Increase in Authorized Shares

On July 7, 2010, the Company executed an amendment to its Certificate of Incorporation increasing the authorized shares to 350,000,000, of which 340,000,000 are common stock and 10,000,000 are preferred stock. The increase was approved by the shareholders at the Company’s May 3, 2010 Shareholder Meeting. The voting results of the meeting were reported on the Company’s Form 8-K filed May 5, 2010.

Common Stock Issuances

On July 6, 2010, Bionovo, Inc. entered into a common stock purchase agreement (“Aspire Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein Aspire Capital is committed to purchase up to an aggregate of $15.0 million of Bionovo, Inc.’s shares of common stock over the two-year term of the Aspire Purchase Agreement, based on certain terms and conditions set forth in the Aspire Purchase Agreement, including a minimum purchase price of $1.98 per share. As of December 31, 2011, there have been no sales of common stock to Aspire Capital under the Aspire Purchase Agreement.

In consideration for entering into the purchase agreement with Aspire Capital, the Company issued to Aspire Capital 279,070 shares as a commitment fee with an assigned value of $2.15 per share (as adjusted for the Company’s reverse stock split effective August 31, 2010). The commitment fee was valued at $600,000 and was capitalized and included in prepaid financing costs as of December 31, 2011. Aspire is required to refund the commitment fee in cash or shares proportionately based on the unfunded portion of the agreement upon termination of the agreement. The capitalized costs will be offset against any future proceeds proportionately based on the total amount funded under the agreement.

On October 6, 2010, the Company completed a registered direct offering through the sale of common stock and warrants. The Company sold a total of 2,727,270 shares of common stock, at a price of $1.10 per share and issued 2,045,451 warrants to purchase shares of common stock. The warrants were exercisable six months after issuance at $1.64 per share and will expire five years from the date of issuance. The shares of common stock and warrants were immediately separable and issued separately.

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

Preferred Stock

On December 30, 2011, the Company entered into a $5 million securities purchase agreement (the “Socius Purchase Agreement”) with Socius CG II, Ltd. (“Socius”), a Bermuda-based subsidiary of Socius Capital Group, LLC. Under the terms of the Socius Purchase Agreement, subject to certain conditions, the Company had the right, in its sole discretion, over a term of two years, to demand, through delivery of separate tranche notices, that Socius purchase up to a total of $5 million of its newly-created redeemable Series A preferred stock, par value $0.0001 per share (the “Preferred Stock”). As of December 31, 2011, no common shares, preferred shares or warrants were issued under the Socius Purchase Agreement.

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.

As of December 31, 2011, the Company had reserved 11.9 million shares of common stock for future issuance under the Plan.

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 expense. 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 zero-coupon issues. For the years ended December 31, 2011, 2010 and 2009, the weighted-average assumptions used were:


	Years Ended December 31,
	2011			2010			2009
Dividend yield		0	%		0	%		0	%
Expected volatility		137	%		150	%		127	%
Risk-free interest rate		1.22	%		1.04	%		1.42	%
Expected life		3.5 years			2.7 years			3.75 years

The following table summarizes share-based compensation expense related to employee and non-employee stock options for the years ended December 31, 2011, 2010 and 2009 (in thousands):


	Years Ended December 31,
	2011		2010		2009
Research and development	$	1,193	$	541	$	686
General and administrative		482		562		500
Total share-based compensation expense	$	1,675	$	1,103	$	1,186

There was no capitalized share-based compensation cost as of December 31, 2011 and 2010 and there were no recognized tax benefits during the years ended December 31, 2011, 2010 and 2009.

Share option activity for the year ended December 31, 2011 was as follows:


	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2010		1,246		$	6.87
Granted		6,916			0.76
Exercised		—			—
Canceled or forfeited		(864	)		2.20
Expired		(22	)		8.00
Options outstanding at December 31, 2011		7,276		$	1.62		4.2	$	—
Options exercisable at December 31, 2011		2,017		$	3.80		3.7	$	—
Options exercisable and options expected to vest at December 31, 2011		6,020		$	1.79		4.1	$	—

In 2011, the Company received approximately $1,000 for the exercise of non-plan options to purchase 20,643 common shares with an intrinsic value of approximately $5,000 on the date of exercise. There are no other non-plan options outstanding. No options issued under the Company’s option plan were exercised during the years ended December 31, 2011, 2010 and 2009.

The weighted-average grant date fair value of options granted for each of the last three years was as follows:


Grant Year	Options Granted (in thousands)		Weighted Average Grant Date Fair Value
2009		105	$	1.90
2010		364		1.64
2011		6,916		0.61

As of December 31, 2011, there was $2.0 million of total future compensation cost related to unvested stock options to be recognized over a weighted-average period of 3.25 years.

Unvested share activity for the year ended December 31, 2011 is summarized below:


	Unvested Number of Options (in thousands)			Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2010		189		$	4.83
Granted		6,916			0.61
Vested		(1,397	)		1.08
Forfeited		(449	)		0.85
Unvested balance at December 31, 2011		5,259		$	0.62

The following table summarizes information about stock options outstanding as of December 31, 2011:


	Options Outstanding						Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price		Number Exercisable (in thousands)		Weighted Average Exercise Price
$0.01 – $1.00		6,386		4.4	$	0.76		1,172	$	0.78
$1.01 – $3.00		228		3.5		1.67		194		1.62
$3.01 – $5.00		232		2.7		3.75		231		3.75
$5.01 – $10.00		151		0.7		7.35		141		7.41
$10.01 – $20.00		227		4.1		14.48		227		14.48
$20.01 – $30.00		52		0.6		23.84		52		23.84
		7,276		4.2		1.62		2,017		3.80

Shares Reserved for Future Issuance

The Company has reserved shares of common stock for future issuance as follows (in thousands):


	December 31,
	2011		2010		2009
Options to purchase common stock – Plan		7,276		1,246		1,022
Options to purchase common stock – Outside plan		—		21		21
Shares available for option grants		4,625		553		799
Warrants to purchase common stock		26,345		10,429		8,649
Total		38,246		12,249		10,491

7. SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Increase in Authorized Shares

Common Stock Issuances

Preferred Stock

Stock Option Plan

Share-based Compensation Expense

Shares Reserved for Future Issuance

BIONOVO INC 10-K