UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ

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

For the quarterly period ended March 31, 2012

or

¨

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

For the transition period from__________to__________

 

Commission File No. 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.)
24570 Clawiter Rd Hayward, CA 94545		(510) 601-2000
(Address of principal executive offices, including zip code)		(Telephone Number)

 

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

 

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

 

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

 

Large accelerated filer 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  ¨    No  þ

 

As of May 1, 2012, 80,326,361 shares of the registrant’s common stock, par value $0.0001, were outstanding.

 

 

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 and from February 1, 2002 (date of inception) to March 31, 2012	2
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 and from February 1, 2002 (date of inception) to March 31, 2012	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 and from February 1, 2002 (date of inception) to March 31, 2012	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1a.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31
Signatures		32

 

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Bionovo, Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(in thousands, except share data) 

 

		March 31, 2012				December 31, 2011
		(unaudited)				(Note 1)
ASSETS
Current assets:
Cash and cash equivalents		$	446			$	2,549
Short-term investments			-				500
Receivables			5				5
Prepaid expenses			726				1,180
Other current assets			508				507
Total current assets			1,685				4,741
Property and equipment, net			8,450				11,382
Patents pending, net			1,766				1,691
Other assets			643				644
Total assets		$	12,544			$	18,458
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,039			$	1,543
Accrued clinical trial expenses			2,436				967
Accrued compensation and benefits			135				304
Current portion of capital lease obligations			644				872
Current portion of notes payable			9				9
Warrant liability			215				2,515
Other current liabilities			1,754				1,131
Total current liabilities			8,232				7,341
Non-current portion of capital lease obligations			32				42
Non-current portion of notes payable			70				72
Total liabilities			8,334				7,455
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued and outstanding			-				-
Common stock $0.0001 par value, 340,000,000 shares authorized, 80,326,361 and 54,581,955 shares outstanding at March 31, 2012 and December 31, 2011, respectively			8				5
Additional paid-in capital			99,362				98,243
Accumulated other comprehensive income (loss)			-				-
Accumulated deficit			(95,160	)			(87,245	)
Total shareholders’ equity			4,210				11,003
Total liabilities and shareholders’ equity		$	12,544			$	18,458

 

See accompanying notes to these condensed consolidated financial statements

 

 

Bionovo, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per share data)

 

		For the Three Months Ended March 31,								Accumulated from February 1, 2002 (Date of inception) to March 31,
		2012				2011				2012
Revenue		$	52			$	65			$	2,109
Operating expenses:
Research and development			5,935				3,883				80,810
General and administrative			1,136				994				25,631
Merger cost			-				-				1,964
Total operating expenses			7,071				4,877				108,405
Loss from operations			(7,019	)			(4,812	)			(106,296	)
Other income (expense):
Change in fair value of warrant liability			2,300				3,122				13,151
Interest income			-				9				2,120
Loss on write off of leasehold improvements			(2,191	)			-				(2,191	)
Lease termination costs			(982	)			-				(982	)
Interest expense			(16	)			(29	)			(634	)
Other expense, net			(6	)			-				(328	)
Total other income (expense)			(895	)			3,102				11,136
Net loss		$	(7,914	)		$	(1,710	)		$	(95,160	)
Basic and diluted net loss per common share		$	(0.12	)		$	(0.04	)		$	(5.85	)
Shares used in computing basic and diluted net loss per share			64,749				43,550				16,255

 

See accompanying notes to these condensed consolidated financial statements

 

  

Bionovo, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited, in thousands)

 

		For the Three Months Ended March 31,								Accumulated from February 1, 2002 (Date of inception) to March 31,
		2012				2011				2012
Net loss		$	(7,914	)		$	(1,710	)		$	(95,160	)
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale			-				-				-
Other comprehensive income (loss)			-				-				-
Comprehensive loss		$	(7,914	)		$	(1,710	)		$	(95,160	)

  

See accompanying notes to these consolidated financial statements

 

 

Bionovo, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flow

(unaudited, in thousands)

 

		For the Three Months Ended March 31,								Accumulated from February 1, 2002 (Date of inception) to March 31,
		2012				2011				2012
Cash flows from operating activities:
Net loss		$	(7,914	)		$	(1,710	)		$	(95,160	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			777				584				9,118
Stock-based compensation expense			(114	)			173				7,132
Amortization and accretion of investments			-				11				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 warrrant liability			(2,300	)			(3,122	)			(13,151	)
Loss on disposal of property and equipment			7				-				158
Loss on write off of leasehold improvements			2,191				-				2,191
Loss on disposal of inactive patent applications			-				-				26
Noncash adjustment to available-for-sale securities			-				-				1
Changes in assets and liabilities:
Receivables			-				(27	)			(5	)
Prepaid expenses and other current assets			453				168				(634	)
Deposits and other non-current assets			1				(246	)			(617	)
Accounts payable			1,496				(42	)			3,039
Accrued clinical trial expenses			1,469				166				2,436
Accrued compensation and benefits			(169	)			(364	)			135
Other accrued liabilities			623				(230	)			1,755
Net cash used in operating activities			(3,480	)			(4,639	)			(81,116	)
Cash flows from investing activities:
Capital expenditures			(8	)			(1,625	)			(15,188	)
Proceeds from sale-leaseback transaction			-				-				1,205
Acquisition of intangible assets			(109	)			(230	)			(2,162	)
Proceeds from sales and maturities of investments			500				-				49,860
Purchases of available-for-sale securities			-				(6,351	)			(50,200	)
Net cash provided by (used in) investing activities			383				(8,206	)			(16,485	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net			1,235				27,258				98,009
Payments under capital lease obligations			(239	)			(318	)			(4,701	)
Payments under notes payable			(2	)			(15	)			(125	)
Proceeds from exercise of warrants and options			-				-				5,001
Payments of convertible notes payable			-				-				(50	)
Payments for financing costs for convertible notes			-				-				(87	)
Net cash provided by financing activities			994				26,925				98,047
Net (decrease) increase in cash and cash equivalents			(2,103	)			14,080				446
Cash and cash equivalents at the beginning of the period			2,549				2,638				-
Cash and cash equivalents at the end of the period		$	446			$	16,718			$	446

  

See accompanying notes to these condensed consolidated financial statements

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

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’’.

 

Restructure of Work Force

 

As a result of insufficient cash flow, on March 9, 2012, the Company announced that it reduced its workforce by over 90%. As of March 31, 2012, the Company had 5 remaining employees, all at a reduced salary rate. The Company began formulating the work force reduction plan during the first quarter of 2012. In connection with the work force reduction, accrued vacation pay of approximately $166,000 was paid to the affected employees upon termination. The Company did not grant the employees any severance.

 

Going Concern

 

The Company has sustained recurring losses and negative cash flows from operations. At March 31, 2012, the Company had an accumulated deficit of $95.2 million, working capital deficit of $6.6 million and shareholders’ equity of $4.2 million. Over the past years, the Company has been funded through a combination of private equity, debt, lease financing and public offerings. As of March 31, 2012, the Company had $0.4 million in its cash accounts and is not able to meet its current or long-term financial obligations. The Company will run out of cash during June if it does not find alternative funding sources.

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

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. In order to continue as a going concern, the Company must obtain additional financing urgently. 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 not successful in its efforts to raise additional funds in the near term, the Company may be required to sell its capital equipment at a significant discount 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.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete annual financial statements. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or for any other future period.

 

The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Bionovo, Inc. Annual Report on Form 10-K for the year ended December 31, 2011.

 

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the Company’s consolidated financial position as of March 31, 2012, the consolidated results of the Company’s operations for the three months ended March 31, 2012 and 2011 and inception to date from February 1, 2002 to March 31, 2012, and the Company’s cash flows for the three months ended March 31, 2012 and 2011 and inception to date from February 1, 2002 to March 31, 2012.

 

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.

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

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.

 

Revenue Recognition

 

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

 

Revenue from technology licenses or other payments under collaborative agreements where the Company has a continuing obligation to perform is recognized as revenue over the expected period of the continuing performance obligation. Revenue on government contracts is recognized on a qualified cost reimbursement basis. For the three months ended March 31, 2012 and 2011, the Company recognized revenue from grants awarded by the National Institutes of Health of $0 and $65,000, respectively.

 

During the first quarter of 2012, the Company provided consulting services to one customer and recognized $51,500 in related revenue.

 

Research and Development

 

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

 

Warrant Liability

 

In October of 2010 and February of 2011, 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 condensed consolidated statements of operations.

  

Recent Accounting Pronouncements

 

There have been no recent accounting pronouncements issued applicable to Bionovo, Inc. other than those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

The following table shows supplemental cash flows for the three months ended March 31, 2012 and 2011 and inception to date from February 1, 2002 through March 31, 2012 (in thousands).

 

		For the Three Months Ended March 31,								Accumulated from February 1, 2002 (Date of inception) to March 31,
		2012				2011				2012
		(in thousands)
Cash paid during the year for:
Interest paid		$	16			$	30			$	622
Income taxes paid			1				1				16
Supplemental disclosure of non-cash investing and financing:
Initial fair value of warrant liability							10,191				12,535
Constuction in progress included in other current liabilities							4,403				4,403
Non-cash warrant expense											1,964
Conversion of notes payable to common stock											450
Assets acquired under capital lease											5,376
Assets acquired under notes payable											204
Issuance of common stock for services			255								1,020
Conversion of accrued interest payable											12
Issuance of common stock with reverse merger											4

  

4. CASH, CASH EQUIVALENTS AND INVESTMENTS

 

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

 

As of March 31, 2012, all of the Company’s funds are held in cash accounts totaling approximately $0.4 million. The following is a summary of cash, cash equivalents, and available-for-sale securities at March 31, 2012 and December 31, 2011 (in thousands):

 

		March 31, 2011
		Cost				Unrealized				Unrealized				Estimated
		Basis				Gains				Losses				Fair Value
Total cash balance		$	446			$	-			$	-			$	446

 

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

		December 31, 2011
		Cost				Unrealized				Unrealized				Estimated
		Basis				Gains				Losses				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

 

As of March 31, 2012 and December 31, 2011, unrealized gains or losses on available-for-sale securities included in accumulated other comprehensive income were $0. There was no realized gain or loss on the sale of available-for-sale securities for the three months ended March 31, 2012 or March 31, 2011.

 

5. FAIR VALUE

 

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

 

As of March 31, 2012, the Company had no financial assets subject to the fair value hierarchy disclosure as there were no cash equivalents or short-term investments. The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2011 (in thousands):

 

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

 

Financial liabilities carried at fair value as of March 31, 2012 and December 31, 2011 were classified as follows (in thousands):

 

						Fair Value Measurements at Reporting Date Using
March 31, 2012			Total				(Level 1)				(Level 2)				(Level 3)
Warrant liability		$	215			$	-			$	-			$	215

 

December 31, 2011		Total				(Level 1)				(Level 2)				(Level 3)
Warrant liability		$	2,515			$	-			$	-			$	2,515

 

As discussed in Note 2, “Summary of Significant Accounting Policies,” the fair value of the warrant liability was initially recorded on each grant date and remeasured at each reporting period using the Black-Scholes Model, which requires inputs such as the expected term of the warrants, share price volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. The fair value of the warrant liability was estimated using the following range of assumptions at March 31, 2012 and December 31, 2011:

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

		October 2010 Warrants								February 2011 Warrants
		March 31, 2012				December 31, 2011				March 31, 2012				December 31, 2011
Expected volatility			149	%			134	%			144	%			131	%
Risk-free interest rate			0.64	%			0.55	%			0.72	%			0.62	%
Expected life			3.5 years				3.8 years				3.8 years				4.1 years

 

The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the three month period ended March 31, 2012 (in thousands):

 

Balance at December 31, 2011		$	2,515
Net decrease in fair value of warrant liability on remeasurment			(2,300	)
Balance at March 31, 2012		$	215

 

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

 

6. PROPERTY AND EQUIPMENT

 

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

 

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

 

The following is a summary of property and equipment, at cost less accumulated depreciation, at March 31, 2012 and December 31, 2011 (in thousands):

 

		March 31, 2012				December 31, 2011
Office and lab equipment		$	9,520			$	9,527
Leasehold improvements			5,823				9,067
Computer equipment and software			402				394
			15,745				18,988
Less:  accumulated depreciation			(7,295	)			(7,606	)
Property and equipment, net		$	8,450			$	11,382

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

  

If the Company is not successful in its efforts to obtain additional funding, it may be required to sell its laboratory and manufacturing equipment. The Company is exploring possible transactions for the sale of its equipment but has not yet entered into any such agreement. The Company expects that a transaction to sell its laboratory and manufacturing equipment would result in funds significantly below the book value of the assets recorded. As of March 31, 2012, the Company has not recorded an impairment charge to its laboratory and manufacturing equipment as the Company continues to actively pursue funding options that would allow it to use the laboratory and manufacturing equipment as intended.

 

In the second quarter of 2012, the Company decided to abandon its facility in Emeryville, California and consolidate its operations at its Hayward, California location. Accordingly, for the three months ended March 31, 2012, the Company recognized a loss on impairment of fixed assets of $2.2 million to write-off the Emeryville leasehold improvements of approximately $3.2 million and related accumulated depreciation of approximately $1.0 million. Included in the impaired leasehold improvements was $0.2 million in gross assets acquired under two notes payable with the lessor of the Emeryville facility. As of March 31, 2012, the Company owed the lessor approximately $79,000 of the outstanding note payable balance (see Note 8, “Notes Payable” for further details).

 

Office and lab equipment include gross assets acquired under capital leases of approximately $2.3 million as March 31, 2012 and December 31, 2011. Amortization of assets under capital leases is included in depreciation expense. For the three months ended March 31, 2012 and 2011, the Company recorded depreciation expense of approximately $0.7 million and $0.6 million, respectively.

 

Intangible assets - Patent Costs

 

Intangible assets consist of patent licensing costs incurred to date. The Company is amortizing the patent cost incurred to date, over a 15 year period. If the patents are not awarded, the costs related to those patents will be expensed in the period that determination is made. As of March 31, 2012, the Company had capitalized approximately $2.0 million in patent licensing costs. For the three months ended March 31, 2012 and 2011, the Company recorded amortization expense of approximately $34,000 and $26,000, respectively.

 

7. OTHER CURRENT LIABILITIES

 

Other current liabilities include the following as of March 31, 2012 and December 31, 2011 (in thousands):

  

		March 31, 2012				December 31, 2011
Accrued consulting fees			68				40
Accrued legal fees			16				101
Deferred rent			602				572
Lease termination costs			982				-
Other current liabilities			86				418
Total other current liabilities		$	1,754			$	1,131

 

8. NOTES PAYABLE

 

In January of 2009, the Company relocated to its facility in Emeryville, California. Related to the relocation, the Company financed leasehold improvements under two notes payable with the lessor of the building. The first note of $100,000 bears interest at 9.5% and is payable in monthly payments of interest and principal amounting to approximately $1,000 beginning May 1, 2009 and continuing over the remaining lease term with a due date of December 31, 2018. The second note of $104,000 was paid in full in July of 2011. The future minimum payments as of March 31, 2012 are as follows (in thousands):

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

		Notes Payable
2012 (1)		$	13
2013			16
2014			16
2015			16
2016			16
Thereafter			31
Total minimum payments		$	108
Less: Amount representing interest			(29	)
Present value of minimum payments		$	79
Less: Current portion			(9	)
Non-current portion of notes payable		$	70

 

   (1) For the nine months ending December 31, 2012

   

9. BASIC AND DILUTED LOSS PER SHARE

 

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

 

Potentially dilutive securities are excluded from the calculation of earnings per share if their inclusion is antidilutive. The effect of the options and warrants was antidilutive for the three months ended March 31, 2012 and 2011. The following table shows the total outstanding securities considered antidilutive and therefore, excluded from the computation of diluted net loss per share (in thousands):

 

		Three Months Ended March 31,
		2012				2011
Options to purchase common stock			4,937				1,255
Options to purchase common stock - outside plan			-				21
Warrants to purchase common stock			25,627				26,345
Total			30,564				27,621

 

10. SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

 

Socius Purchase 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. During the three months ended March 31, 2012 and prior to the termination of the Socius Purchase Agreement, we issued 6,031,915 shares of our common stock under the agreement resulting in gross proceeds of $1,050,000.

 

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”).

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

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 31, 2012, the final VWAP Shares was 5,480,795 which included 2,980,795 of additional shares issued by the Company to Socius as final settlement.

 

March 2012 Securities Purchase Agreement

 

On March 12, 2012, the Company 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 its common stock and warrants to purchase 11,485,844 shares of its common stock for net proceeds of approximately $0.4 million. The exercise price of the warrants was $0.03 per share and the warrants expired on March 30, 2012. No warrants issued under the Securities Purchase Agreement were exercised prior to their expiration.

 

Stock Option Plan

 

On April 6, 2005, in connection with the completion of the reverse merger, the board of directors assumed and adopted the Stock Incentive Plan, as amended, (the “Plan”) of Bionovo Biopharmaceuticals and 699,358 shares of common stock for issuance under the Plan. In May of 2006 and June of 2008, the shareholders approved increases totaling 1,200,000 of additional shares for the option plan resulting in a total of 1,899,358 shares reserved for issuance under the plan. On May 10, 2011, the shareholders approved an increase of 10,100,642 additional shares for the plan, for a total of 12,000,000.

 

Under the Plan, incentive options to purchase the Company’s common stock may be granted to employees at prices not lower than fair market value at the date of grant as determined by the Board of Directors. Non-statutory options (options that do not qualify as incentive options) may be granted to employees and consultants at prices no lower than 85% of fair market value at the date of grant as determined by the Board of Directors. In addition, incentive or non-statutory options may be granted to persons owning more than 10% of the voting power of all classes of stock at prices no lower than 110% of the fair market value at the date of grant (no longer than ten years from the date of grant, five years in certain instances). Options granted generally have a five-year life and typically vest over four years.

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

As of March 31, 2012, the Company had reserved 11.9 million shares of common stock for future issuance under the Plan.

 

Share-based Compensation Expense

 

The following table shows total share-based compensation expense included in the condensed consolidated statements of operations for the three months ended March 31 2012 and 2011 (in thousands):

 

		Three Months Ended March 31,
		2012				2011
Research and development		$	(53	)		$	59
General and administrative			(61	)			114
Total share-based compensation expense		$	(114	)		$	173

 

As discussed in Note 1, “Business and Organization,” the Company reduced its workforce by over 90% in March of 2012. As of March 31, 2012, the Company had 5 remaining employees, all at a reduced salary rate. The credit balance shown for share-based compensation expense for the three months ended March 31, 2012 is due to the reversal of expense for unvested cancelled options of approximately $249,000 partially offset by expense for continuing employees of approximately $135,000. There was no capitalized share-based compensation cost as of March 31, 2012 and there were no recognized tax benefits during the three months ended March 31, 2012 and 2011.

 

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

 

The fair value of share-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the three months ended March 31, 2012 and 2011:

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

   

		Three Months Ended March 31,
		2012				2011
Dividend yield			0	%			0	%
Expected volatility			135.0	%			152.0	%
Risk-free interest rate			0.54	%			1.07	%
Expected life			3.67 years				2.67 years

 

Share option activity for the three months ended March 31, 2012 was as follows:

 

		Options (in thousands)				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)				Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2011			7,276			$	1.62
Granted			685				0.22
Exercised			-				-
Canceled or forfeited			(2,931	)			1.69
Expired			(93	)			9.58
Options outstanding at March 31, 2012			4,937			$	1.23				4.0			$	-
Options exercisable at March 31, 2012			1,649			$	2.30				3.5			$	-
Options exercisable and options expected to vest at March 31, 2012			4,196			$	1.33				3.9			$	-

 

Pursuant to the Plan, upon involuntary termination non-vested options are cancelled immediately. Vested options remain exercisable for 90 days following the involuntary termination. The 2.9 million options included under the heading “canceled or forfeited” in the table above include the cancellation of approximately 2.6 million unvested options due to the Company’s workforce reduction. An additional 0.7 million vested options will expire in June of 2012 if not exercised by the terminated employees within 90 days of termination. As of March 31, 2012, all applicable options had exercise prices substantially in excess of the market price and were not expected to be exercised.

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

Unvested share activity for the three months ended March 31, 2012 was as follows:

 

		Unvested Number of Options (in thousands)				Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2011			5,259			$	0.62
Granted			685				0.18
Vested			(36	)			0.32
Forfeited			(2,620	)			0.60
Unvested balance at March 31, 2012			3,288				0.55

 

As of March 31, 2012, the Company had approximately 7.0 million common shares reserved for future grant under its share option plan and there were no shares exercised during the first three months of 2012.

 

At March 31, 2012, there was $1.0 million of unrecognized share-based compensation expense related to unvested share options with a weighted average remaining recognition period of 3.0 years.

  

11. STOCK WARRANTS

 

The Company has issued warrants to investors as part of its overall financing strategy. As of March 31, 2012, there were 25.6 million warrants to purchase Bionovo shares outstanding with a weighted average price of $2.71, a weighted average remaining life of 3.3 years and an aggregate exercise price of $69.4 million. Warrants to purchase an aggregate of 718,523 shares at a weighted-average exercise price of $10.62 expired in January of 2012.

 

In connection with the closing of the Company’s March 2012 Securities Purchase Agreement, the investors were issued warrants to purchase up to an aggregate of 11,485,844 shares of the Company’s common stock at a price of $0.03 per share. The warrants expired on March 30, 2012. As of March 31, 2012, none of the warrants were exercised and none remained outstanding.

 

The following table summarizes information about all warrants outstanding as of March 31, 2012:

 

Issue Date		Expiration Date		Number Outstanding (in thousands)		Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (years)
October 2007		October 2012		1,491			12.50				0.59
October 2009		October 2014		6,174			4.28				2.52
October 2010		October 2015		2,045			1.64				3.52
February 2011		February 2016		15,917			1.32				3.84
				25,627			2.71				3.31

 

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

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

Warrant Liability

 

As discussed above and in Note 2, “Summary of Significant Accounting Policies,” the warrants issued in the October 2010 Private Placement (“October 2010 warrants”) and the February 2011 Public Offering (“February 2011 warrants”) include provisions that provide the warrant holders with an option to require the Company (or its successor) to purchase their warrants for cash in an amount equal to their Black-Scholes value, in the event of a change in control of the Company. Accordingly, the fair value of the warrants at the issuance date was estimated using the Black-Scholes Model and the Company initially recorded a warrant liability of $1.7 million for the October 2010 warrants and a liability of $10.8 million for the February 2011 warrants. The Company remeasured the warrant liability resulting from these two issuances at each reporting period. For the three months ended March 31, 2012, the Company recorded adjustments resulting in a net decrease to the warrant liability of approximately $2.3 million with a corresponding entry to record a gain in other income (expense) in the Company’s condensed consolidated statements of operations. For the same period of 2011, the Company recorded adjustments resulting in a net decrease to the warrant liability of approximately $3.1 million with a corresponding entry to record a gain in other income (expense) in the Company’s condensed consolidated statements of operations. Additional disclosures regarding assumptions used in calculating the fair value of the warrant liability are included in Note 5, “Fair Value.”

 

The Securities Purchase Agreement of March 2012 did not result in a change of control as defined in the warrant agreements or trigger the cash settlement provisions in relation to the warrants issued in the October 2010 or February 2011 financing transactions.

 

12. LEASES, COMMITMENTS AND CONTINGENCIES

  

The Company leases certain office and laboratory equipment under agreements that are classified as capital leases. The cost of equipment under capital leases is included in the Balance Sheets as property and equipment and was $2.3 million at March 31, 2012 and December 31, 2011. Amortization of assets under capital leases is included in depreciation expense. Accumulated amortization at March 31, 2012 and December 31, 2011 was $1.3 million and $1.1 million, respectively.

 

The Company leases its laboratory and office facilities for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2021. The leases provide for increases in future minimum annual rental payments and the agreements generally require the Company to pay executory costs (real estate taxes, insurance, and repairs), which are approximately $55,000 per month. Operating lease expense totaled approximately $0.6 million for the three months ended March 31, 2012 and $0.5 million for the same period of 2011.

 

In April of 2012, the Company decided to abandon its facility in Emeryville, California and consolidate its operations at its Hayward, California facility. Although the Company has abandoned the Emeryville facility, the Company remains liable for the remaining duration of the lease. Accordingly, the full remaining balance of approximately $14.7 million is included in the table below under “Operating Leases.” The Company is currently negotiating with the lessor to modify the lease terms. The Company recorded approximately $982,000 of lease termination costs in the condensed consolidated financial statements as of March 31, 2012.

 

 

Bionovo, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements – continued (unaudited)

 

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

 

		Capital Leases				Operating Leases
2012 (1)		$	653			$	2,006
2013			45				2,763
2014			-				3,224
2015			-				3,423
2016			-				3,519
Thereafter			-				10,848
Total minimum lease payments		$	698			$	25,783
Less: Amount representing interest			(22	)
Present value of minimum lease payments		$	676
Less: Current portion of capital lease obligations			(644	)
Non-current portion of capital lease obligations		$	32

 

     (1) For the nine months ending December 31, 2012

 

13. INCOME TAX

 

The Company does not have any unrecognized tax benefits and does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized for the period ended March 31, 2012. As of March 31, 2012, the Company had recorded a full valuation reserve for all recognized tax benefits.

 

The U.S. Tax Code limits the annual use of net operating loss and tax credit carry forwards in certain situations where changes occur in stock ownership of a company.

 

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

 

14. SUBSEQUENT EVENTS

 

As disclosed in Note 6, “Property and Equipment” and Note 12, “Leases, Commitments and Contingencies,” in April of 2012, the Company decided to abandon its Emeryville, California facility and consolidate its operations at its facility in Hayward, California. For the three months ended March 31, 2012, the Company recorded an impairment loss of $2.2 million upon write-off of Emeryville leasehold improvements of $3.2 million and accumulated depreciation of $1.0 million.

 

On April 30, 2012, David Boyle, the Company’s Chief Financial Officer, resigned from the Company to pursue other business opportunities. The Company also recorded approximately $982,000 of lease termination costs at March 31, 2012

 

The Company held a Special Meeting of its Shareholders on May 3, 2012. The shareholders approved an amendment to the Company’s certificate of incorporation to effect a reverse stock split of the Company’s common stock at an exchange ratio of 1-for-250 and to authorize the Board of Directors of the Company, in its discretion, to implement the reverse stock split at any time prior to December 31, 2012 by filing an amendment to the Certificate of Incorporation.

 

  

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

 

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

 

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.

 

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”.

 

Restructure 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 31, 2012, the Company had 5 remaining employees, all at a reduced salary rate. The Company began formulating the work force reduction plan during the first quarter of 2012. In connection with the work force reduction, accrued vacation pay of approximately $166,000 was paid to the affected employees upon termination. The Company did not grant the employees any severance.

 

 

Going Concern

 

We have sustained recurring losses and negative cash flows from operations. At March 31, 2012, we had an accumulated deficit of $95.2 million, working capital deficit of $6.6 million and shareholders’ equity of $4.2 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. In order to continue as a going concern, we must obtain additional financing urgently. We are 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 we are not successful in our efforts to raise additional funds in the near term, we may be required to sell our capital equipment at a significant discount 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 will be severely diluted if not eliminated entirely.

 

Business

 

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

 

Our lead drug candidate, Menerba^™ (formerly MF-101), represents a new class of receptor sub-type selective estrogen receptor modulator (“SERM”), for the treatment of vasomotor symptoms of menopause, or “hot flashes.” We have designed Menerba to selectively modulate estrogen receptor beta (“ERß”) and we believe it could provide a safe and effective alternative to existing Food and Drug Administration (“FDA”) approved therapies that have been observed to pose a significant risk to women for developing breast cancer, stroke, cardiovascular disease, blood clots and other serious diseases. 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 to10 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 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 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 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.

  

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 service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with selected service providers and make adjustments, if necessary. Examples of estimated accrued expenses include:

 

·

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

·

fees paid to investigative sites in connection with clinical trials;

·

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

·

professional service fees.

 

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under 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 condensed 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 March 31, 2012, 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 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.

 

 

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

 

There have been no recent accounting pronouncements issued that are applicable to us other that those included with our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Research and Development Activities

 

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

 

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

 

During the three months ended March 31, 2012 and 2011, we incurred research and development expenses of $5.9 million and $3.9 million, respectively. If we are successful in obtaining addition funding, 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.

 

 

Results of Operations

 

Revenues

		Three Months Ended March 31,								Change in
		2012				2011				%
		(in thousands)
Revenue		$	52			$	65				-20	%

 

During the three months ended March 31, 2012, we recognized revenue of approximately $52,000 for consulting services provided to one customer. We do not expect these consulting services to be significant to our operations as a whole. During the three months ended March 31, 2011, we recognized revenue of approximately $65,000 under a one-year grant from the National Institutes of Health (“NIH”) awarded in 2010. We did not recognize any NIH grant revenue during the three months ended March 31, 2012.

 

Research and Development Expenses

 

		Three Months Ended March 31,								Change in
		2012				2011				%
		(in thousands)
Research and development expenses		$	5,935			$	3,883				53	%

 

Research and development (R&D) expenses reflect costs for the development of drugs and include salaries, contractor and consultant fees and other support costs, including employee stock-based compensation expense. The increase in R&D expenditures during the three months ended March 31, 2012 compared to the same period of 2011 is primarily due to our Phase 3 testing of Menerba. Future spending and continued progress on the Menerba Phase 3 trial is dependent upon our ability to obtain additional funding.

  

General and Administrative Expenses

 

		Three Months Ended March 31,								Change in
		2012				2011				%
		(in thousands)
General and administrative expense		$	1,136			$	994				14	%

 

General and administrative (G&A) expense includes personnel costs for finance, administration, information systems, marketing, professional fees as well as facilities expenses. We do not currently have any dedicated sales support or marketing personnel. Marketing and communications expenses include public relations related to our drug development and clinical trials, participation in conventions and tradeshows, and website related expenses. The increase in G&A expenses during the three months ended March 31, 2012 as compared to the same period in 2011 is primarily due to legal fees incurred for unsuccessful funding transactions.

  

 

Other Income (Expense)

 

		Three Months Ended March 31,								Change in
		2012				2011				%
		(in thousands)
Other income (expense):
Change in fair value of warrant liability			2,300				3,122				-26	%
Interest income			-				9				-100	%
Loss on write off of leasehold improvements			(2,191	)			-				*
Lease termination costs			(982	)			-				*
Interest expense			(16	)			(29	)			-45	%
Other expense, net			(6	)			-				*
Total other income (expense)		$	(895	)		$	3,102				-129	%

 

The change in fair value of warrant liability during the three months ended March 31, 2012 and 2011 is due to the decrease of our stock price. The write off of the leasehold improvements in Emeryville resulted in a loss of approximately $2.2 million. We have also recorded approximately $1 million in leasehold termination costs.

 

Income Taxes

 

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

 

Liquidity and Capital Resources

 

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

 

As of March 31, 2012 we had cash of $0.4 million compared to cash, cash equivalents and short-term investments of $3.0 million at December 31, 2011. The decrease in cash is due to cash used to fund continuing operations. We are currently insolvent and do not have adequate funds to meet our current or long-term obligations.

 

In order to continue as a going concern, we must obtain additional financing urgently. We are currently pursuing a variety of funding options, including equity offerings, partnering/co-investment, venture debt and commercial licensing agreements for our products. If we are not successful in our efforts to raise additional funds in the near term, we may be required to sell our capital equipment at a significant discount 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 will be severely diluted if not eliminated entirely.

 

As of March 31, 2012, we had an accumulated deficit of $95.2 million, working capital deficiency of $6.6 million, and total shareholders’ equity of $4.2 million.

 

Financing Transactions

 

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. During the three months ended March 31, 2012 and prior to the termination of the Socius Purchase Agreement, we issued 6,031,915 shares of our common stock under the agreement resulting in gross proceeds of $1,050,000.

 

 

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 31, 2012, the final VWAP Shares was 5,480,795 which included 2,980,795 of additional shares issued by the Company to Socius as final settlement.

 

Securities Purchase Agreement

 

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 resulting in net proceeds of approximately $0.4 million. The exercise price of the warrants was $0.03 per share and the warrants expired on March 30, 2012. As of March 30 2012, no warrants were exercised prior to their expiration.

 

Notes Payable

 

In connection with the move to our Emeryville, California facility in 2009, 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 March 31, 2012 are as follows (in thousands):

 

 

		Notes Payable
2012 (1)		$	13
2013			16
2014			16
2015			16
2016			16
Thereafter			31
Total minimum payments		$	108
Less: Amount representing interest			(29	)
Present value of minimum payments		$	79
Less: Current portion			(9	)
Non-current portion of notes payable		$	70

 

(1) For the nine months ending December 31, 2012

 

Commitments and Contingencies

 

In the second quarter of 2012, we decided to abandon our facility in Emeryville, California and consolidate our operations at facility in Hayward, California. Although we have abandoned the Emeryville facility, the Company remains liable for the remaining duration of the lease. Accordingly, the full remaining balance of approximately $14.7 million is included in the table below under “Operating Lease Obligations.” The Company is currently negotiating with the lessor to modify the lease terms. The Company recorded approximately $982,000 of lease termination costs in the condensed consolidated financial statements as of March 31, 2012. Our contractual obligations and future minimum lease payments that are non-cancelable at March 31, 2012 are disclosed in the following table (in thousands).

 

		Total				2012				2013				2014				2015				2016				2017 and beyond
Contractual Obligations		$	972			$	972			$	-			$	-			$	-			$	-			$	-
Operating lease obligations			25,783				2,006				2,763				3,224				3,423				3,519				10,848
Notes payable			108				13				16				16				16				16				31
Capital lease obligations			698				653				45				-				-				-				-
Total contractual commitments		$	27,561			$	3,644			$	2,824			$	3,240			$	3,439			$	3,535			$	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

 

In April of 2012, we decided to abandon our facility in Emeryville, California and consolidate our operations at our facility in Hayward, California. Accordingly, during the three months ended March 31, 2012, we recorded an impairment of $2.2 million due to the write-off of $3.2 million in leasehold improvements at the Emeryville facility and related accumulated depreciation of $1.0 million. The Company recorded approximately $982,000 of lease termination costs in the condensed consolidated financial statements as of March 31, 2012.

 

On April 30, 2012, David Boyle, the Company’s Chief Financial Officer, resigned from the Company to pursue other business opportunities.

 

The Company held a Special Meeting of its Shareholders on May 3, 2012. The shareholders approved an amendment to the Company’s certificate of incorporation to effect a reverse stock split of the Company’s common stock at an exchange ratio of 1-for-250 and to authorize the Board of Directors of the Company, in its discretion, to implement the reverse stock split at any time prior to December 31, 2012 by filing an amendment to the Certificate of Incorporation.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

As of March 31, 2012, we had cash of $0.4 million in checking and savings accounts. We did not have any cash equivalents or short-term investments. When we do hold short-term investments, we expect they will likely decline by an immaterial amount if market interest rates increase and, therefore, we believe our exposure to interest rate changes is immaterial. Declines of interest rates over time will, however, reduce our interest income from short-term investments.

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures: We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2012 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

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

 

Changes in internal controls: On March 9, 2012, we implemented a workforce reduction of approximately 90%. Although all accounting employees other than the CFO were terminated pursuant to the workforce reduction, we have retained the services of two of the terminated employees on a consulting basis to perform the quarterly accounting and reporting function. Due to the continuity of the staff and vigorous oversight of all expenditures by the CFO, we believe there were no significant changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. However with the departure of our CFO, effective April 30, 2012, it is possible that our internal controls over financial reporting may deteriorate. The Company will attempt to mitigate this through various measures.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

 

ITEM 1a.

RISK FACTORS

 

There have been no material changes to the risk factors disclosed in our 2011 Annual Report on Form 10-K as filed on March 30, 2012. 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.

OTHER INFORMATION

 

None.

 

 

ITEM 6.

EXHIBITS

 

Exhibit
Number
3.1		Certificate of Incorporation of the registrant dated as of June 27, 2005. (1)
3.2		Certificate of Amendment of the Certificate of Incorporation of the registrant dated May 9, 2007. (2)
3.3		Certificate of Amendment of the Certificate of Incorporation of the registrant dated July 7, 2010. (3)
3.4		Certificate of Amendment of the Certificate of Incorporation of the registrant dated August 27, 2010. (4)
3.5		Amended and Restated By-Laws of the registrant. (5)
31.1*		Certification of Chief Executive Officer, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

*		Filed herewith
(1)		Incorporated by reference to the registrant’s Registration Statement on Form SB-2, as amended, initially filed with the SEC on July 5, 2005.
(2)		Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on May 10, 2007.
(3)		Incorporated by reference to the registrant’s Registration Statement on Form S-1, filed with the SEC on July 16, 2010.
(4)		Incorporated by reference to the registrant’s Amendment No. 1 to its Registration Statement on Form S-1, filed with the SEC on January 21, 2011.
(5)		Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on January 7, 2008.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 15th day of May 2012.

 

	BIONOVO, INC.
	By:	/s/ Isaac Cohen
		Isaac Cohen
		Chairman and Chief Executive Officer
	By:	/s/ Robert Farrell
		Robert Farrell
		Acting Chief Financial Officer