $440,000. We will require substantial capital resources in order to conduct our operations and develop our therapeutic products, and do not expect that our current cash and cash equivalents will be sufficient to fund our current and planned operations. If we need additional funding for operations and are unable to raise it through debt or equity financings, we may be forced to liquidate assets and/or curtail or cease operations.

Additional financing through grants, strategic collaborations, public or private equity financings or other financing sources may not be available on acceptable terms, or at all. The interest of the public and private equity markets to any proposed financing 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 current shareholders. The amount of dilution could be increased by the issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets. 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.

To conserve funds, we may pursue less expensive but higher-risk development paths or suspend some or all development activity. Historically, we have limited our product development activities to the minimum we felt was sufficient to support our development and commercialization goals, in particular, with respect to Menerba. While we successfully completed Phase 2 clinical trials of Menerba without extensive product development experience, we may lack the information and resources necessary to complete product development of Menerba or any of our other products and may be unable to manufacture any of them successfully on a commercially-viable scale. If we are unable to complete our product development, we may be unable to effectively commercialize our products, if approved. If we do not obtain additional financing in the near future, we do not expect that any of our clinical trials will continue. If we cease to continue as a going concern due to lack of available capital or otherwise, you may lose your entire investment in our company.

We have a history of net losses, which we expect to continue for the foreseeable future 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 are a development stage company which commenced operations in 2002, and we are subject to all of the risks associated with having a limited operating history and pursuing the development of new products. Our cash flows may be insufficient to meet expenses relating to our operations and the development of our business, and may be insufficient to allow us to develop our products. We currently conduct research and

TABLE OF CONTENTS

development to develop women’s health and anticancer drugs. We do not know whether we will be successful in the development of such products. From inception through December 31, 2011, we have a deficit accumulated during the development stage of approximately $87.2 million. Our net loss for fiscal years ended December 31, 2011, 2010 and 2009 were $13.7 million, $17.7 million and $16.4 million, respectively. Our net loss for the fiscal year ended December 31, 2008 was $16.7 million and for the fiscal year ended December 31, 2007 was $12.9 million.

To date, we have mainly recognized revenues from a technology license, research services, and government grants. On October 15, 2007, we terminated the technology license agreement. 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 have 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 Menerba and Bezielle, advance our other women’s health and anticancer product candidates into clinical trials, expand our research and development activities, seek regulatory approvals and 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.

If we are unable to raise sufficient additional capital, we may seek to merge with or be acquired by another company and that transaction may adversely affect our business and the value of our securities.

If we are unable to raise sufficient additional capital, we may seek to merge with another company with a stronger cash position, complementary work force, or product candidate portfolio or for other reasons. We believe the market price for our common stock may not accurately reflect the value of our business. While we will continue to seek to maximize the value of our business to our stockholders, the most attractive option for doing so may require us to consummate a transaction involving an exchange of our common stock with that of another company. There are numerous risks associated with merging or being acquired. These risks include, among others, incorrectly assessing the quality of a prospective acquirer or merger-partner, encountering greater than anticipated costs in integrating businesses, facing resistance from employees and being unable to profitably deploy the assets of the new entity. The operations, financial condition, and prospects of the post-transaction entity depend in part on our and our acquirer/merger-partner’s ability to successfully integrate the operations related to our product candidates, business and technologies. We may be unable to integrate operations successfully or to achieve expected cost savings and any cost savings which are realized may be offset by losses in revenues or other charges to operations. As a result, our stockholders may not realize the full value of their investment.

We have a limited number of authorized shares of common stock available for issuance, and if our stockholders do not approve an increase in the number of shares of our common stock available for issuance, we may be unable to raise significant additional common equity capital.

As of March 23, 2012, we had 340,000,000 authorized shares of common stock, of which 129.3 million shares of common stock were issued and outstanding on a fully diluted basis. Thus, we have a limited number of shares of common stock available for future issuance. The limited availability of shares of common stock may hinder our ability to raise capital through the issuance of common stock or securities convertible into or exchangeable or exercisable for common stock, if the need should so arise. If we need to increase the number of our shares of common stock available for issuance, then under applicable Delaware law and the provisions of our certificate of incorporation, such an increase will require the approval of the holders of a majority of our issued and outstanding shares of common stock. No assurance can be provided that we would be able to obtain the requisite vote to increase the number of our shares of common stock available for issuance. A failure to increase our authorized share capital when needed would adversely affect our ability to raise additional capital and therefore could materially and adversely affect our financial condition, liquidity and prospects.

TABLE OF CONTENTS

We may enter into equity financing transactions in the near future, which may result in significant dilution to existing stockholders.

Our Board of Directors believes that we need to raise substantial additional capital in order to continue our operations beyond April 15, 2012 and is contemplating an equity financing transaction, the terms of which have not yet been established. On February 8, 2012, we filed a registration statement on Form S-1 with the SEC (File No. 33-179429), as amended, to register the offering of an aggregate of up to $25 million in convertible preferred stock and warrants to purchase shares of common stock. We expect that the terms and conditions of this offering, if consummated, will change. However, we anticipate that the terms of any new financing transactions, if available, will include the issuance of a substantial amount of our common stock, or securities convertible or exercisable into a substantial amount of our common stock. Sales of our common stock offered through future equity offerings may result in substantial dilution to the interests of other holders of our common stock and a decline in the market price of our common stock. The sale of a substantial number of shares of our common stock to investors, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

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.

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 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 potential products face significant regulatory hurdles prior to marketing which could delay or prevent sales. These regulatory hurdles include both clinical development requirements and chemistry manufacturing and control (CMC) requirements.

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 trial 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, future 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.

TABLE OF CONTENTS

In addition, the process development and manufacturing of potential products is subject to extensive government regulation, including by the FDA, DEA and state and other territorial authorities. The FDA administers processes to ensure that marketed products are safe, effective, and consistently uniform, of high quality and marketed only for approved indications. These quality assurance processes are complex and difficult for a new company to implement. 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. A number of companies have suffered significant setbacks in clinical development and in seeking regulatory approvals, despite their best efforts in the development of quality systems.

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:

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:

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

TABLE OF CONTENTS

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.

We must comply with significant government regulations.

The research and development, manufacture and marketing of human therapeutic and diagnostic products are subject to regulation, primarily by the FDA in the U.S. and by comparable authorities in other countries. These national agencies and other federal, state, local and foreign entities regulate, among other things, research and development activities (including testing in animals and in humans) and the testing, manufacturing, handling, labeling, storage, record keeping, approval, advertising and promotion of the products that we are developing. Noncompliance with applicable requirements can result in various adverse consequences, including delay in approving or refusal to approve product licenses or other applications, suspension or termination of clinical investigations, revocation of approvals previously granted, fines, criminal prosecution, recall or seizure of products, injunctions against shipping products and total or partial suspension of production and/or refusal to allow a company to enter into governmental supply contracts.

The process of obtaining requisite FDA approval has historically been costly and time-consuming. Current FDA requirements for a new human biological product to be marketed in the U.S. include: (1) the successful conclusion of preclinical laboratory and animal tests, if appropriate, to gain preliminary information on the product’s safety; (2) filing with the FDA of an Investigational New Drug Application to conduct human clinical trials for drugs or biologics; (3) the successful completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the IND for its recommended use; and (4) filing by a company and acceptance and approval by the FDA of a BLA for a biological IND, to allow commercial distribution of a biologic product. A delay in one or more of the procedural steps outlined above could be harmful to us in terms of getting our products through clinical testing and to market.

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. 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.

TABLE OF CONTENTS

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 large markets, includes entering into collaborations with corporate partners, licensors, licensees and others.

These collaborations may provide us with funding and research and development resources for potential products. These agreements also may 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, which compete with the types of drugs they currently are developing with us. This could 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 may 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.

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:

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 at our facilities in Hayward, California and Emeryville, California 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

TABLE OF CONTENTS

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.

If we cannot maintain manufacturing arrangements with third parties on acceptable terms, or if these third parties do not perform as agreed, the development or marketing of our product candidates could be delayed or otherwise materially and adversely affected.

In 2011 we completed the construction and commissioning of a pilot manufacturing plant for clinical trial supply for Menerba. This facility will not be sufficient for the commercial manufacture of the drug. We may be relying upon third-party manufacturers to provide significant portions of our supply chain for our drug-product. 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:

These contract manufacturers may not be able to manufacture for us 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, as well as other applicable regulations. There are comparable foreign requirements. This potential 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 a 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 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 commercial manufacturing experience, nor do we currently have any commercial manufacturing facilities and we must incur significant costs to develop this expertise. We may encounter difficulties in developing our manufacturing capacity and in manufacturing our products in commercial quantities, including, but not limited to: (i) maintaining product yields; (ii) maintaining quality control and assurance; (iii) providing component and service availability; (iv) maintaining adequate control policies and procedures; and (v) hiring and retaining qualified personnel. Difficulties encountered in developing our manufacturing could have a material adverse effect on our business, financial condition and results of operations. We cannot provide assurance that we will be able to successfully develop commercial manufacturing capacity by ourselves in a timely fashion or on an economically favorable basis.

TABLE OF CONTENTS

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to annually furnish a report by our management on our internal control over financial reporting. Such report must contain, among other matters, an assessment by our principal executive officer and our principal financial officer on the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective as of the end of our fiscal year. This assessment must include disclosure of any material weakness in our internal control over financial reporting identified by management. Performing the system and process documentation and evaluation needed to comply with Section 404 is both costly and challenging. In the future if any material weaknesses are identified in our internal control over financial reporting, our management will not be able to assert that our internal control over financial reporting or our disclosure controls and procedures are effective, and we could be required to further implement expensive and time-consuming remedial measures. We cannot be certain that any measures we take will ensure that we implement and maintain adequate internal control over financial reporting and that we will remediate any material weaknesses. If we fail to maintain effective internal control over financial reporting or disclosure controls and procedures, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on our stock price. Failure to comply with Section 404 could also potentially subject us to sanctions or investigations by the Securities and Exchange Commission (SEC) or other regulatory authorities.

The current global economic environment poses severe challenges to our business strategy, which relies on access to capital from the markets and our collaborators, and creates other financial risks for us.

The global economy, including credit markets and the financial services industry, has been experiencing a period of substantial turmoil and uncertainty. These conditions have generally made equity and debt financing more difficult to obtain, and may negatively impact our ability to complete financing transactions. The duration and severity of these conditions is uncertain, as is the extent to which they may adversely affect our business and the business of current and prospective collaborators and vendors. If the global economy does not improve or worsens, we may be unable to secure additional funding to sustain our operations or to find suitable partners to advance our internal programs, even if we receive positive results from our research and development or business development efforts.

From time to time we maintain a portfolio of investments in marketable debt securities which are recorded at fair value. Although we have established investment guidelines relative to diversification and maturity with the objectives of maintaining safety of principal and liquidity, credit rating agencies may reduce the credit quality of our individual holdings which could adversely affect their value. Lower credit quality and other market events, such as changes in interest rates and further deterioration in the credit markets, may have an adverse effect on the fair value of our investment holdings and cash position.

Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic event.

Our corporate headquarters are located at a single business park in Emeryville, California. Important documents and records, including copies of our regulatory documents and other records for our product candidates, are located at our facilities and we depend on our facilities for the continued operation of our business. Natural disasters and other catastrophic events, such as wildfires and other fires, earthquakes and extended power interruptions, which have not severely impacted Emeryville businesses in the past, and terrorist attacks, drought or flood, could significantly disrupt our operations and result in additional, unplanned expense. As a small company, we have a limited capability to establish and maintain a comprehensive disaster recovery program. Any significant natural disaster or catastrophic event could delay our development and commercialization efforts. Even though we believe we carry commercially reasonable insurance, we might suffer losses that exceed the coverage available under these insurance policies. In addition, we are not insured against terrorist attacks or earthquakes.

TABLE OF CONTENTS

We may be negatively impacted by the effects of climate change.

With respect to the impacts of climate change, we have no means of assessing or determining whether climate change is a known trend likely to come to fruition with a material impact on us. If climate change were to have an impact on our results of operations, the physical impacts of climate change could have an adverse effect on the sourcing of our raw materials. We may be required to pay more for the raw materials and/or move to alternative suppliers in new geographical areas.

Risks Relating to Our Products, Technology and Know-how

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 one or more of the following:

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 symptoms of menopause and the treatment of cancer. Several companies are developing products with technologies that are similar to ours. We also face competition in therapies for the symptoms of menopause from over-the-counter (OTC) dietary supplements. Many of our competitors may have greater financial and human resources or more experience in research and development than we have, 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 following:

TABLE OF CONTENTS

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.

Our lead product candidate for the treatment of menopausal symptoms, Menerba, 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, Menerba may be expected to compete with newer generation anti-depressants used to treat hot flash frequency, such as desvenlafaxine by Wyeth, fluoxetine by Eli Lilly and paroxetine by GlaxoSmithKline. The makers of these hormonal agents would compete directly with us relative to Menerba. Menerba may also face competition from over-the-counter dietary supplements.

While we are developing Menerba to minimize many of the risks associated with long-term use of HT that have been observed in recent studies, further clinical testing of this product candidate has yet to be completed. In addition, certain hormone therapies may have advantages relative to Menerba, which may include greater efficacy and lower cost.

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 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 or adoption of such proposals or efforts could adversely affect our business.

TABLE OF CONTENTS

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 on 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.

At present, we have about 140 patent applications pending in the United States Patent and Trademark Office as well as under the Patent Cooperation Treaty and in the European Patent Office, Japan, and other markets. Two patents for Bezielle (US 7482029 B1, issued March 29, 2006 and US 8110228, issued February 7, 2012) are entitled “Composition for Treatment of Menopause.” “Estrogenic Extracts of Morus alba and Uses Thereof,” (US 7815949 B1, issued October 19, 2010) and “Estrogenic extracts of Ligustrum lucidum ait. of the oleaceae family and uses thereof” (US 8092841, issued January 10, 2012), are patents that cover separate components of Menerba. Another patent (US 7700136, issued on April 20, 2010), for Bezielle is entitled “Scutellaria barbata Extract for the Treatment of Cancer.”

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 on 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.

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 the following:

If our product candidates do not become widely accepted by physicians, patients, third-party payers and other members of the medical community, we may be unable to achieve profitability.

Additional clinical and non-clinical trials may be necessary as we progress to an NDA.

While we have reached agreement with the FDA as to the clinical and non-clinical studies necessary for progression of Menerba to an NDA, including trial design and size, this is subject to change based on the results of said studies. For example, prior to initiation of the Menerba Phase 3 studies, the FDA requested an additional 13-week non-clinical toxicology study in rats and dogs, and a 28-day, 20-patient, open label clinical trial to assess tolerance of the higher dose planned. We cannot be certain whether or not additional studies might be considered necessary by the FDA, or whether or not the FDA may mandate changes to the other planned studies. Additionally, we cannot be certain whether or not the FDA review process will result in a delay to the initiation of the planned or additional clinical or non-clinical studies.

Risks Related to Our Common Stock

If our common stock is determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.

On February 7, 2012, we effected a voluntary delisting from The NASDAQ Capital Market and our common stock began trading on the OTCQB under the trading symbol “BNVI”. The SEC has adopted regulations that define a “penny stock” to include any equity security that has a market price per share of less than $5.00, subject to certain exceptions, and certain securities not listed on a national securities exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. The last reported closing sales price of our

TABLE OF CONTENTS

common stock on March 23, 2012 was $0.04 per share, as reported on the OTCQB. Although we do not believe that our common stock currently is a “penny stock” under Rule 3a51-1(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), because we are an issuer with net tangible assets in excess of $2 million and meet other requirements, if our net tangible assets were to decrease and our common stock was determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock on the secondary market. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.

Volatility of our stock price could adversely affect stockholders.

The market price of our common stock has been volatile, and fluctuates widely in price in response to various factors which are beyond our control. The price of our common stock is not necessarily indicative of our operating performance or long term business prospects. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. During the period from January 1, 2005 to March 23, 2012, the lowest and highest reported trading prices of our common stock, as reported in the OTCQB for the period from March 23, 2012 to February 7, 2012, or for the period from May 29, 2007 to February 6, 2012, as reported on The NASDAQ Capital Market, or for periods before May 29, 2007, as reported on the OTC Bulletin Board, were $0.03 and $34.00 (in each case, as adjusted to reflect the 1 for 5 reverse stock split on August 30, 2010). Factors such as the following could cause the market price of our common stock to fluctuate substantially:

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.

TABLE OF CONTENTS

In August 2010, we implemented a 1-for-5 reverse split of our common stock to address The NASDAQ Capital Market’s continuing listing requirement that our stock price exceed $1.00. Subsequently, we were informed by The NASDAQ Capital Market that we had regained compliance with NASDAQ. However, on March 14, 2011, we received a letter from The NASDAQ Stock Market stating that we were not in compliance with NASDAQ listing rules because we failed to maintain a minimum bid price of $1.00 per share for the last 30 consecutive business days. NASDAQ granted us a period of 180 calendar days to regain compliance and on September 14, 2011, NASDAQ informed us that we had been granted an additional 180 calendar days, or until March 12, 2012 to regain compliance. On February 7, 2012, we effected a voluntary delisting from The NASDAQ Capital Market and our common stock began trading on the OTCQB under the trading symbol “BNVI”.

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 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 any of the following:

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.

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.

TABLE OF CONTENTS

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 23, 2012, we have four effective registration statements and have registered for resale up to 108,337,448 shares of our common stock and shares of our common stock issuable upon exercise of warrants. 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 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company leases approximately 32,000 square feet of laboratory and office facilities located at 5858 Horton Street, Suite 400, Emeryville, CA 94608, under a long-term, non-cancelable operating lease agreement that expires in December 2018. The lease provides for increases in future minimum annual rental payments and the agreement requires the Company to pay executory costs (real estate taxes, insurance, and repairs).

The Company leases a manufacturing facility in Hayward, California under a ten year, non-cancelable operating lease agreement that expires in March 2021. Monthly rental payments of $18,750 began on April 1, 2011 and will increase over the ten-year period. The Company will gradually assume greater space between the first year and the fourth year for a total of 51,472 square feet beginning with the fourth year and through the end of the lease.

Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosures.

None.

TABLE OF CONTENTS

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities

Our common stock is listed on OTCQB under the ticker symbol “BNVI” For the fiscal years 2011, 2010 and 2009 listed in the tables below, our common stock traded on The NASDAQ Capital Market. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — NASDAQ Voluntary Delisting” beginning on page 0 of this report for additional information regarding the voluntary delisting of our common stock on The NASDAQ Capital Market.

The following table sets forth the actual high and low sale prices of our common stock for the periods prior to our 1-for-5 reverse stock split of our outstanding common stock on August 30, 2010:

		Fiscal 2011								Fiscal 2010								Fiscal 2009
		High				Low				High				Low				High				Low
First Quarter			—				—			$	0.76			$	0.38			$	0.40			$	0.18
Second Quarter			—				—			$	0.63			$	0.38			$	0.95			$	0.22
Third Quarter(1)			—				—			$	0.46			$	0.35			$	1.15			$	0.36
Fourth Quarter			—				—				—				—			$	0.79			$	0.34

The following table sets forth the adjusted high and low sale prices of our common stock, which adjusts the actual high and low sale prices of the previous table (as if our 1-for-5 reverse stock split occurred on January 1, 2009) for comparison purposes to the actual high and low sale prices of our common stock for the periods after our 1-for-5 reverse stock split of our outstanding common stock on August 30, 2010.

		Fiscal 2011								Fiscal 2010								Fiscal 2009
		High				Low				High				Low				High				Low
First Quarter		$	1.43			$	0.52			$	3.80			$	1.90			$	2.00			$	0.90
Second Quarter		$	0.85			$	0.55			$	3.15			$	1.90			$	4.75			$	1.10
Third Quarter		$	1.03			$	0.48			$	2.35			$	1.03			$	5.75			$	1.80
Fourth Quarter		$	0.62			$	0.22			$	1.79			$	0.88			$	3.95			$	1.70

On December 31, 2011, the last reported sales price on The NASDAQ Capital Market for our common stock was $0.23.

Holders

On March 23, 2012, there were 81 stockholders of record of our common stock and the last reported sales price on the OTCQB for our common stock was $0.04. The market for our common stock is highly volatile.

Dividends

We did not repurchase any shares of our equity securities during the year ended December 31, 2011. We have never declared or paid any cash dividends on our common stock and we do not currently intend to pay any cash dividends on our common stock for the foreseeable future.

The information required by this item regarding equity compensation plans is incorporated by reference to the information in Item 11 of this Annual Report.

TABLE OF CONTENTS

Stockholder Return Comparison

The following graph shows the total shareholder return of an investment of $100 in cash on December 31, 2006 for (i) our common stock, (ii) the NASDAQ composite Market Index (the “NASDAQ Index”) and (iii) The NASDAQ Pharmaceutical Index (the “NASDAQ-Pharmaceutical”). The NASDAQ Index tracks the aggregate price performance of equity securities traded on the NASDAQ. The NASDAQ-Pharmaceutical tracks the aggregate price performance of equity securities of pharmaceutical companies traded on The NASDAQ Index.

PERFORMANCE MEASUREMENT COMPARISON*

TABLE OF CONTENTS

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included in this Report on Form 10-K.

		For the Years Ended December 31,																				Accumulated from February 1, 2002 (Date of inception) to December 31, 2011
		2011				2010				2009				2008				2007
		(in thousands, except per share data)
Statements of Operations Data:
Revenues		$	265			$	613			$	288			$	233			$	582			$	2,058
Operating expenses:
Research and development			20,528				14,642				12,499				11,416				9,938				74,876
General and administrative			3,367				3,526				4,053				6,097				4,284				24,496
Merger cost			—				—				—				—				—				1,964
Total operating expenses			23,895				18,168				16,552				17,513				14,222				101,336
Loss from operations			(23,630	)			(17,555	)			(16,264	)			(17,280	)			(13,640	)			(99,278	)
Other income (expense):
Change in fair value of warrant liability			10,114				(94	)			—				—				—				10,851
Interest income			28				18				84				730				850				2,119
Interest expense			(97	)			(61	)			(95	)			(129	)			(87	)			(618	)
Other expense			(113	)			(39	)			(88	)			(17	)			(21	)			(304	)
Total other income (expense)			9,932				(176	)			(99	)			584				742				12,048
Loss before income tax			(13,698	)			(17,731	)			(16,363	)			(16,696	)			(12,898	)			(87,230	)
Income tax provision			(1	)			(1	)			(1	)			(4	)			(3	)			(15	)
Net loss		$	(13,699	)		$	(17,732	)		$	(16,364	)		$	(16,700	)		$	(12,901	)		$	(87,245	)
Basic and diluted net loss per common share		$	(0.26	)		$	(0.80	)		$	(0.98	)		$	(1.09	)		$	(0.98	)		$	(5.80	)
Shares used in computing basic and diluted net loss per common share			51,848				22,299				16,725				15,271				13,153				15,036

		Years Ended December 31,																				Accumulated from February 1, 2002 (Date of inception) to December 31, 2011
		2011				2010				2009				2008				2007
		(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short term investments		$	3,049			$	2,638			$	15,934			$	13,562			$	33,296			$	3,049
Working capital (deficit)			(2,600	)			(1,408	)			14,524				12,166				31,271				(2,600	)
Total assets			18,458				12,982				24,149				22,504				38,165				18,458
Long-term obligations			114				917				217				545				526				114
Accumulated deficit			(87,245	)			(73,546	)			(55,814	)			(39,450	)			(22,750	)			(87,245	)
Total shareholders’ equity			11,003				6,601				21,896				19,632				34,922				11,003

TABLE OF CONTENTS

Item 7. 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 Annual Report on Form 10-K for the year ended December 31, 2011 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 respective clinical trials, research programs, product pipeline, current and potential corporate partnerships, licenses and intellectual property, the adequacy of capital reserves and anticipated operating results and cash expenditures, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As such, they are subject to a number of uncertainties that could cause actual results to differ materially from the statements made, including risks associated with the success of research and product development programs, the issuance and validity of patents, the development and protection of proprietary technologies, the ability to raise capital, operating expense levels and the ability to establish and retain corporate partnerships. Reference is made to discussions about risks associated with product development programs, intellectual property and other risks which may affect us under Item 1A, “Risk Factors” above. We do not undertake any obligation to update forward-looking statements.

Formation of the Company

Bionovo, Inc., (“the Company”) was originally incorporated in California in February of 2002. In March of 2004, it reincorporated in the state of Delaware and in June of 2005 changed its name from Bionovo, Inc. to Bionovo Biopharmaceuticals, Inc. On April 6, 2005, Bionovo Biopharmaceuticals, Inc. became public through a reverse merger with Lighten Up International, Inc., whereby Lighten Up Enterprises International, Inc. acquired all the outstanding shares of Bionovo Biopharmaceuticals, Inc. in exchange for 8,422,490 restricted shares of its common stock in a reverse triangular merger. The acquisition was accounted for as a reverse merger in which Bionovo Biopharmaceuticals, Inc. was deemed to be the accounting acquirer. The Company operated as Lighten Up Enterprises International, Inc. until June 29, 2005 when the Company assumed the name Bionovo, Inc. The historical financial information presented herein is that of Bionovo Biopharmaceuticals, Inc. (as adjusted for any difference in the par value of each entity’s stock with an offset to capital in excess of par value). Financial information subsequent to the reverse merger is that of the merged entity, Bionovo, Inc.

Bionovo, Inc. is incorporated in the state of Delaware.

Reverse Stock Split

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

Business

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

Our lead drug candidate, Menerba^TM (formerly MF-101), represents a new class of receptor sub-type selective estrogen receptor modulator (“SERM”), for the treatment of vasomotor symptoms of menopause, or “hot flashes.” We have designed Menerba to selectively modulate estrogen receptor beta (“ERβ”) and we believe it could provide a safe and effective alternative to existing Food and Drug Administration (“FDA”) approved therapies that have been observed to pose a significant risk to women for developing breast cancer, stroke, cardiovascular disease, blood clots and other serious diseases. Hot flashes (or hot flushes) are a brief experience of body surface temperature irregularity resulting in fever like redness, sweating, prickly sensation that lasts from 4 to 10 minutes. The experience may be accompanied by other symptoms such as anxiety, irritability, palpitations, blushing, panic, a sensation of loss of control, along with significant physical and emotional distress. Recently it has been suggested that women experiencing hot flashes are at higher risk for

TABLE OF CONTENTS

coronary heart disease, Type 2 diabetes, osteoporosis and early dementia, while at lower risk for breast cancer. Although not life threatening, hot flashes should be viewed as a marker of health decline and risk factor for aging diseases in women. In preclinical studies, Menerba does not lead to tumor formation in either breast or uterine tissues and it does not increase the risk for clotting. This characteristic, if confirmed in clinical testing, would differentiate Menerba from some existing therapies and other hormone-based therapies in clinical development. We announced the results in 2007 of our completed, multicenter, randomized, double-blinded, placebo-controlled Phase 2 trial, involving 217 women, which showed the higher of two Menerba doses tested was well tolerated and resulted in a statistically significant reduction of hot flashes after 12 weeks of treatment. In addition, treatment with the higher dose of Menerba led to a statistically significant reduction in night time awakenings when compared to placebo, which represents superior efficacy to existing non-hormonal therapies in development. In 2011 we announced the results of two tolerability studies with doses higher and similar to the higher dose in the Phase 2 study. In both studies significant reduction in hot flashes was observed as well as significant reduction in night time awakening. Following the FDA guidance and approval received, we are currently enrolling patients in a Phase 3, pivotal, clinical testing at multiple clinical sites in the U.S. We believe that Menerba’s novel mechanism of action could lead to a more favorable safety profile than currently approved hormone therapies (“HT”).

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

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

TABLE OF CONTENTS

from botanical extracts and are being developed by following this FDA guidance. In addition, we have identified active chemical components underpinning the mechanism of action for all of our drug candidates, and in some cases, we have developed synthetic methods of production.

We expect to continue to incur significant operating losses over the next few years, and do not expect to generate profits until and unless Menerba or one of our other drug candidates has been approved and is being marketed with commercial partners. As of December 31, 2011, we had an accumulated deficit of $87.2 million. Historically, we have funded our operations primarily through private placements and public offerings of our capital stock, equipment lease financings, license fees and interest earned on investments.

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

Development Stage Company

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

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

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

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

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

Accruals

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the

TABLE OF CONTENTS

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:

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 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 do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

Warrant Liability

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

Share-Based Compensation

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

Income Tax

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

We generated net losses since inception through the year ended December 31, 2011, and accordingly did not record a provision for federal income taxes. Deferred tax assets of $34.2 million as of December 31, 2011

TABLE OF CONTENTS

were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding our ability to continue to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our deferred tax assets. Additionally, the future utilization of our NOL carry-forwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.

Management has performed an analysis of whether a change in control occurred due to the financing that occurred in February 2011. As a result of this analysis, management believes a change in control did not occur according to Section 382 and 383 of the Internal Revenue Code. Therefore, utilization of the Company’s net operating loss will not be limited beginning in 2011 as a result of the February 2011 transaction.

Research and Development Activities

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

During the years ended December 31, 2011, 2010 and 2009, we incurred research and development expenses of $20.5 million, $14.6 million and $12.5 million, respectively. We expect that research and development expenses will continue to increase as we continue our development of Menerba, Bezielle and other drug candidates and continue our Phase 3 testing of Menerba.

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

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

Recent Accounting Pronouncements

In June of 2011, the Financial Accounting Standards Board (“FASB”) issued ASU (“Accounting Standards Update”) No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The amendments in this ASU require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2011, with early adoption permitted. In December of 2011, the FASB completed this project with the issuance of ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This project was the first of two phases regarding presentation requirements for items reclassified out of accumulated other comprehensive income. The FASB will reconsider those presentation requirements currently deferred by Update No. 2011-12 in phase two of the project, “Presentation of Reclassifications from Accumulated Other Comprehensive Income.” We adopted the provisions of Update No. 2011-05 in the fourth quarter of 2011.

TABLE OF CONTENTS

In May of 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and disclosure Requirements in U. S. GAAP & IFRS,” which results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The future adoption of ASU 2011-04 is not expected to have a material impact on our consolidated financial statements.

Results of Operations

Results of Operations for the Years Ended December 31, 2011, 2010, and 2009

Revenue

		Years Ended December 31,												% Increase (Decrease)
		2011				2010				2009				2010 to 2011				2009 to 2010
		(in thousands)
Government grants		$	265			$	599			$	233				-56	%			157	%
Service revenue			—				14				55				-100	%			-75	%
Total revenue		$	265			$	613			$	288				-57	%			113	%

Revenue over the fiscal years 2011, 2010 and 2009 consisted primarily of US government grants. In 2011, the National Institutes of Health (“NIH”) awarded the Company an extension of a grant that was awarded in 2010. The total awarded under the grant after the extension was approximately $374,000. We recognized $265,000 in revenue under the grant during the twelve months ended December 31, 2011 and $109,000 in revenue during the twelve months ended December 31, 2010. In addition, during the twelve months ended December 31, 2010, we received notification from the Internal Revenue Service that two of our projects, Menerba and Bezielle, were approved for funding at the maximum level under the Qualifying Therapeutic Discovery Project Credit (“QTDP”) program. The amount granted to us under the program was approximately $489,000 and the full amount was recognized in revenue in 2010.

We recognized $233,000 in revenue in 2009 under an NIH grant that expired in 2009. We also recognized revenue of $14,000 and $55,000 for research services provided to one client in 2010 and 2009, respectively.

Research and Development Expenses

		Years Ended December 31,												% Increase (Decrease)
		2011				2010				2009				2010 to 2011				2009 to 2010
		(in thousands)
Research and development expenses		$	20,528			$	14,642			$	12,499				40	%			17	%

Research and development (R&D) expenses reflect costs for the development, manufacturing and clinical testing of drugs and include salaries, contractor and consultant fees and other support costs, including employee share-based compensation expense. The increase of $5.9 million during the twelve months ended December 31, 2011 compared with the same period of 2010 is due to the completion of our Menerba tolerability study, the initiation of our Menerba Phase 3 clinical study, and manufacturing costs at our Hayward, California manufacturing facility. Included in the increase is an approximately $0.7 million increase in share-based compensation expense due to a greater number of options granted in 2011 as compared to 2010. The increase in R&D expenses is partially offset by no employee or officer bonuses for 2011 as compared to approximately $0.5 million in bonuses for 2010.

The increase of $2.1 million for the twelve months ended December 31, 2010 compared with the same period of 2009 is due to costs to support the Menerba manufacturing process development and officer and employee performance bonuses of approximately $0.5 for 2010 compared with no bonuses paid for 2009.

TABLE OF CONTENTS

General and Administrative Expenses

		Years Ended December 31,												% Increase (Decrease)
		2011				2010				2009				2010 to 2011				2009 to 2010
		(in thousands)
General and administrative expense		$	3,367			$	3,526			$	4,053				-5	%			-13	%

General and administrative (G&A) expense includes personnel costs for finance, administration, information systems, and public relations related to our drug development and clinical trials, participation in conventions and tradeshows, website related expenses, facilities expenses, professional fees, legal expenses, and other administrative costs. We do not currently have any dedicated sales support or personnel. The decrease of $0.2 million for the twelve months ended December 31, 2011 compared to the same period of 2010 is primarily due to decreased employee-related costs including no officer or employee bonuses for 2011, whereas the same period of 2010 included approximately $0.1 million in employee and officer performance bonuses.

The decrease of $0.5 million in G&A expenses for the twelve months ended December 31, 2010 compared with the same period of 2009 is due to approximately $0.2 million reduction in employee-related costs resulting from headcount reductions in 2009 and approximately $0.5 million reduction in legal costs primarily due to the resolution of a legal matter in 2009 as disclosed on our 2009 Form 10-K. The reductions in expense were partially offset by approximately $0.1 million in officer and employee performance bonuses for 2010 compared with no bonuses paid for 2009.

Other Income (Expense)

		Years Ended December 31,												% Increase (Decrease)
		2011				2010				2009				2010 to 2011				2009 to 2010
		(in thousands)
Other income (expense):
Change in fair value of warrant liability		$	10,114			$	(94	)		$	—				-10860	%			*
Interest income			28				18				84				56	%			-79	%
Interest expense			(97	)			(61	)			(95	)			59	%			-36	%
Other expense, net			(113	)			(39	)			(88	)			190	%			-56	%
Total other income (expense)		$	9,932			$	(176	)		$	(99	)			-5743	%			78	%

The change in fair value of warrant liability in 2011 is due to the effect of the decrease of our share price upon the remeasurement of our warrant liability at December 31, 2011.

Interest income is derived from cash balances and short term investments. The decreases in interest income in 2011 and 2010 as compared with 2009 is due to our lower investment balances combined with low rates of return consistent with general market conditions. Interest expense includes interest expense from capital lease agreements for our laboratory equipment and two notes payable to finance $0.2 million of leasehold improvements made in 2009. Other expense for the year ended December 31, 2011, includes the write-off of an employee receivable of approximately $0.1 million. The difference in other expense from 2010 to 2009 is primarily due to approximately $91,000 in loss on fixed asset disposal in 2009 associated with the move to our headquarters in Emeryville, California.

Liquidity and Capital Resources

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

As of December 31, 2011 we had cash, cash equivalents and short-term investments of $3.0 million compared to $2.6 million in cash and cash equivalents at December 31, 2010. The use of cash, cash equivalents, and short term investments for the year ended December 31, 2011 includes net cash used in operating activities of $17.6 million, $7.9 million in expenditures for capital assets and patent costs, and $1.2 million for payments on our capital lease agreements and notes payable, partially offset by net proceeds of approximately $27.2 million from our financing transaction in February 2011.

TABLE OF CONTENTS

Since we rely on public and private financing to fund our operations, we invest financing proceeds in cash equivalents and short-term investments upon receipt. We then utilize the proceeds from sales and maturities of the investments to fund our operations. Fluctuations in net short-term investing activities from year to year relate to the timing of funds from successful financing transactions. During 2011, we had capital expenditures of $7.3 million as compared to $1.2 million in 2010 and $0.6 million in 2009. The increase in capital expenditures in 2011 was in support of the development of our manufacturing facility in Hayward, California.

Net cash provided by financing activities in 2011 was $26.0 as compared to $1.6 million 2010 and $16.8 million in 2009. The differences from year to year primarily relate to the timing of successful financing transactions; in 2011 we received net proceeds of $27.2 million from our February 2011 registered public offering as compared to $2.5 million in net proceeds in 2010 and $17.3 million in net proceeds in 2009.

Financing Transactions

On July 6, 2010, we entered into a common stock purchase agreement (“Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), an Illinois limited liability company, which provides that, upon the terms and subject to the conditions and limitations set forth therein Aspire Capital is committed to purchase up to an aggregate of $15.0 million of our shares of common stock over the term of the Aspire Purchase Agreement. The Aspire Purchase Agreement is subject to a minimum purchase price of $1.98 per share (as adjusted for our reverse stock split of August 2010) and the term of the agreement expires in July of 2012. As of December 31, 2011, there have been no sales of common stock to Aspire Capital under the Aspire Purchase Agreement.

On October 6, 2010, we completed a registered direct offering through the sale of common stock and warrants. We sold a total of 2,727,270 shares of common stock, at a price of $1.10 per share and issued 2,045,451 warrants to purchase shares of common stock. The warrants are exercisable six months after issuance at $1.64 per share and will expire five years from the date of issuance. The warrants contain a provision that provides the warrant holders with an option to require us to purchase their warrants for cash in an amount equal to their Black-Scholes Model value, in the event of a change in control of the Company. The shares of common stock and warrants were immediately separable and issued separately. The offering produced approximately $2.5 million, net of financing costs and other expenses.

On February 2, 2011, the Company completed an underwritten public offering and issued 30,031,200 shares of its common stock and 15,015,600 warrants at a price of $1.00 per unit, with each unit including one share of common stock and a warrant to purchase one half of one share of our common stock. The warrants are exercisable any time after the closing date and will expire five years from the date of issuance. The warrants contain a provision that provides the warrant holders with an option to require us to purchase their warrants for cash in an amount equal to their Black-Scholes Model value, in the event of a change in control of the Company. The offering produced approximately $27.2 million, net of financing costs and other expenses.

On December 30, 2011, we entered into a $5 million securities purchase agreement (the “Socius Purchase Agreement”) with Socius CG II, Ltd. (“Socius”), a Bermuda-based subsidiary of Socius Capital Group, LLC. Under the terms of the Socius Purchase Agreement, subject to certain conditions, we had the right, in our sole discretion, over a term of two years, to demand, through delivery of separate tranche notices, that Socius purchase up to a total of $5 million of our newly-created redeemable Series A preferred stock (the “Preferred Stock”). On February 24, 2012, we issued and sold to Socius 105 shares of Preferred Stock at $10,000 per share pursuant to the Socius Purchase Agreement. The Socius Purchase Agreement automatically terminated pursuant to its terms on February 29, 2012.

On March 12, 2012, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with the investors named in the Securities Purchase Agreement (the “Investors”), pursuant to which the Investors purchased an aggregate of 14,231,696 shares of our common stock and warrants to purchase 11,485,844 shares of our common stock. The aggregate purchase price for the common stock was approximately $426,951. The exercise price of the warrants is $0.03 per share. The warrants expire on March 30, 2012. If the warrants are exercised in full for cash, we will receive approximately an additional $344,575 in proceeds. As of March 23, 2012, no warrants were exercised.

TABLE OF CONTENTS

Going Concern

We have sustained recurring losses and negative cash flows from operations. At December 31, 2011, we had an accumulated deficit of $87.2 million, working capital deficit of $2.6 million and shareholders’ equity of $11.0 million. Over the past years, we have been funded through a combination of private equity, debt, lease financing and public offerings.

We have experienced and continue to experience operating losses and negative cash flows from operations, as well as an ongoing requirement for substantial additional capital investment. We expect that we will need to raise substantial additional capital to continue our operations beyond April 15, 2012. We are currently pursuing a variety of funding options, including equity offerings, partnering/co-investment, venture debt and commercial licensing agreements for our products. There can be no assurance as to the availability or terms upon which such financing and capital might be available. If we are not successful in our efforts to raise additional funds by April 15, 2012, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs or discontinue operations altogether.

As a result, we will likely file for bankruptcy or seek similar protection. Moreover, it is possible that our creditors may seek to initiate involuntary bankruptcy proceedings against us, which would force us to make defensive voluntary filing(s) of our own. In addition, if we restructure our debt or file for bankruptcy protection, it is very likely that our common stock and preferred stock will be severely diluted if not eliminated entirely.

Notes Payable

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

		Notes Payable
2012		$	16
2013			16
2014			16
2015			16
2016			15
Thereafter			32
Total minimum payments		$	111
Less: Amount representing interest			(30	)
Present value of minimum payments		$	81
Less: Current portion			(9	)
Non-current portion of notes payable		$	72

TABLE OF CONTENTS

Commitments and Contingencies

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

		Total				2012				2013				2014				2015				2016				2017 and beyond
Contractual obligations		$	1,828			$	1,828			$	—			$	—			$	—			$	—			$	—
Operating lease obligations			26,242				2,466				2,763				3,224				3,423				3,519				10,847
Notes payable			111				16				16				16				16				15				32
Capital lease obligations			950				905				45				—				—				—				—
Total contractual commitments		$	29,131			$	5,215			$	2,824			$	3,240			$	3,439			$	3,534			$	10,879

Off-Balance Sheet Financings and Liabilities

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

Subsequent Events

Socius Agreement

On December 30, 2011, we entered into a securities purchase agreement with Socius for up to $5 million as discussed in the Financing Transactions section above. The Socius Purchase Agreement automatically terminated pursuant to its terms on February 29, 2012. Prior to the termination of the Socius Purchase Agreement, we had issued 6,031,915 shares of our common stock under the agreement resulting in gross proceeds of $1,050,000. For further details, please refer to Note 12 — “Subsequent Events” in our Consolidated Financial Statements in Item 8 of this filing.

On February 13, 2012, Socius filed a $250,000 claim against the Company in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida (the “Court”), in connection with a non-refundable commitment fee owed to Socius pursuant to the Socius Purchase Agreement (the “Claim”).

On February 16, 2012, the Court entered an Order Approving Stipulation for Settlement of Claim (the “Order”) with respect to the Claim. The Order and the Stipulation for Settlement of Claim, dated February 15, 2012, between the Company and Socius (the “Stipulation”), provides for the full and final settlement of the Claim.

Pursuant to the terms of the Order and the Stipulation, the Company issued and delivered to Socius 2,500,000 shares of the Company’s common stock (the “Settlement Shares”), subject to adjustment as set forth in the Stipulation. The total number of shares of the Company’s common stock to be issued to Socius in connection with the Order was adjusted on the 21st trading day following the date on which the Settlement Shares are issued based on the number of VWAP Shares (as defined below) that exceeded the number of Settlement Shares initially issued.

The number of “VWAP Shares” is equal to (i) $250,000 plus Socius’ reasonable legal fees, expenses, and costs (ii) divided by 70% of the volume weighted average price of the Company’s common stock over the 20-day trading period immediately following the date on which the Settlement Shares were issued. In no event will the number of shares of the Company’s common stock issued to Socius in connection with the settlement of the Claim, aggregated with all shares of the Company’s common stock then owned or beneficially owned or controlled by, collectively, Socius and its affiliates, at any time exceed 9.99% of the total number of shares of the Company’s common stock then outstanding.

On March 2, 2012 and March 21, 2012, the Company issued to Socius additional shares of the Company’s common stock equal to the difference between the number of VWAP Shares and the number of Settlement Shares. As of March 21, 2012, the final VWAP Shares was 5,480,795 and the total number of additional shares issued by the Company to Socius as final settlement was 2,980,795.

TABLE OF CONTENTS

Voluntary NASDAQ Delisting

On March 14, 2011, we received a letter from The NASDAQ Stock Market stating that we were not in compliance with NASDAQ listing rules because we failed to maintain a minimum bid price of $1.00 per share for the last 30 consecutive business days. NASDAQ granted us a period of 180 calendar days to regain compliance. On September 14, 2011, NASDAQ informed us that we had been granted an additional 180 calendar days, or until March 12, 2012 to regain compliance. On February 7, 2012, we filed a Form 25 with the SEC to effect the voluntary delisting of our common stock from the NASDAQ Capital Market and our common stock began trading on the OTCQB under the trading symbol “BNVI”.

Restructuring of Work Force

As a result of insufficient cash flow, on March 9, 2012, we announced that we reduced our workforce by over 90%. As of March 23, 2012, we had 5 remaining employees, all at a reduced salary rate.

Potential Equity Financing

Our Board of Directors believes that we need to raise substantial additional capital in order to continue our operations beyond April 15, 2012 and is contemplating an equity financing transaction, the terms of which have not yet been established. On February 8, 2012, we filed a registration statement on Form S-1 with the SEC (File No. 33-179429), as amended, to register the offering of an aggregate of up to $25 million in convertible preferred stock and warrants to purchase shares of common stock. We expect that the terms and conditions of this potential offering, if consummated, will change. There can be no assurance that we will be able to obtain additional financing.

Item 7A. 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 December 31, 2011, we had cash, cash equivalents and short-term investments of $3.0 million, consisting of cash, cash equivalents and highly liquid short-term investments. We believe that we do not have any material exposure to changes in the fair value of these assets in the near term due to extremely low rates of investment interest and the short term nature of our cash and cash equivalents. Future declines in interest rates, however, would reduce investment income, but are not likely to be a material source of revenue to our company in the foreseeable future.

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

TABLE OF CONTENTS

Item 8. Financial Statements and Supplementary Data

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Bionovo, Inc.

We have audited the accompanying consolidated balance sheets of Bionovo, Inc. (the Company), a development stage company, as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the years ended December 31, 2011, 2010, 2009 and the period from inception (February 1, 2002) to December 31, 2011. Bionovo, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bionovo, Inc. as of December 31, 2011 and 2010 and the results of its operations and its cash flows for the years ended December 31, 2011, 2010, 2009 and the period from inception (February 1, 2002) to December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has a net working capital deficiency and has a need for substantial additional capital investment that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ PMB Helin Donovan, LLP

PMB Helin Donovan, LLP
San Francisco, California
March 30, 2012

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Consolidated Balance Sheets

		December 31,
		2011				2010
		(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	2,549			$	2,638
Short-term investments			500				—
Receivables			5				49
Prepaid expenses			1,180				973
Other current assets			507				396
Total current assets			4,741				4,056
Property and equipment, net			11,382				6,647
Patents pending, net			1,691				1,259
Other assets			644				1,020
Total assets		$	18,458			$	12,982
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,543			$	655
Accrued clinical trial expenses			967				7
Accrued compensation and benefits			304				901
Current portion of capital lease obligations			872				1,055
Current portion of notes payable			9				40
Warrant liability			2,515				1,843
Other current liabilities			1,131				963
Total current liabilities			7,341				5,464
Non-current portion of capital lease obligations			42				836
Non-current portion of notes payable			72				81
Total liabilities			7,455				6,381
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; 10% Series A Cumulative Preferred Stock, 1,000 shares authorized, none issued and outstanding			—				—
Common stock $0.0001 par value, 340,000,000 shares authorized, 54,581,955 and 24,530,112 shares outstanding at December 31, 2011 and 2010, respectively			5				2
Additional paid-in capital			98,243				80,145
Accumulated other comprehensive income (loss)			—				—
Accumulated deficit			(87,245	)			(73,546	)
Total shareholders’ equity			11,003				6,601
Total liabilities and shareholders’ equity		$	18,458			$	12,982

 
 
See accompanying notes to these consolidated financial statements

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Consolidated Statements of Operations

		For the Years Ended December 31,												Accumulated from February 1, 2002 (Date of inception) to December 31, 2011
		2011				2010				2009
		(in thousands, except per share data)
Revenue		$	265			$	613			$	288			$	2,058
Operating expenses:
Research and development			20,528				14,642				12,499				74,876
General and administrative			3,367				3,526				4,053				24,496
Merger cost			—				—				—				1,964
Total operating expenses			23,895				18,168				16,552				101,336
Loss from operations			(23,630	)			(17,555	)			(16,264	)			(99,278	)
Other income (expense):
Change in fair value of warrant liability			10,114				(94	)			—				10,851
Interest income			28				18				84				2,119
Interest expense			(97	)			(61	)			(95	)			(618	)
Other expense, net			(113	)			(39	)			(88	)			(304	)
Total other income (expense)			9,932				(176	)			(99	)			12,048
Loss before income tax			(13,698	)			(17,731	)			(16,363	)			(87,230	)
Income tax provision			(1	)			(1	)			(1	)			(15	)
Net loss		$	(13,699	)		$	(17,732	)		$	(16,364	)		$	(87,245	)
Basic and diluted net loss per common share		$	(0.26	)		$	(0.80	)		$	(0.98	)		$	(5.80	)
Shares used in computing basic and diluted net loss per share			51,848				22,299				16,725				15,036

 
 
See accompanying notes to these consolidated financial statements

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Consolidated Statements of Comprehensive Income (Loss)

		For the Years Ended December 31,												Accumulated from February 1, 2002 (Date of inception) to December 31, 2011
		2011				2010				2009
		(in thousands)
Net loss		$	(13,699	)		$	(17,732	)		$	(16,364	)		$	(87,245	)
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale			—				5				(29	)			—
Other comprehensive income (loss)			—				5				(29	)			—
Comprehensive loss		$	(13,699	)		$	(17,727	)		$	(16,393	)		$	(87,245	)

 
 
See accompanying notes to these consolidated financial statements

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Consolidated Statements of Shareholders’ Equity

		Common Stock								Additional Paid in Capital				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit Development Stage				Total Sharesholders’ Equity
		Number of Shares				Par
		(in thousands)
Balance at inception (February 1, 2002) – Adjusted to reflect effect of stock split on August 31, 2010, June 17, 2004 and March 4, 2004, and reverse merger on April 6, 2005			4,080			$	0.4			$	(0.4	)		$	—			$	—			$	0
Balances at December 31, 2002			4,080				0.4				(0.4	)			—				—				0
Net loss			—				—				—				—				(56	)			(56	)
Balances at December 31, 2003			4,080				0.4				(0.4	)			—				(56	)			(56	)
Noncash compensation expense for options issued			—				—				30								—				30
Net loss			—				—				—				—				(538	)			(538	)
Balances at December 31, 2004			4,080				0.4				30				—				(594	)			(564.0	)
Issuance of shares for reverse merger			800				0.1				—				—				—				0.1
Issuance of common stock for funds received by private placement net of financing cost			4,093				0.4				9,932				—				—				9,932.4
Issuance of common stock for conversion on notes payable			250				—				462				—				—				462.0
Amortization of deferred stock compensation			—				—				16				—				—				16.0
Net loss			—				—				—				—				(3,637	)			(3,637.0	)
Balances at December 31, 2005			9,223				0.9				10,440				—				(4,231	)			6,209.5
Issuance of common stock for exercise of warrants			1,005				0.1				2,304				—				—				2,304.1
Issuance of common stock for services			40				—				165				—				—				165.0
Amortization of deferred stock compensation			—				—				—				—				—				—
Stock-based compensation			—				—				435				—				—				435.0
Net loss			—				—				—				—				(5,618	)			(5,618.0	)
Balances at December 31, 2006			10,268				1				13,344				—				(9,849	)			3,496
Issuance of common stock from private placement, net of financing cost			2,104				0.2				14,506				—				—				14,506
Issuance of common stock from public financing, net of financing cost			2,000				0.2				23,675				—				—				23,675
Issuance of common stock upon exercise of warrants			822				0.1				4,537				—				—				4,537
Issuance of common stock upon exercise of stock options			75				—				325				—				—				325
Stock-based compensation related to issuance of stock option grants			—				—				1,280				—				—				1,280
Net loss															—				(12,901	)			(12,901	)
Other comprehensive income															4				—				4
Balances at December 31, 2007			15,269				1.5				57,667				4				(22,750	)			34,922

 
 
See accompanying notes to these consolidated financial statements

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Consolidated Statements of Shareholders’ Equity — (Continued)

		Common Stock								Additional Paid in Capital				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit Development Stage				Total Sharesholders’ Equity
		Number of Shares				Par
		(in thousands)
Balances at December 31, 2007			15,269				1.5				57,667				4				(22,750	)			34,922
Issuance of common stock upon exercise of stock options			4				—				18				—				—				18
Stock-based compensation related to issuance of stock option grants			—				—				1,371				—				—				1,371
Net loss			—				—				—				—				(16,700	)			(16,700	)
Other comprehensive income			—				—				—				20				—				20
Balances at December 31, 2008			15,273				1.5				59,056				24				(39,450	)			19,631
Issuance of common stock upon exercise of warrants			44				—				120				—				—				120
Issuance of common stock from public financing, net of financing cost			6,187				0.6				17,351				—				—				17,352
Stock-based compensation related to issuance of stock option grants			—				—				1,186				—				—				1,186
Net loss			—				—				—				—				(16,364	)			(16,364	)
Other comprehensive loss			—				—				—				(29	)			—				(29	)
Balances at December 31, 2009			21,504				2.1				77,713				(5	)			(55,814	)			21,896
Issuance of restricted shares			20				—				—				—				—				—
Issuance of commitment shares			279				—				600				—				—				600
Issuance of common stock from public financing, net of financing cost			2,727				0.3				2,478				—				—				2,478
Initial valuation of warrant liability			—				—				(1,749	)			—				—				(1,749	)
Stock-based compensation related to issuance of stock option grants			—				—				1,103				—				—				1,103
Net loss			—				—				—				—				(17,732	)			(17,732	)
Other comprehensive income			—				—				—				5				—				5
Balances at December 31, 2010			24,530				2.4				80,145				—				(73,546	)			6,601
Issuance of common stock upon exercise of options			21				—				1				—				—				1
Issuance of common stock from public financing, net of financing cost			30,031				3.0				27,208				—				—				27,211
Initial valuation of warrant liability			—				—				(10,786	)			—				—				(10,786	)
Stock-based compensation related to issuance of stock option grants			—				—				1,675				—				—				1,675
Net loss			—				—				—				—				(13,699	)			(13,699	)
Other comprehensive income			—				—				—				—				—				—
Balances at December 31, 2011			54,582				5				98,243				—				(87,245	)			11,003

 
 
See accompanying notes to these consolidated financial statements

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Consolidated Statements of Cash Flows

		For the Years Ended December 31,												Accumulated from February 1, 2002 (Date of inception) to December 31, 2011
		2011				2010				2009
		(in thousands)
Cash flows from operating activities:
Net loss		$	(13,699	)		$	(17,732	)		$	(16,364	)		$	(87,245	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,879				1,782				1,578				8,341
Stock-based compensation expense			1,675				1,103				1,186				7,246
Amortization and accretion of investments			72				128				79				341
Non-cash compensation for warrants issued			—				—				—				1,964
Amortization of note discount			—				—				—				139
Amortization of deferred stock compensation			—				—				—				16
Change in fair value of warrant liability			(10,114	)			94				—				(10,851	)
Loss on disposal of property and equipment			3				35				91				151
Loss on retirement of inactive patent applications			26				—				—				26
Noncash adjustment to available-for-sale securities			—				2				(1	)			1
Changes in assets and liabilities:
Receivables			44				202				(125	)			(5	)
Prepaid expenses and other current assets			(318	)			(394	)			430				(1,087	)
Deposits and other non-current assets			372				(453	)			(75	)			(618	)
Accounts payable			888				344				(210	)			1,543
Accrued clinical trial expenses			960				(5	)			(61	)			967
Accrued compensation and benefits			(597	)			534				(89	)			304
Other accrued liabilities			168				152				216				1,131
Net cash used in operating activities			(17,641	)			(14,208	)			(13,345	)			(77,636	)
Cash flows from investing activities:
Capital expenditures			(7,333	)			(1,251	)			(629	)			(15,180	)
Proceeds from sale-leaseback transaction			—				1,205				—				1,205
Acquisition of intangible assets			(571	)			(516	)			(299	)			(2,053	)
Proceeds from sales and maturities of investments			7,936				13,930				10,235				49,360
Purchases of available-for-sale securities			(8,508	)			(920	)			(13,185	)			(50,200	)
Net cash (used in) provided by investing activities			(8,476	)			12,448				(3,878	)			(16,868	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net			27,211				2,478				17,351				96,774
Payments under capital lease obligations			(1,144	)			(820	)			(695	)			(4,462	)
Payments under notes payable			(40	)			(59	)			(24	)			(123	)
Proceeds from exercise of warrants and options			1				—				120				5,001
Payments of convertible notes payable			—				—				—				(50	)
Payments for financing costs for convertible notes			—				—				—				(87	)
Net cash provided by financing activities			26,028				1,599				16,752				97,053
Net (decrease) increase in cash and cash equivalents			(89	)			(161	)			(471	)			2,549
Cash and cash equivalents at the beginning of the period			2,638				2,799				3,270				—
Cash and cash equivalents at the end of the period		$	2,549			$	2,638			$	2,799			$	2,549

 
 
See accompanying notes to these consolidated financial statements

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Notes to Consolidated Financial Statements

1. BUSINESS AND ORGANIZATION

Formation of the Company

Bionovo, Inc., (“the Company”) was originally incorporated in California in February of 2002. In March of 2004, it reincorporated in the state of Delaware and in June of 2005 changed its name from Bionovo, Inc. to Bionovo Biopharmaceuticals, Inc. On April 6, 2005, Bionovo Biopharmaceuticals, Inc. became public through a reverse merger with Lighten Up International, Inc., whereby Lighten Up Enterprises International, Inc. acquired all the outstanding shares of Bionovo Biopharmaceuticals, Inc. in exchange for 8,422,490 restricted shares of its common stock in a reverse triangular merger. The acquisition was accounted for as a reverse merger in which Bionovo Biopharmaceuticals, Inc. was deemed to be the accounting acquirer. The Company operated as Lighten Up Enterprises International, Inc. until June 29, 2005 when the Company assumed the name Bionovo, Inc. The historical financial information presented herein is that of Bionovo Biopharmaceuticals, Inc. (as adjusted for any difference in the par value of each entity’s stock with an offset to capital in excess of par value). Financial information subsequent to the reverse merger is that of the merged entity, Bionovo, Inc.

Bionovo, Inc. is incorporated in the state of Delaware.

Reverse Stock Split

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

NASDAQ Voluntary Delisting

On March 14, 2011, the Company received a letter from The NASDAQ Stock Market stating that it was not in compliance with NASDAQ listing rules because it failed to maintain a minimum bid price of $1.00 per share for the last 30 consecutive business days. NASDAQ granted the Company a period of 180 calendar days to regain compliance. On September 14, 2011, NASDAQ informed the Company that it had been granted an additional 180 calendar days, or until March 12, 2012 to regain compliance. On February 7, 2012, the Company filed a Form 25 with the Securities and Exchange Commission (the “SEC”) to effect the voluntary delisting of its common stock from the NASDAQ Capital Market and the Company’s common stock began trading on the OTCQB under the trading symbol “BNVI”.

Going Concern

The Company has sustained recurring losses and negative cash flows from operations. At December 31, 2011, the Company had an accumulated deficit of $87.2 million, working capital deficit of $2.6 million and shareholders’ equity of $11.0 million. Over the past years, the Company has been funded through a combination of private equity, debt, lease financing and public offerings. As of December 31, 2011, the Company had $2.5 million in cash and cash equivalents and $0.5 million in short-term securities, for a total of $3.0 million.

The Company has experienced and continues to experience operating losses and negative cash flows from operations, as well as an ongoing requirement for substantial additional capital investment. The Company expects that it will need to raise substantial additional capital to fully pursue its business plan before April 15, 2012. The Company is currently pursuing a variety of funding options, including equity offerings, partnering/co-investment, venture debt and commercial licensing agreements for its products. There can be no assurance as to the availability or terms upon which such financing and capital might be available. If the Company is

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Notes to Consolidated Financial Statements

1. BUSINESS AND ORGANIZATION  – (continued)

not successful in its efforts to raise additional funds by April 15, 2012, the Company may be required to further delay, reduce the scope of, or eliminate one or more of its development programs or discontinue operations altogether.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Development Stage Company

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

Use of Estimates and Reclassifications

The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the amounts in the 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.

Cash, Cash Equivalents and Short-Term Investments

As part of its cash management program, the Company maintains a portfolio of marketable investment securities. The securities are investment grade and generally mature within one year and may include tax exempt securities and certificates of deposit. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Debt and marketable equity securities not classified as held-to-maturity or as trading are classified as available-for-sale and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in the statement of comprehensive income. 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.

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

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:

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

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

		December 31,
		2011				2010
Office and lab equipment		$	9,527			$	8,030
Leasehold improvements			9,067				3,368
Computer equipment and software			394				283
			18,988				11,681
Less: accumulated depreciation			(7,606	)			(5,034	)
Property and equipment, net		$	11,382			$	6,647

Office and lab equipment include gross assets acquired under capital leases of approximately $2.3 million and $3.8 million as of December 31, 2011 and 2010, respectively. Amortization of assets under capital leases is included in depreciation expense. For the years ended December 31, 2011, 2010 and 2009, the Company recorded depreciation expense of approximately $2.8 million, $1.7 million and $1.5 million, respectively.

Assets Held under Capital Leases

Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease.

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. For the year ended December 31, 2011, the Company expensed approximately $35,000 for patent applications that had been deemed inactive. There were no inactive patent applications identified for the years ended December 31, 2010 or 2009. The Company has capitalized $1.9 million in patent licensing costs as of December 31, 2011 and $1.4 million as of December 31, 2010. Amortization expense charged to operations was approximately $117,000 for 2011, $82,000 for 2010 and $55,000 for 2009.

Revenue Recognition

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

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

Revenue from technology licenses or other payments under collaborative agreements where the Company has a continuing obligation to perform is recognized as revenue over the expected period of the continuing performance obligation. Revenue on government contracts is recognized on a qualified cost reimbursement basis. For the years ended December 31, 2011, 2010, and 2009, the Company recognized revenue from grants awarded by the National Institutes of Health of approximately $265,000, $109,000 and $233,000, respectively. Revenue from grants received on a refundable tax credit basis is recognized when awarded.

In November of 2010, the Company received notification from the Internal Revenue Service that two of its projects, Menerba and Bezielle, were approved for funding at the maximum level under the Qualifying Therapeutic Discovery Project Credit (“QTDP”) program. The amount granted to the Company under the program was approximately $489,000 and the full amount was recognized in revenue in 2010.

In fiscal year 2009, the Company began performing limited research services for one customer and for the years ended December 31, 2011, 2010 and 2009 recognized approximately $0, $14,000 and $55,000, respectively, in related revenue. Prior to 2009, only revenue from technology licenses and grant proceeds had been received.

Research and Development

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

Basic and Diluted Loss per Share

In accordance with FASB Accounting Standards Codification 260, Earnings per Share Topic, 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 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 (in thousands):

		December 31,
		2011				2010				2009
Options to purchase common stock			7,276				1,246				1,022
Options to purchase common stock – outside plan			—				21				21
Warrants to purchase common stock			26,345				10,429				8,649
Potential equivalent shares excluded			33,621				11,696				9,692

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

Other Current Liabilities

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

		December 31,
		2011				2010
Accrued consulting fees			40				150
Accrued legal fees			101				168
Deferred rent			572				424
Other current liabilities			418				221
Total other current liabilities		$	1,131			$	963

Warrant Liability

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

Income Taxes

The Company accounts for its income taxes based on the FASB Accounting Standards Codification 740, Income Taxes Topic which requires the establishment of a deferred tax asset or liability for the recognition of future deductible or taxable amounts and operating loss and tax credit carryforwards. Deferred tax expense or benefit is recognized as a result of timing differences between the recognition of assets and liabilities for book and tax purposes during the year.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized for deductible temporary differences and operating loss, and tax credit carryforwards. A valuation allowance is established, when necessary, to reduce that deferred tax asset if it is “more likely than not” that the related tax benefits will not be realized.

The Company has no material uncertain tax positions.

Share-based Compensation

The Company records share-based compensation in accordance with the provisions of the Share-based Compensation Topic of the FASB Codification. The guidance requires the use of option-pricing models that require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model, and the resulting charge is expensed using the straight-line attribution method over the vesting period. Both the expected stock price volatility and the weighted-average expected life assumptions were determined using historical data. Stock compensation expense recognized during the period is based on the value of share-based awards that were expected to vest during the period adjusted for estimated forfeitures.

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  – (continued)

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 each of the option plans as described above.

Recent Accounting Pronouncements

In June of 2011, the FASB issued ASU (“Accounting Standards Update”) No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The amendments in this ASU require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2011, with early adoption permitted. In December of 2011, the FASB completed this project with the issuance of ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This project was the first of two phases regarding presentation requirements for items reclassified out of accumulated other comprehensive income. The FASB will reconsider those presentation requirements currently deferred by Update No. 2011-12 in phase two of the project, “Presentation of Reclassifications from Accumulated Other Comprehensive Income.” The Company adopted the provisions of Update No. 2011-05 in the fourth quarter of 2011 and they were effective for the Company for the year ended December 31, 2011.

In May of 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and disclosure Requirements in U. S. GAAP & IFRS,” which results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The future adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial statements.

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Notes to Consolidated Financial Statements

3. CASH, CASH EQUIVALENTS AND INVESTMENTS

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

		December 31, 2011
		Cost Basis				Unrealized Gains				Unrealized Losses				Estimated Fair Value
Cash and cash equivalents:
Cash		$	935			$	—			$	—			$	935
Money market funds			1,614				—				—				1,614
Total cash and cash equivalents		$	2,549			$	—			$	—			$	2,549
Available-for-sale investments:
Corporate notes		$	500			$	—			$	—			$	500
Total available-for-sale investments		$	500			$	—			$	—			$	500

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

Unrealized gains included in the consolidated statements of comprehensive income (loss) amounted to $0, $5,000 and $29,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

4. FAIR VALUE

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

TABLE OF CONTENTS

Bionovo, Inc.
(A Development Stage Company)
  
Notes to Consolidated Financial Statements

4. FAIR VALUE  – (continued)

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

		Total				Fair Value Measurements at Reporting Date Using
December 31, 2011						(Level 1)				(Level 2)				(Level 3)
Money market funds		$	1,614			$	1,614			$	—			$	—
Corporate notes			500								500				—
Total		$	2,114			$	1,614			$	500			$	—