Riot Platforms, Inc. - Quarter Report: 2009 September (Form 10-Q)
FORM
10-Q
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended
September 30, 2009
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
_________ to __________
Commission
file number: 001-33675
|
ASPENBIO
PHARMA, INC.
|
|
(Exact
name of registrant as specified in its
charter)
|
|
Colorado
|
84-1553387
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
|
1585 South Perry Street, Castle Rock, Colorado
80104
|
|
(Address
of principal executive offices) (Zip
Code)
|
|
(303) 794-2000
|
|
(Registrant's
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one)
|
Large
accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
The
number of shares of no par value common stock outstanding as of November 2, 2009
was 37,467,642.
|
Page
|
||||||||
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PART
I — Financial Information
|
||||||||
|
Item
1.
|
Condensed
Financial Statements
|
|||||||
|
Balance
Sheets as of September 30, 2009 (unaudited) and December 31,
2008
|
3
|
|||||||
|
Statements
of Operations for the Three and Nine Months Ended September 30, 2009 and
2008 (unaudited)
|
4
|
|||||||
|
Statements
of Cash Flows for the Nine Months Ended September 30, 2009 and 2008
(unaudited)
|
5
|
|||||||
|
Notes
to Condensed Financial Statements (unaudited)
|
6
|
|||||||
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
||||||
|
Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
|
20
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||||||
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Item
4.
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Controls
and Procedures
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20
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||||||
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PART
II - Other Information
|
||||||||
|
Item
1.
|
Legal
Proceedings
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21
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||||||
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Item
1A.
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Risk
Factors
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21
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||||||
|
Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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21
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||||||
|
Item
3.
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Defaults
Upon Senior Securities
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**
|
||||||
|
Item
4.
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Submission
of Matters to a Vote of Security Holders
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**
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||||||
|
Item
5.
|
Other
Information
|
**
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||||||
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Item
6.
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Exhibits
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21
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||||||
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Signatures
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21
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|||||||
|
**
- Item is none or not applicable
|
2
Item I.
Condensed Financial Statements
AspenBio
Pharma, Inc.
Balance
Sheets
|
September
30, 2009
|
December
31, 2008
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 7,643,571 | $ | 11,819,505 | ||||
|
Short-term
investments
|
1,808,528 | 5,639,208 | ||||||
|
Accounts
receivable, net
|
34,006 | 63,194 | ||||||
|
Inventories
(Note 2)
|
696,132 | 572,286 | ||||||
|
Prepaid
expenses and other current assets
|
100,503 | 776,318 | ||||||
|
Total
current assets
|
10,282,740 | 18,870,511 | ||||||
|
Property
and equipment, net (Note 3)
|
3,296,017 | 3,415,728 | ||||||
|
Other
long term assets, net (Note 4)
|
2,129,390 | 1,900,439 | ||||||
|
Total
assets
|
$ | 15,708,147 | $ | 24,186,678 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,144,452 | $ | 833,240 | ||||
|
Accrued
compensation
|
153,997 | 156,054 | ||||||
|
Accrued
expenses – other
|
674,769 | 483,937 | ||||||
| Current portion of notes and other obligations (Note 5) | 150,243 | 358,533 | ||||||
|
Deferred
revenue, current portion (Note 6)
|
913,947 | 913,947 | ||||||
|
Total
current liabilities
|
3,037,408 | 2,745,711 | ||||||
|
Notes
and other obligations, less current portion (Note 5)
|
2,679,720 | 2,754,923 | ||||||
|
Deferred
revenue, less current portion (Note 6)
|
750,132 | 798,092 | ||||||
|
Total
liabilities
|
6,467,260 | 6,298,726 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity (Notes 7 and 8):
|
||||||||
|
Common
stock, no par value, 60,000,000 shares authorized;
|
||||||||
|
32,312,642
and 31,175,807 shares issued and outstanding
|
45,523,312 | 43,839,785 | ||||||
|
Accumulated
deficit
|
(36,282,425 | ) | (25,951,833 | ) | ||||
|
Total
stockholders' equity
|
9,240,887 | 17,887,952 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 15,708,147 | $ | 24,186,678 | ||||
Statements
of Operations
Periods
Ended September 30, (Unaudited)
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Sales
(Note 9)
|
$ | 69,212 | $ | 227,525 | $ | 222,251 | $ | 702,959 | ||||||||
|
Cost
of sales
|
16,646 | 141,821 | 303,535 | 496,939 | ||||||||||||
|
Gross
profit (loss)
|
52,566 | 85,704 | (81,284 | ) | 206,020 | |||||||||||
|
Other
revenue - fee (Note 6)
|
15,987 | 15,987 | 47,960 | 31,974 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling, general and administrative
(includes
non cash compensation
of $408,890; $388,560;
$1,214,887
and $1,065,362)
|
1,602,242 | 1,037,376 | 4,428,035 | 3,520,642 | ||||||||||||
|
|
||||||||||||||||
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Research
and development
|
2,275,175 | 1,963,196 | 5,933,495 | 4,324,385 | ||||||||||||
|
Total
operating expenses
|
3,877,417 | 3,000,572 | 10,361,530 | 7,845,027 | ||||||||||||
|
Operating
loss
|
(3,808,864 | ) | (2,898,881 | ) | (10,394,854 | ) | (7,607,033 | ) | ||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
27,616 | 178,015 | 171,242 | 634,012 | ||||||||||||
|
Interest
expense
|
(49,141 | ) | (53,893 | ) | (150,115 | ) | (175,692 | ) | ||||||||
|
Other,
net
|
— | 38,465 | 43,135 | 25,459 | ||||||||||||
|
Total
other income (expense)
|
(21,525 | ) | 162,587 | 64,262 | 483,779 | |||||||||||
|
Net
loss
|
$ | (3,830,389 | ) | $ | (2,736,294 | ) | $ | (10,330,592 | ) | $ | (7,123,254 | ) | ||||
|
Basic
and diluted net loss per share
|
$ | (.12 | ) | $ | (.09 | ) | $ | (.32 | ) | $ | (.23 | ) | ||||
|
Basic
and diluted weighted average number
|
||||||||||||||||
|
of
shares outstanding
|
32,158,512 | 31,117,128 | 31,833,900 | 31,179,785 | ||||||||||||
Statements
of Cash Flows
Nine
Months Ended September 30, 2009 and 2008
(Unaudited)
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (10,330,592 | ) | $ | (7,123,254 | ) | ||
|
Adjustments
to reconcile net loss to
|
||||||||
|
net
cash used in operating activities
|
||||||||
|
Stock
based compensation for services
|
1,214,887 | 1,065,362 | ||||||
|
Depreciation
and amortization
|
287,037 | 273,831 | ||||||
|
Amortization
of license fee
|
(47,960 | ) | (31,974 | ) | ||||
|
Noncash
charges
|
21,965 | 311,254 | ||||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
receivable
|
29,188 | 33,217 | ||||||
|
Inventories
|
(123,846 | ) | 15,722 | |||||
|
Prepaid
expenses and other current assets
|
675,815 | (90,652 | ) | |||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
311,212 | 344,735 | ||||||
|
Accrued
liabilities
|
190,832 | 231,534 | ||||||
|
Accrued
compensation
|
(2,057 | ) | (548,402 | ) | ||||
|
Deferred
revenue
|
— | 1,560,000 | ||||||
|
Net
cash used in operating activities
|
(7,773,519 | ) | (3,958,627 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases
of short-term investments
|
(2,307,248 | ) | (14,257,291 | ) | ||||
|
Sales
of short-term investments
|
6,137,928 | 10,322,249 | ||||||
|
Purchases
of property and equipment
|
(132,640 | ) | (200,661 | ) | ||||
|
Purchases
of patent and trademark application costs
|
(285,602 | ) | (308,494 | ) | ||||
|
Other
long-term assets
|
— | 5,589 | ||||||
|
Net
cash provided by (used in) investing activities
|
3,412,438 | (4,438,608 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Repayment
of notes payable
|
(283,493 | ) | (709,283 | ) | ||||
|
Proceeds
from exercise of stock warrants and options
|
468,640 | 532,186 | ||||||
|
Repurchase
of common stock
|
— | (991,876 | ) | |||||
|
Net
cash provided by (used in) financing activities
|
185,147 | (1,168,973 | ) | |||||
|
Net
decrease in cash and cash equivalents
|
(4,175,934 | ) | (9,566,208 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
11,819,505 | 22,446,106 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 7,643,571 | $ | 12,879,898 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid during the period for interest
|
$ | 144,024 | $ | 169,401 | ||||
|
Schedule
of non-cash investing and financing transactions:
|
||||||||
|
Acquisition
of patent rights for deferred installment obligation
|
$ | — | $ | 57,097 | ||||
Notes
to Condensed Financial Statements
(Unaudited)
The
accompanying financial statements of AspenBio Pharma, Inc. (the “Company,”
“AspenBio” or “AspenBio Pharma”) have been prepared in accordance with the
instructions to quarterly reports on Form 10-Q. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and changes in
financial position at September 30, 2009, and for all periods presented have
been made. Certain information and footnote data necessary for fair presentation
of financial position and results of operations in conformity with accounting
principles generally accepted in the United States of America have been
condensed or omitted. It is therefore suggested that these financial statements
be read in conjunction with the summary of significant accounting policies and
notes to financial statements included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2008, as amended. The results of operations
for the periods ended September 30, 2009 are not necessarily an indication of
operating results for the full year.
The
Company considers all highly liquid investments with an original maturity of
three months or less at the date of acquisition to be cash equivalents. From
time to time the Company’s cash account balances exceed the balances as covered
by the Federal Deposit Insurance System. The Company has never suffered a loss
due to such excess balances.
The
Company invests excess cash from time to time in highly liquid debt and equity
investments of highly rated entities which are classified as trading securities.
The purpose of the investments is to have readily available funding for research
and development, product development, FDA clearance related activities and
general corporate purposes. Such investment amounts are recorded at market
values using Level 1 inputs in determining fair value and are classified as
current, as the Company does not intend to hold the investments beyond twelve
months. Investment securities classified as trading are those securities that
are bought and held principally for the purpose of selling them in the near term
with the objective of preserving principal and generating profits. These
securities are reported at fair value with unrealized gains and losses reported
as an element of other income (expense) in current period earnings. Unrealized
holding gains and losses are included in earnings as interest income. For the
three months ended September 30, 2009, there was $3,463 in unrealized loss and
$3,700 in management fees and there was no realized gain or loss during the
period. For the nine months ended September 30, 2009, there was $7,062 in
unrealized gain and $14,158 in management fees and there was no realized gain or
loss during the period. For the three months ended September 30, 2008, there was
$17,787 in unrealized losses, $7,670 in management fees and no realized gain or
loss during the period. For the nine months ended September 30, 2008, there was
$11,461 in unrealized losses, $250 in realized loss and $24,381 in management
fees. The Company’s Board has approved an investment policy covering the
investment parameters to be followed with the primary goals being the safety of
principal amounts and maintaining liquidity of the funds. The policy provides
for minimum investment rating requirements as well as limitations on investment
duration and concentrations. Commencing in the fourth quarter of 2008, based
upon market conditions, the investment guidelines were temporarily tightened to
raise the minimum acceptable investment ratings required for investments and
shorten the maximum investment term. As of September 30, 2009, approximately 88%
of the investment portfolio was in cash equivalents, which is included with cash
on the accompanying balance sheet, and the remaining funds were invested in
short term marketable securities with none individually representing more than
5% of the portfolio and none with maturities past January 2010. To date, the
Company’s cumulative market loss from the investments has been
insignificant.
Effective
January 1, 2008, the Company partially adopted Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification Topic (“ASC”) 820 (formerly -
Statement of Financial Accounting Standard (“SFAS”) No. 157), “Fair Value
Measurements”. This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. As permitted, the
Company elected to defer the adoption of the nonrecurring fair value measurement
disclosure of nonfinancial assets and liabilities until January 1, 2009.
The adoption of ASC 820 did not have a material impact on the Company’s results
of operations, cash flows or financial position. To increase consistency and
comparability in fair value measurements, ASC 820 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three levels as follows:
|
Level
1 — quoted prices (unadjusted) in active markets for identical assets or
liabilities;
|
|
Level
2 — observable inputs other than Level 1, quoted prices for similar assets
or liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, and model-derived
prices whose inputs are observable or whose significant value drivers are
observable; and
|
|
Level
3 — assets and liabilities whose significant value drivers are
unobservable.
|
6
Observable
inputs are based on market data obtained from independent sources, while
unobservable inputs are based on the Company’s market assumptions.
Unobservable inputs require significant management judgment or estimation.
In some cases, the inputs used to measure an asset or liability may fall into
different levels of the fair value hierarchy. In those instances, the fair
value measurement is required to be classified using the lowest level of input
that is significant to the fair value measurement. Such determination
requires significant management judgment. There were no financial assets or
liabilities measured at fair value, with the exception of cash, cash equivalents
and short-term investments, as of September 30, 2009 and December 31,
2008. There were no changes in the Company’s valuation techniques used to
measure fair value on a recurring or non-recurring basis as a result of adopting
ASC 820.
Certain
amounts in the accompanying financial statements for the period ended September
30, 2008, have been reclassified to conform to the presentation used in
2009.
Basic
earnings (loss) per share includes no dilution and is computed by dividing net
earnings (loss) available to stockholders by the weighted number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the Company’s earnings. The
effect of the inclusion of the dilutive shares would have resulted in a decrease
in loss per share. Accordingly, the weighted average shares outstanding have not
been adjusted for dilutive shares. Outstanding stock options and warrants are
not considered in the calculation, as the impact of the potential common shares
(totaling approximately 4,847,000 shares for the nine months ended September 30,
2009, and approximately 4,271,000 shares for the nine months ended September 30,
2008) would be to decrease loss per share.
In
June 2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the Codification.
There have been no changes to the content of the Company’s financial statements
or disclosures as a result of implementing the Codification during the quarter
ended September 30, 2009.
As a
result of the Company’s implementation of the Codification during the quarter
ended September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current quarter financial
statements, the Company will provide reference to both new and old guidance to
assist in understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.
In
December 2007, the FASB issued ASC 805 (formerly - SFAS No. 141 (R)), “Business Combinations”, which
became effective for fiscal periods beginning after December 15, 2008. The
standard changes the accounting for business combinations, including the
measurement of acquirer shares issued in consideration for a business
combination, the recognition of contingent consideration, the accounting for
pre-acquisition gain and loss contingencies, the recognition of capitalized
in-process research and development, the accounting for acquisition-related
restructuring cost accruals, the treatment of acquisition related transaction
costs, and the recognition of changes in the acquirer’s income tax valuation
allowance. The standard became effective for the Company on January 1, 2009. The
Company will apply the provisions of ASC 805 to any future business
combinations.
In
December 2007, the FASB issued ASC 810 (formerly - SFAS No. 160), “Consolidation” The standard
changes the accounting for non-controlling (minority) interests in consolidated
financial statements, including the requirements to classify non-controlling
interests as a component of consolidated stockholders’ equity, and the
elimination of minority interest accounting in results of operations with
earnings attributable to non-controlling interests reported as part of
consolidated earnings. Purchases and sales of non-controlling interests are to
be reported in equity similar to treasury stock transactions. The standard
became effective for the Company on January 1, 2009. The adoption of this
statement did not have an impact on the Company’s financial
statements.
In
December 2007, the FASB ratified ASC 808 (formerly - Emerging Issues Task Force
(“EITF”) No. 07-1),
“Collaborative Arrangements”. ASC 808 defines collaborative arrangements
and establishes reporting requirements for transactions between participants in
a collaborative arrangement and between participants in the arrangement and
third parties. ASC 808 also establishes the appropriate income statement
presentation and classification for joint operating activities and payments
between participants, as well as the sufficiency of the disclosures related to
these arrangements. ASC 808 was effective for the Company beginning January 1,
2009, and its adoption did not have a material impact on the Company’s financial
statements.
7
On
January 1, 2009, the Company adopted ASC 815 (formerly - EITF Issue No. 07-5),
“Derivatives and
Hedging”, which requires the application of a two-step approach in
evaluating whether an equity-linked financial instrument (or embedded feature)
is indexed to our own stock, including evaluation of the instrument’s contingent
exercise and settlement provisions. The adoption of ASC 815 did not have an
impact on the Company’s financial statements.
Inventories
consisted of the following:
|
September
30, 2009
(Unaudited)
|
December
31, 2008
|
|||||||
|
Finished
goods
|
$ | 262,442 | $ | 262,537 | ||||
|
Work
in process
|
73,626 | 46,822 | ||||||
|
Raw
materials
|
360,064 | 262,927 | ||||||
| $ | 696,132 | $ | 572,286 | |||||
Property
and equipment consisted of the following:
|
September
30, 2009
(Unaudited)
|
December
31, 2008
|
|||||||
|
Land
and improvements
|
$ | 1,107,508 | $ | 1,107,508 | ||||
|
Building
and improvements
|
2,767,891 | 2,767,891 | ||||||
|
Laboratory
equipment
|
1,111,570 | 1,062,840 | ||||||
|
Office
and computer equipment
|
239,999 | 158,909 | ||||||
|
Total
cost
|
5,226,968 | 5,097,148 | ||||||
|
Less
accumulated depreciation
|
1,930,951 | 1,681,420 | ||||||
| $ | 3,296,017 | $ | 3,415,728 | |||||
Note
4. Other Long Term Assets
Other
long term assets consisted of the following:
8
|
September
30, 2009
(Unaudited)
|
December
31, 2008
|
|||||||
|
Patents
and trademarks and applications, net of
|
||||||||
|
accumulated
amortization of $89,812 and $57,760
|
$ | 1,719,641 | $ | 1,486,409 | ||||
|
Goodwill,
net of accumulated amortization of $60,712
|
387,239 | 387,239 | ||||||
|
Deposits
and other
|
22,510 | 26,791 | ||||||
| $ | 2,129,390 | $ | 1,900,439 | |||||
The
Company capitalizes legal costs and filing fees associated with obtaining
patents on its new discoveries. Once the patents have been issued, the Company
amortizes these costs over the shorter of the legal life of the patent or its
estimated economic life using the straight-line method.
Notes
payable and other obligations consisted of the following:
|
September
30, 2009
(Unaudited)
|
December
31, 2008
|
|||||||
|
Mortgage
notes
|
$ | 2,777,982 | $ | 2,850,380 | ||||
|
Other
installment obligation
|
51,981 | 263,076 | ||||||
| 2,829,963 | 3,113,456 | |||||||
|
Less
current portion
|
150,243 | 358,533 | ||||||
| $ | 2,679,720 | $ | 2,754,923 | |||||
The
Company has a permanent mortgage facility on its land and building. The mortgage
is held by a commercial bank and includes approximately 39% that is guaranteed
by the U. S. Small Business Administration (“SBA”). The loan is collateralized
by the real property and is also personally guaranteed by a stockholder of the
Company. The interest rate on the bank portion is one percentage over the Wall
Street Journal Prime Rate (minimum 7%), with 7% being the approximate effective
rate for 2009 and 2008. The SBA portion bears interest at the rate of 5.86%. The
loan requires total monthly payments of approximately $23,700 through June 2013
when the then remaining principal balance is due.
The
Company has executed agreements with a manufacturer related to the transfer of
certain manufacturing and development processes. Under the agreements, the
Company agreed to pay a total of $350,000 under an agreement in 2007 and
$250,000 under an agreement in 2008, payable in eight quarterly installments of
$43,750 for the 2007 agreement and six quarterly installments of $41,667 for the
2008 agreement. The Company discounted these obligations at an assumed interest
rate of 8% in 2007 and 6% in 2008 (which represents the rate management believes
it could have borrowed at for similar financings). The 2007 balance was paid off
in May 2009. At September 30, 2009 and December 31, 2008, these obligations
totaled $41,042 and $245,498, respectively.
The
Company has capitalized certain obligations under leases that meet the
requirements of capital lease obligations. At September 30, 2009, such
obligations totaled $10,939, of which approximately $8,919 is due in 2009 and
the balance in 2010.
9
In April
2008, the Company entered into a long term exclusive license and
commercialization agreement with Novartis Animal Health, Inc. (“Novartis”), to
develop and launch the Company’s novel recombinant single-chain products for use
in bovines, BoviPure LH™ and BoviPure FSH™. The license agreement is a
collaborative arrangement that provides for a sharing of product development
activities, development and registration costs and worldwide product sales. The
Company received an upfront cash payment of $2.0 million, of which 50% was
non-refundable upon signing the agreement, and the balance is subject to certain
conditions, which the Company expects to be substantially achieved in early
2010. Ongoing royalties will be payable to the Company upon product launch based
upon net direct product margins as defined and specified under the agreement.
AspenBio has agreed to fund its share of 35% of the product development and
registration costs during the development period. Under the terms of the
original license agreement that the Company has with The Washington University
in St Louis (“University”), a portion of license fees and royalties AspenBio
receives from sublicensing agreements will be paid to the University. The
obligation for such front end fees, totaling $440,000, was recorded upon receipt
of the license fees; as of September 30, 2009, $190,000 has been paid to the
University and the remaining $250,000 is included with accrued expenses on the
accompanying balance sheet.
For
financial reporting purposes, the up-front license fees received from this
agreement, net of the amounts due to the University, have been recorded as
deferred revenue and will be amortized over the term of the Novartis license
agreement. Milestone revenue will be recognized as such milestones
are achieved. As of September 30, 2009, deferred revenue includes $813,947 which
has been classified as a current liability and $650,132, which has been
classified as a long-term liability. The current liability includes the net
front-end fee amount that is subject to certain conditions. During the nine
months ended September 30, 2009, $47,960 was recorded as the amortized license
fee income arising from the Novartis agreement.
In March
2003, the Company entered into a global development and distribution agreement
with Merial Limited (“Merial”). The agreement provides Merial with exclusive
rights to market and distribute the Company’s patent-pending bovine diagnostic
blood test. The test is designed to be used approximately 21 days after
insemination to determine the early pregnancy status of dairy and beef cattle.
Upon execution of the agreement, the Company received $200,000, which has been
recorded as deferred revenue. During 2003, AspenBio determined that results for
the test were not proceeding as anticipated. Accordingly, the test was not
launched by the October 2003 contract date and Merial’s payment of subsequent
development fees was suspended. In July
2009, the Company received a letter from Merial stating that the Company has not
achieved the development goals under this agreement and that the Company must
either pay Merial $100,000 or execute a first right of refusal for the bovine
diagnostic blood test. As of September 30, 2009 and to date, no
determination has been made by the Company on this matter. Based upon the
Company’s assessment, $100,000 of the deferred revenue has been classified as a
current liability.
The
Company has entered into three agreements with separate universities, under
which the Company obtained exclusive proprietary rights to certain patents,
licenses and technology to manufacture, market and sell developed products.
Under the agreements, the Company is obligated to make certain minimum annual
payments totaling $45,000, plus milestone payments, as defined, based on a
percentage of sales of the products. Under one of the agreements entered into in
2004, the Company acquired rights to the University’s patent portfolio for use
in the animal health industry for a total cost of $190,000, of which $60,000 was
paid in cash and $130,000 was paid in shares of the Company’s common stock.
During January 2008, the Company entered into an amendment of its existing
animal health industry license agreement with the University. The amendment
provides for the human therapeutic use of certain of the University’s products.
As consideration for this amendment, the Company agreed to pay a total of
$125,000 in cash, with $65,000 paid at signing and four quarterly payments
thereafter of $15,000, each. The final payment was made in January 2009. The
existing royalty rate was extended to cover these new products and
uses.
During
the nine months ended September 30, 2009, former employees exercised options
outstanding under the Company’s 2002 Stock Incentive Plan (“Plan”) to purchase
605,000 shares of common stock generating $438,700 in cash proceeds to the
Company and advisors exercised options to purchase 38,000 shares of common stock
generating $29,940 in cash proceeds. An advisor’s options to purchase 50,000
shares of common stock expired upon the advisor’s termination from the Company
during 2009. During the nine months ended September 30, 2009, the
holders of 670,924 warrants that were issued for investor relations services
elected to exercise those warrants on a cashless basis as provided in the
agreements (Note 8) and as a result, were issued 493,835 common shares in
consideration for the surrender of the 670,924 warrants.
10
During
the nine months ended September 30, 2008, employees exercised 400,433 options
outstanding under the Plan generating $428,136 in cash proceeds and advisors
exercised options for 63,000 shares of common stock generating $104,050 in cash.
Also during the nine months ended September 30, 2008, the holder of 36,346
warrants that were issued in 2002 and 2003 elected to exercise those warrants on
a cashless basis as provided in the agreements. The 36,346 rights were
surrendered and cancelled, and the holder was issued 30,000 common
shares.
During
the nine months ended September 30, 2008, the Company’s board of directors
authorized a stock repurchase plan to purchase shares of the Company’s common
stock up to a maximum of $5.0 million. Purchases are made in routine, open
market transactions, when management determines to effect purchases and any
purchased common shares are thereupon retired. Management may elect to purchase
less than $5.0 million. The repurchase program allows the Company to repurchase
its shares in accordance with the requirements of the Securities and Exchange
Commission on the open market, in block trades and in privately negotiated
transactions, depending upon market conditions and other factors. The repurchase
program is being funded using the Company’s working capital. A total of
approximately 232,000 common shares have been purchased through September 30,
2008, at a total cost of approximately $992,000.
The
Company currently provides stock-based compensation to employees, directors and
consultants under the Plan that has been approved by the Company’s shareholders
reserving 4,600,000 shares under the Plan. Stock options granted under this plan
generally vest over three years from the date of grant as specified in the Plan
or by the compensation committee of the Company’s board of directors and are
exercisable for a period of up to ten years from the date of grant. The Company
recognized total stock-based compensation for the periods ended September 30, as
follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
|
Stock
options to employees and directors
|
$ | 365,181 | $ | 233,240 | $ | 1,109,692 | $ | 629,516 | ||||
|
Stock
options to advisory board members
|
13,584 | 13,000 | 33,780 | 89,751 | ||||||||
|
Stock
options and warrants to consultants
|
30,125 | 142,320 | 71,415 | 346,095 | ||||||||
|
Total
stock-based compensation
|
$ | 408,890 | $ | 388,560 | $ | 1,214,887 | $ | 1,065,362 | ||||
AspenBio
Pharma accounts for stock-based compensation under ASC 718 (formerly - SFAS No.
123 (revised 2004)), “Share-Based Payment”. ASC 718
requires the recognition of the cost of employee services received in exchange
for an award of equity instruments in the financial statements and is measured
based on the grant date fair value of the award. ASC 718 also requires the stock
option compensation expense to be recognized over the period during which an
employee is required to provide service in exchange for the award (generally the
vesting period). The Company estimated the fair value of each stock option at
the grant date by using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 2009 and
2008:
|
2009
|
2008
|
||
|
Expected
life
|
5
years
|
5
years
|
|
|
Volatility
|
114
to 119%
|
68
to 69%
|
|
|
Risk-free
interest rate
|
1.59
to 2.66%
|
2.60
to 3.21%
|
|
|
Dividend
yield
|
0%
|
0%
|
The
expected term of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
AspenBio Pharma’s common stock based upon management’s assessment of the
appropriate term to determine volatility. The risk-free interest rate represents
the U.S. Treasury bill rate for the expected life of the related stock options.
The dividend yield represents the Company’s anticipated cash dividend over the
expected life of the stock options. Forfeitures represent the weighted average
estimate of future options to be cancelled primarily due to employee
terminations and were 10% for 2009 and 2008.
11
A summary
of stock option activity under the Plan of options to employees, directors and
advisors, for the nine months ended September 30, 2009 is presented
below:
|
Shares
Under
Option
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||
|
Outstanding
at January 1, 2009
|
3,361,632
|
$
|
2.13
|
|||||||
|
Granted
|
2,038,500
|
1.65
|
||||||||
|
Exercised
|
(643,000
|
)
|
.73
|
|||||||
|
Forfeited
|
(227,267
|
)
|
2.51
|
|||||||
|
Outstanding
at September 30, 2009
|
4,529,865
|
$
|
2.09
|
7.5
|
$
|
2,357,000
|
||||
|
Exercisable
at September 30, 2009
|
2,077,272
|
$
|
1.70
|
5.5
|
$
|
1,605,000
|
||||
The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing stock price on September 30,
2009 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders, had all option holders been
able to and in fact, had exercised their options on September 30,
2009.
During
the nine months ended September 30, 2009, 2,038,500 stock options were granted
under the Plan to employees, consultants, officers and directors exercisable at
the then market price which averaged $1.65 per share and a weighted average fair
value at the grant date of $1.35 per option. Existing employees and directors
were granted a total of 698,000 options at $1.33 per share. The Company also
issued a total of 800,000 stock options to two newly hired officers, 500,000 are
exercisable at $1.69 per share and 300,000 are exercisable at $1.80 per share,
all vesting annually over three years in arrears and expiring in ten years. In
addition, newly hired employees were granted a total of 240,500 options
exercisable at an average of $1.77 per shares, all vesting annually over three
years in arrears and expiring in ten years. During the nine months
ending September 30, 2009, two former employee exercised 605,000 options
outstanding under the Plan generating $438,700 in cash proceeds and advisors
exercised 38,000 options outstanding under the Plan generating $29,940 in cash.
The options when exercised had an intrinsic value totaling
$1,285,000.
During
the nine months ended September 30, 2009, two consultants were granted stock
options under the Plan, with each option vesting in equal amounts after six
months, twelve months, twenty-four months and thirty-six months from the date of
grant and expiring ten years from the grant date. One consultant was
granted 200,000 options exercisable at $2.09 per share and the other was granted
100,000 options exercisable at $2.00 per share.
During
the nine months ended September 30, 2009, 177,267 options which were exercisable
at an average of $3.00 per share, terminated upon the employees’ terminations
from the Company and an advisor’s options for 50,000 shares exercisable at $0.75
per share expired upon the advisor’s termination from the Company.
During
the nine months ended September 30, 2008, there were 461,987 stock options
granted under the Plan with a weighted average fair value at the grant date of
$3.90 per option. Of this amount, 421,987 were granted to officers and directors
of the Company exercisable at an average of $6.51 per share vesting over a three
year period annually in arrears. A total of 40,000 options were granted to
employees at an average $7.49 per share vesting over a three year period
annually in arrears. All of the options granted expire in ten years. Employee
options for 15,000 shares expired upon the employee’s termination from the
Company during the nine months ended September 30, 2008.
During
the nine months ended September 30, 2008, employees exercised 400,433 options
outstanding under the Company’s Plan generating $428,136 in cash proceeds and
advisors exercised options for 63,000 shares of common stock generating $104,050
in cash. During the 2008 period, the 463,433 options exercised by employees and
advisors had an intrinsic value when exercised of $3,105,000.
Based
upon the Company’s experience, approximately 90% or approximately 4,137,000
options are expected to vest in the future, under their terms. The total fair
value of stock options granted to employees, directors and advisors that vested
during the nine months ended September 30, 2009 and 2008 was $845,000 and
$489,000, respectively.
12
A
summary of the status of the Company’s non-vested options to acquire common
shares granted to employees, officers, directors and consultants and changes
during the nine months ended September 30, 2009 is presented below.
|
Nonvested
Options
|
Nonvested
Shares
Under
Option
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Grant
Date
Fair
Value
|
|||||||
|
Nonvested
at January 1, 2009
|
881,389 | $ | 5.00 | $ | 3.18 | |||||
|
Granted
|
2,038,500 | 1.65 | 1.35 | |||||||
|
Vested
|
(290,029 | ) | 4.45 | 2.91 | ||||||
|
Forfeited
|
(177,267 | ) | 3.00 | 2.06 | ||||||
|
Nonvested
at September 30, 2009
|
2,452,593 | $ | 2.42 | $ | 1.77 | |||||
As of
September 30, 2009, based upon employee, advisor and consultant options granted
there was approximately $2,943,000 of unrecognized compensation cost related to
stock options that will be recorded over a weighted average future period of
approximately two years.
Warrants:
As of
September 30, 2009, in addition to the stock options discussed above, the
Company had outstanding 317,530 warrants in connection with consulting services
for investor relations and placement agent services. Following is a summary of
such outstanding warrants for the nine months ended September 30,
2009:
|
Shares
Under
Warrants
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||
|
Outstanding
at January 1, 2009
|
943,454
|
$
|
3.49
|
|||||||
|
Granted
|
45,000
|
2.86
|
||||||||
|
Exercised
|
(670,924
|
)
|
1.69
|
|||||||
|
Outstanding
and exercisable at September 30, 2009
|
317,530
|
$
|
7.21
|
1.6
|
$
|
9,000
|
||||
During
the nine months ended September 30, 2009, 45,000 warrants were issued for
investor relations services, 20,000 warrants are exercisable at $1.59 per share,
10,000 warrants are exercisable at $2.20 per share and 15,000 are exercisable at
$4.99 per share. These warrants were vested upon issuance and expire in three
years.
During
the nine months ended September 30, 2009, the holders of 670,924 of the above
warrants that were issued for investor relations services elected to exercise
them on a cashless basis as provided in the agreements with the 670,924 rights
surrendered and cancelled, and the holders were issued 493,835 common
shares.
At
September 30, 2009 there was no unrecognized cost for the warrants. Operating
expenses for the nine months ended September 30, 2009 and 2008 include $71,415
and $346,095, respectively, for the value of the investor relations consulting
warrants which also equaled the total fair value of warrants that vested during
the periods. The fair value of the warrants, recorded as a consulting expense
related to investor relations services, at the grant dates has been estimated
using the Black-Scholes valuation model, with the following
assumptions:
|
2009
|
2008
|
||
|
Expected
term
|
3
years
|
3
years
|
|
|
Volatility
|
71
to 128%
|
68
to 69%
|
|
|
Risk-free
interest rate
|
1.00
to 1.62%
|
1.87
to 3.07%
|
|
|
Dividend
yield
|
0%
|
0%
|
13
Subsequent
to September 30, 2009, an investor relations firm was granted warrants to
purchase 10,000 shares of common stock which are exercisable at an average of
$2.20 per share. The warrants were vested upon grant and expire in three
years.
At
September 30, 2009, three customers accounted for approximately 59% of total
accounts receivable, with two of the customers each accounting for approximately
22% and one customer accounting for approximately 15%. At December 31, 2008,
three customers accounted for 42%, 16% and 10% of total accounts
receivable. For the nine months ended September 30, 2009, one
customer represented approximately 26% of the sales for the period. For the nine
months ended September 30, 2008, three customers represented more than 10% of
the Company’s sales, accounting for approximately 43%, 16%, and 11%, of the
sales for the period. For the three months ended September 30, 2009,
four customers represented more than 10% of the Company’s sales, accounting for
approximately 16%, 16%, 14%, and 12%, of the sales for the period. For the three
months ended September 30, 2008, two customers represented more than 10% of the
Company’s sales, accounting for approximately 40% and 32%, of the sales for the
period.
During
the nine months ended September 30, 2009, the Company entered into employment
agreements with two newly elected officers and one existing officer who
previously did not have an employment contract, providing total minimum annual
compensation for the three officers of $675,000. The agreements are for an
initial term of one year, automatically renew at the end of each year unless
terminated by either party and contain customary confidentiality and benefit
provisions. In connection with these employment agreements, a total of 800,000
stock options were granted under the Company’s Plan to the newly elected
officers.
The
Company periodically enters into generally short term consulting and development
agreements primarily for product development, testing services and in connection
with clinical trials conducted as part of the Company’s FDA clearance process.
Such commitments at any point in time may be significant but the agreements
typically contain cancellation provisions.
Note
11. Subsequent Events
The
Company evaluated events through November 5, 2009 for consideration as a
subsequent event to be included in its September 30, 2009 financial statements,
issued November 5, 2009.
In
October 2009, the Company completed a public offering of 5,155,000 common shares
generating $8,763,500 in gross proceeds. The net proceeds of
approximately $8.3 million, after deducting the underwriting discounts and
commissions and estimated offering expenses, is to be used for product
development, FDA 510(k) submission related activities, general corporate
purposes, and working capital.
14
Comparative
Results for the Nine Months Ended September 30, 2009 and 2008
Sales for
the nine months ended September 30, 2009, totaled $222,000, which is a $481,000
or 68% decrease from the 2008 period. This decrease in sales is primarily
attributable to general economic conditions and the timing of existing
customers’ order placement, as it is not unusual for the orders from our
customers to vary by quarter depending upon the customers’ sales and production
needs combined with a change in product mix between the two periods. In April
2008, the Company entered into a long term exclusive license and
commercialization agreement to develop and launch the Company’s novel
recombinant single-chain bovine products. The total payments received under this
agreement were recorded as deferred revenue and will be recognized in the
future, with $48,000 of such license fee recognized in the nine months ended
September 30, 2009 and $32,000 in the nine months ended September 30,
2008.
Cost of
sales for the nine months ended September 30, 2009 totaled $304,000 which is a
$193,000 or 39% decrease as compared to the 2008 period. As a percentage of
sales, there was a gross loss of 37% in the 2009 period as compared to a gross
margin of 29% in the 2008 period. The change in the gross margin percent
resulted from the lower level of sales in the 2009 period combined with certain
fixed overhead costs.
Selling,
general and administrative expenses in the nine months ended September 30, 2009,
totaled $4,428,000, which is a $907,000 or 26% increase as compared to the 2008
period. During late 2008 and into early 2009, the Company increased its overhead
costs to support its development activities and advance its licensing activities
and negotiations for the single-chain animal products. These changes have
resulted in among other items, advancing the AppyScore product in clinical
trials and filing a Premarket Notification [510(k)] with the FDA. The hiring of
additional personnel resulted in approximately $1,050,000 of additional expenses
in the 2009 period, which included approximately $480,000 in additional employee
related stock based compensation expense in 2009 over 2008 amounts. This was
offset by a decrease of approximately $320,000 in public company expenses for
2009 with $275,000 of this decrease due to a reduction in the stock option
expense to the investor relations firm which was off-set by a $73,000 increase
in Sarbanes-Oxley related expenses in 2009. Selling, general and
administrative expenses also increased in the nine months ended September 30,
2009 by an additional $73,000 in insurance related costs primarily due to
increased staff and an increase in general liability insurance.
Research
and development expenses in the 2009 period totaled $5,933,000, which is a
$1,609,000 or 37% increase as compared to the 2008 period. Development efforts
and advances on the appendicitis test, including product development advances,
the clinical trial, FDA submission related activities and market research
resulted in an expense increase in 2009 of approximately
$1,582,000. This was offset by a decrease in the development expenses
on the single-chain animal products of approximately $110,000 as the bovine
products moved from feasibility development by AspenBio to a commercialization
and licensing arrangement with Novartis commencing in late 2008. Additions to
research staff, including temporary contract personnel, to support accelerating
development efforts, increased expenses by approximately $147,000 in the 2009
period.
Primarily
as a result of the lower levels of cash and reduced investment returns in 2009
as compared to 2008, interest income of approximately $171,000 was earned in
2009 as compared to $634,000 in 2008.
No income
tax benefit was recorded on the loss for the nine months ended September 30,
2009, as management was unable to determine that it was more likely than not
that such benefit would be realized.
Sales for
the three months ended September 30, 2009 totaled $69,000, which is a $158,000
or 70% decrease from the 2008 period. The decrease in sales is primarily
attributable to general economic conditions, a change in product mix between the
two periods combined with the timing of existing customers’ order placement, as
it is not unusual for the orders from our customers to vary by quarter depending
upon the customers’ sales and production needs. In April 2008, the Company
entered into a long term exclusive license and commercialization agreement to
develop and launch the Company’s novel recombinant single-chain bovine products.
The total payments received under this agreement were recorded as deferred
revenue and will be recognized in the future, with $16,000 of such license fee
recognized in each of the three months ended September 30, 2009 and
2008.
Cost of
sales for the three months ended September 30, 2009 totaled $17,000; a $125,000
or 88% increase as compared to the 2008 period. As a percentage of sales, gross
margin increased to 76% in the 2009 period as compared to a gross margin of 38%
in the 2008 period. The increase in gross profit margin is primarily the result
of a decrease in certain fixed overhead costs attributable to products being
produced and sold during the 2009 period.
15
Selling,
general and administrative expenses in the three months ended September 30,
2009, totaled $1,602,000, which is a $565,000 or 54% increase as compared to the
2008 period. During late 2008 and into early 2009, the Company increased its
overhead costs to support its development activities and advance its licensing
activities and negotiations for the single-chain animal products. These changes
have resulted in among other items, advancing the AppyScore product in clinical
trials and filing a Premarket Notification [510(k)] with the FDA. The hiring of
additional personnel resulted in approximately $411,000 of additional expenses
in the 2009 period, which included approximately $151,000 in additional employee
related stock based compensation expense in 2009 over 2008 amounts. This was
offset by a decrease of approximately $82,000 in public company expenses for
2009 with $98,000 of this decrease in public company expenses due to a reduction
in the stock option expense to the investor relations firm which was off-set by
a $16,000 increase in Sarbanes-Oxley related expenses being higher in
2009. Selling, general and administrative expenses also increased in
the three months ended September 30, 2009 by an additional $48,000 in insurance
related costs primarily due to health insurance for increased staff and an
increase in general liability insurance.
Research
and development expenses in the 2009 period totaled $2,275,000, which is a
$312,000 or 16% increase as compared to the 2008 period. Development efforts and
advances on the appendicitis test, including product development advances, the
clinical trial, FDA submission related activities and market research resulted
in an expense increase in 2009 of approximately $707,000. This was offset by a
decrease in the development expenses on the single-chain animal products of
approximately $498,000 as the bovine products moved from feasibility development
by AspenBio to a commercialization and licensing arrangement with Novartis
commencing in late 2008. Additions to research staff, including temporary
contract personnel, to support accelerating development efforts, increased
expenses by approximately $61,000 in the 2009 period.
Primarily
as a result of the lower levels of cash and reduced investment returns in 2009
as compared to 2008, interest income of approximately $28,000 was earned in 2009
as compared to $178,000 in 2008.
We
reported a net loss of $10,331,000 during the nine months ended September 30,
2009, which included $1,476,000 in non-cash expenses relating to stock-based
compensation totaling $1,215,000 and depreciation, amortization and other items
totaling $261,000. At September 30, 2009, we had working capital of $7,245,000.
Subsequent to September 30, 2009, the Company completed a public offering
generating approximately $8,764,000 in gross proceeds from the sale of 5,155,000
shares of common stock ($8,300,000 in net proceeds). We believe that
our current working capital position is sufficient to continue with the
technology development activities and support the current level of operations
for the near term. Our primary focus currently is to continue the development
activities on the appendicitis and single chain products in order to attempt to
continue to secure near-term value from these products from either additional
entering licensing agreements for their rights or generating revenues directly
from sales of the products.
Capital
expenditures, primarily for production, laboratory and facility improvement
costs for the remainder of the fiscal year ending December 31, 2009, are
anticipated to total approximately $200,000. We anticipate these capital
expenditures to be financed out of working capital.
We
anticipate that expenditures for research and development for the fiscal year
ending December 31, 2009 will generally be in line with or increased somewhat
from amounts expended in the nine months ended September 30, 2009. Development
and testing costs in support of the current pipeline products as well as costs
to file patents and revise and update previous filings on our technologies will
continue to be substantial. Our principal development products consist of the
appendicitis tests and the single-chain animal hormone products. As we continue
towards commercialization of these products we will need to consider a number of
strategic alternatives to effectively maximize the value of our technology,
including possible transaction and partnering opportunities, working capital
requirements including possible product management and distribution alternatives
and implications of product manufacturing and associated carrying costs. Certain
costs such as manufacturing and license / royalty agreements have different
implications depending upon the ultimate strategic commercialization path
determined.
We expect
that our primary expenditures will be incurred to continue to advance our
appendicitis blood test technology, AppyScore™ through the FDA clearance process
in addition to advancing development and testing of the appendicitis product in
the cassette and instrument format. During the nine months ended September 30,
2009 and 2008, we expended approximately $4,317,000 and $2,734,000, respectively
in direct costs for the appendicitis test development and related efforts. While
commercialization of the appendicitis product will be an ongoing and evolving
process with subsequent generations and improvements being made in the test, we
believe that 2009 and 2010 will reflect significant progress in advancing and
commercializing the test. Should we be unable to achieve FDA clearance of the
AppyScore test and generate revenues from the product, we would need to rely on
other product opportunities to generate revenues and the costs that we have
incurred for the appendicitis patent may be deemed to be impaired. In May 2003,
we signed the Assignment and Consultation Agreement (“Bealer Agreement”) with
Dr. John Bealer, whom we collaborated with on the appendicitis test. In the
event that the product is commercialized and we sell it or in the event of a
transaction involving a sale of all or a portion of the Company’s assets (but
not the sale of the common stock of the Company), the Bealer Agreement provides
for a royalty payment to Dr. Bealer, based upon what the Company
receives.
16
In April
2008 we entered into a long term exclusive license and commercialization
agreement with Novartis Animal Health, Inc., (“Novartis”) to develop and launch
our novel recombinant single-chain bovine products, BoviPure LH™ and BoviPure
FSH™. The license agreement is a collaborative arrangement that provides for a
sharing of product development activities, development and registration costs
and worldwide product sales. We received an upfront cash payment of $2,000,000,
of which 50% was non-refundable upon signing the agreement and the balance is
subject to certain conditions which we expect to be substantially achieved in
early 2010. Ongoing royalties will be payable upon product launch based upon net
direct product margins as defined and specified under the agreement. We have
agreed to fund our share of 35% of the product development and registration
costs during the development period. Under the terms of the original license
agreement that the Company has with The Washington University in St Louis
(“University”), a portion of license fees and royalties AspenBio receives from
sublicensing agreements (such as the Novartis Agreement) will be paid to the
University. For financial reporting purposes, the up-front license fees received
from this agreement, net of the amounts due to the University, have been
recorded as deferred revenue and will be amortized over the life of the license
agreement. We currently anticipate that the commercialization process for these
two bovine products, which are both proceeding simultaneously, including
securing required FDA and other major countries equivalent regulatory clearance
to market the products will encompass approximately three to four years. During
the nine months ended September 30, 2009 and 2008, we expended approximately
$649,000 and $756,000, respectively in direct costs for the BoviPure LH and
BoviPure FSH product development and related efforts. We expect that our portion
of the future development and commercialization costs will be three to five
million dollars, which will be incurred over the development period. Should we
be unable to achieve FDA clearance of the BoviPure LH and BoviPure FSH products,
we would need to rely on other product opportunities to generate
revenues.
The
Company periodically enters generally short term consulting and development
agreements primarily for product development, testing services and in connection
with clinical trials conducted as part of the Company’s FDA clearance process.
Such commitments at any point in time may be significant but the agreements
typically contain cancellation provisions.
We have a
permanent mortgage facility on our land and building. The mortgage is held by a
commercial bank and includes a portion guaranteed by the U. S. Small Business
Administration. The loan is collateralized by the real property and is also
personally guaranteed by a stockholder. The average approximate interest rate is
7% and the loan requires monthly payments of approximately $23,700 through June
2013 with the then remaining principal balance due July 2013.
During
the nine months ended September 30, 2009, we received cash proceeds of $469,000
from the exercise of 643,000 options.
In April,
2008 our Board of Directors authorized a stock repurchase plan to purchase
shares of our common stock up to a maximum of $5.0 million. Purchases are being
made in routine, open market transactions, when management determines to effect
purchases and any purchased common shares are thereupon retired. Management may
elect to purchase less than $5.0 million. The repurchase program allows us to
repurchase our shares in accordance with the requirements of the Securities and
Exchange Commission on the open market, in block trades and in privately
negotiated transactions, depending upon market conditions and other factors. The
repurchase program is being funded using our working capital. A total of
approximately 232,000 common shares were purchased through September 30, 2008 at
a total cost of approximately $992,000 with no purchases in 2009 and no
anticipated purchases in the near-term.
We expect
to continue to incur losses from operations for the near-term and these losses
could be significant as we incur product development, contract consulting and
product related expenses. We have also increased our overhead expenses with the
hiring of additional management personnel. We believe that our current working
capital position will be sufficient to meet our near-term needs. Our investments
are maintained in relatively short term, high quality investments instruments,
to ensure we have ready access to cash as needed.
With the
recent changes in market conditions, combined with our conservative investment
policy and lower average investable balances due to cash consumption, we expect
that our investment earnings in 2009 will be significantly lower than that in
2008. Our Board of Directors has approved an investment policy covering the
investment parameters to be followed with the primary goals being the safety of
principal amounts and maintaining liquidity of the fund. The policy provides for
minimum investment rating requirements as well as limitations on investment
duration and concentrations. Commencing in the fourth quarter of 2008, based
upon market conditions, the investment guidelines were temporarily tightened to
raise the minimum acceptable investment ratings required for investments and
shorten the maximum investment term. Current investment guidelines require
investments to be made in investments with minimum ratings purchasing commercial
paper with an A1/P1 rating, longer-term bonds with an A- rating or better, a
maximum maturity of nine months and a concentration guideline of 10% (no
security or issuer representing more than 10% of the portfolio).
17
As of
September 30, 2009 approximately 75% of the investment portfolio was in cash
equivalents which are included with cash and the remaining funds were invested
in short term marketable securities with none individually representing more
than 10% of the portfolio and none maturing past January 2010. Of the marketable
securities investment portion, 100% was invested in companies in the financial
sector, all in large market cap public companies. To date the cumulative market
loss from the investments has been insignificant. The investment account was
established in late December 2007 and, during the nine months ended September
30, 2009, gross marketable securities investments acquired totaled approximately
$2.3 million, sales of investments totaled approximately $6.1 million, interest
and dividend income totaled approximately $152,000 and there were no significant
losses. We expect gain and loss activity in the future to be less than the
historical levels.
Due to
recent market events that have adversely affected all industries and the economy
as a whole, management has placed increased emphasis on monitoring the risks
associated with the current environment, particularly the investment parameters
of the short term investments, the recoverability of receivables and
inventories, the fair value of assets, and the Company’s liquidity. At this
point in time, there has not been a material impact on the Company’s assets and
liquidity. Management will continue to monitor the risks associated with the
current environment and their impact on the Company’s results.
Net cash
consumed by operating activities was $7,774,000 during the nine months ended
September 30, 2009. Cash was consumed by the loss of $10,331,000, less non-cash
expenses of $1,215,000 for stock-based compensation and $261,000 for
depreciation and amortization and other non-cash items. Our base antigen
business is generally not significant to our operations and therefore does not
generally significantly impact operating cash flows. As of
September 30, 2009 inventories had increased by $124,000 due to
receipt of a recent raw material supply order and prepaid expenses and other
current assets generated cash of $676,000 primarily related to collection of
shared costs incurred under the Novartis agreement, payable by Novartis, in the
amount of $425,000.
Net cash
consumed by operating activities was $3,959,000 during the nine months ended
September 30, 2008. Cash was consumed by the loss of $7,123,000 less non-cash
expenses of $1,065,000 for stock-based compensation issued for services,
$274,000 for depreciation and amortization and $311,000 in non-cash charges. A
net increase in accounts payable and accrued liabilities of $28,000 generated
cash. Deferred revenues increased by $1,560,000 from the Novartis license
agreement.
Net cash
inflows from investing activities generated $3,412,000 during the nine months
ended September 30, 2009. Marketable securities investments acquired totaled
approximately $2,307,000 and sales of marketable securities totaled
approximately $6,138,000. A $418,000 use of cash was attributable to additional
costs incurred from patent filings and equipment additions for upgrades and
expansion of equipment.
Net cash
outflows from investing activities consumed $4,439,000 during the nine months
ended September 30, 2008. Marketable securities investments acquired totaled
approximately $14,257,000 and sales of marketable securities totaled
approximately $10,322,000. A $504,000 use of cash was attributable to additional
costs incurred from patent filings and equipment additions for upgrades and
expansion of equipment.
Financing
Activities
Net cash
inflow from financing activities generated $185,000 during the first nine months
of 2009. The Company received proceeds of $469,000 from the exercise of common
stock options and $283,000 was consumed for repayments under existing debt
agreements.
Net cash
outflow from financing activities consumed $1,169,000 during the similar period
in 2008. The Company received proceeds of $532,000 from the exercise of common
stock options, $992,000 was consumed to repurchase and retire the Company’s
common stock and $709,000 was used for repayments under existing debt
agreements.
18
See Note
1 to the accompanying financial statements in Part I, Item 1 of this report
regarding recently issued and recently adopted accounting
pronouncements.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates
associated with the timing of revenue recognition, the impairment analysis of
intangibles and stock-based compensation.
The
Company’s financial position, results of operations and cash flows are impacted
by the accounting policies the Company has adopted. In order to get a full
understanding of the Company’s financial statements, one must have a clear
understanding of the accounting policies employed. A summary of the Company’s
critical accounting policies follows:
Investments: The
Company invests excess cash from time to time in highly liquid debt and equity
securities of highly rated entities which are classified as trading securities.
Such amounts are recorded at market and are classified as current, as the
Company does not intend to hold the investments beyond twelve months. Such
excess funds are invested under the Company’s investment policy but an
unexpected decline or loss could have an adverse and material effect on the
carrying value, recoverability or investment returns of such investments. Our
Board has approved an investment policy covering the investment parameters to be
followed with the primary goals being the safety of principal amounts and
maintaining liquidity of the fund. The policy provides for minimum investment
rating requirements as well as limitations on investment duration and
concentrations.
Accounts Receivable:
Accounts receivable balances are stated net of allowances for
doubtful accounts. The Company records allowances for doubtful accounts when it
is probable that the accounts receivable balance will not be collected. When
estimating the allowances for doubtful accounts, the Company takes into
consideration such factors as its day-to-day knowledge of the financial position
of specific clients, the industry and size of its clients. A financial decline
of any one of the Company’s large clients could have an adverse and material
effect on the collectability of receivables and thus the adequacy of the
allowance for doubtful accounts. Increases in the allowance for doubtful
accounts are recorded as charges to bad debt expense and are reflected in
operating expenses in the Company’s statements of operations. Write-offs of
uncollectible accounts are charged against the allowance for doubtful
accounts.
Inventories: Inventories
are stated at the lower of cost or market. Cost is determined on the first-in,
first-out (FIFO) method. The elements of cost in inventories include materials,
labor and overhead. The Company does not have supply agreements in place for the
antigen business raw material purchases but believes that there are multiple
suppliers for our antigen raw material; however in 2009 and 2008 substantially
all of our purchases were made from one supplier. Management believes that its
relationship with this supplier is strong; however if necessary this
relationship can be replaced. If the relationship was to be replaced there may
be a short term disruption to the base antigen business and operations, a period
of time in which products would not be available and additional expenses may be
incurred.
Long-Lived Assets:
The Company records property and equipment at cost.
Depreciation of the assets is recorded on the straight-line basis over the
estimated useful lives of the assets. Dispositions of property and equipment are
recorded in the period of disposition and any resulting gains or losses are
charged to income or expense when the disposal occurs. The carrying value of the
Company’s long-lived assets is reviewed at least annually to determine that such
carrying amounts are not in excess of estimated market value. Goodwill is
reviewed annually for impairment by comparing the carrying value to the present
value of its expected cash flows or future value. The required annual testing
resulted in no impairment charges being recorded to date.
Revenue Recognition:
The Company’s revenues are recognized when products are
shipped or delivered to unaffiliated customers. The Securities and Exchange
Commission’s Staff Accounting Bulletin (SAB) No. 104, provides guidance on the
application of generally accepted accounting principles to select revenue
recognition issues. The Company has concluded that its revenue recognition
policy is appropriate and in accordance with SAB No. 104. Revenue is recognized
under development and distribution agreements only after the following criteria
are met: (i) there exists adequate evidence of the transactions; (ii) delivery
of goods has occurred or services have been rendered; and (iii) the price is not
contingent on future activity and collectability is reasonably
assured.
19
Stock-based Compensation:
ASC 718 (formerly - SFAS No. 123(R)), Share-Based Payment,
defines the fair-value-based method of accounting for stock-based employee
compensation plans and transactions used by the Company to account for its
issuances of equity instruments to record compensation cost for stock-based
employee compensation plans at fair value as well as to acquire goods or
services from non-employees. Transactions in which the Company issues
stock-based compensation to employees, directors and advisors and for goods or
services received from non-employees are accounted for based on the fair value
of the equity instruments issued. The Company utilizes pricing models in
determining the fair values of options and warrants issued as stock-based
compensation. These pricing models utilize the market price of the Company’s
common stock and the exercise price of the option or warrant, as well as time
value and volatility factors underlying the positions.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain
statements in Management’s Discussion and Analysis and other portions of this
report are forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the safe harbor
created thereby. These statements relate to future events or the Company’s
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause the actual results, levels of activity,
performance or achievements of the Company or its industry to be materially
different from those expressed or implied by any forward-looking statements. In
some cases, forward-looking statements can be identified by terminology such as
“may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,”
“intend,” “believe,” “estimate,” “predict,” “potential” or other comparable
terminology. Please see the “Cautionary Note Regarding Forward-Looking
Statements” and “Risk Factors” in the Company’s Form 10-K for the year ended
December 31, 2008, as amended, for a discussion of certain important factors
that relate to forward-looking statements contained in this report. Although the
Company believes that the expectations reflected in these forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Unless otherwise required by applicable securities laws,
the Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
AspenBio
has limited exposure to market risks from instruments that may impact the Balance Sheets, Statements of Operations, and
Statements of Cash
Flows, with such exposure associated primarily with changing interest
rates on its mortgage notes and investments. Approximately 39% of the total
mortgage balance is guaranteed by the U. S. Small Business Administration
(“SBA”). While we periodically expend funds for products and services that are
denominated in foreign country currencies we do not have any long term
commitments for such purchases.
The
primary objective for our investment activities is to preserve principal while
maximizing yields without significantly increasing risk. This is accomplished by
investing in diversified short-term interest bearing investments of high grade
companies. We have no investments denominated in foreign country currencies and
therefore our investments are not subject to foreign currency exchange
risk.
Management
of the Company, including the Chief Executive Officer and the Chief
Financial Officer, has conducted an evaluation of the effectiveness of the
Company’s disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rule 13a-15(e)) as of the last day of the period of the
accompanying financial statements. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective as of September 30,
2009.
Changes in Internal Control Over
Financial Reporting.
There was
no change in the Company’s internal control over financial reporting that
occurred during the fiscal quarter to which this report relates that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
20
We are
not a party to any legal proceedings, the adverse outcome of which would, in our
management’s opinion, have a material adverse effect on our business, financial
condition and results of operations.
There
have been no material changes from the risk factors disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008, as
amended.
(a)
The following sets forth the equity securities we sold during the period covered
by this report, not previously reported on Forms 10-Q or 8-K, which were not
registered under the Securities Act.
On a
monthly basis during the nine months ended September 30, 2009, 45,000 warrants
(5,000 per month) to acquire common shares were granted to a consultant in
consideration for investor relations services, 15,000 of these are exercisable
at $4.99 per share, 20,000 are exercisable at $1.59 per share and 10,000 are
exercisable at $2.20 per share. The warrants vested upon grant and expire in
three years. The Company relied on the exemption under section 4(2) of the
Securities Act of 1933 (the “Act”) for the above issuance because we: (i) did
not engage in any public advertising or general solicitation in connection with
the warrant issuance; (ii) made available to the recipient disclosure regarding
all aspects of our business including our reports filed with the SEC and our
press releases, and other financial, business, and corporate information; and
(iii) believed that the recipient obtained all information regarding the Company
requested (or believed appropriate) and received answers to all questions posed
by the recipient, and otherwise understood the risks of accepting our securities
for investment purposes. No commission or other remuneration was paid on this
issuance.
(c)
During the quarter covered by this report, the Company did not make any
purchases of its common shares under the previously announced authorized common
stock repurchase program of up to $5 million that may be made from time to
time at prevailing prices as permitted by securities laws and other
requirements, and subject to market conditions and other factors and no
purchases are anticipated in the near-term. The program is administered by
management and may be discontinued at any time.
|
EXHIBIT
|
DESCRIPTION
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) - Certification of Chief Executive Officer. Filed
herewith.
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) - Certification of Chief Financial Officer. Filed
herewith.
|
|
32
|
Section
1350 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the SARBANES-OXLEY ACT of 2002. Furnished
herewith.
|
Pursuant
to the requirements 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.
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AspenBio
Pharma, Inc.
(Registrant)
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|||
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By:
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/s/
Jeffrey G. McGonegal
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||
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Dated:
November 5, 2009
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Jeffrey
G. McGonegal,
Chief
Financial Officer and duly authorized officer
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