UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED December 31, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-50019
ASPENBIO, INC.
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(Name of small business issuer in its charter)
Colorado 84-1553387
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1585 South Perry Street, Castle Rock, Colorado 80104
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(Address of principal executive offices) (Zip Code)
(303) 794-2000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for at least the past 90 days.
Yes [X] No [ ]
Check if there was no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The registrant had revenues of $650,575 for its most recent fiscal year
ended December 31, 2003.
The aggregate market value of the common stock of the registrant held by
non-affiliates as of March 19, 2004 was $7,789,000.
The number of shares outstanding of the registrant's common stock at
March 17, 2004, was 10,477,031.
Transitional small business disclosure format. Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement expected to be filed within 120
days of the close of the registrant's fiscal year in connection with the
registrant's annual meeting of shareholders are incorporated by reference into
portions of Part III of this Form 10-KSB.
ASPENBIO, INC.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
Page
PART I
Item 1. Description of Business...........................................1
Item 2. Description of Property..........................................15
Item 3. Legal Proceedings................................................15
Item 4. Submission of Matters to a Vote of Security Holders..............15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.........15
Item 6. Management's Discussion and Analysis or Plan of Operation........16
Item 7. Financial Statements.............................................21
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures........................................39
Item 8A. Controls and Procedures..........................................39
PART III
Item 9. Directors and Executive Officers of the Registrant...............41
Item 10. Executive Compensation...........................................41
Item 11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters...................41
Item 12. Certain Relationships and Related Transactions...................41
Item 13. Exhibits and Reports on Form 8-K.................................41
Item 14. Principal Accountant Fees and Services...........................41
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties, and other factors, which may cause actual results, performance,
or achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. We undertake no
obligation to update any forward-looking statements to reflect events or
circumstances after the date on which they are made.
Statements concerning the establishments of reserves and adjustments for
dated and obsolete products, expected financial performance, on-going business
strategies and possible future action which we intend to pursue to achieve
strategic objectives constitute forward-looking information. The sufficiency of
such charges, implementation of strategies and the achievement of financial
performance are each subject to numerous conditions, uncertainties, and risk
factors. Factors which could cause actual performance to differ materially from
these forward-looking statements, include, without limitation, management's
analysis of our assets, liabilities, and operations, the failure to sell
date-sensitive inventory prior to its expiration, competition, new product
development by competitors, which could render particular products obsolete, the
inability to develop or acquire and successfully introduce new products or
improvements of existing products, problems in collecting receivables, testing
or other delays or problems in introducing our bovine pregnancy test, and
difficulties in obtaining financing on an as-needed basis.
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
Overview
We were founded to acquire the antigen business from Vitro Diagnostics,
Inc. in August 2000, and to leverage that base of operations and technology to
develop new products with substantial market potential. Our management team had
been conducting the antigen business at Vitro Diagnostics since 1990. Many new
products have been developed since the acquisition.
Our human diagnostic antigen division has been our core business and,
taking into account the operations while this division was part of Vitro
Diagnostics, this part of our business has been in operation since 1990. We have
continued to expand our product offerings since it became part of AspenBio. We
manufacture over thirty products. Our products are used as standards and
controls in diagnostic test kits, antibody purification and in research
projects.
Our strategy is to search for niches that we can dominate with our
purification abilities. We are focusing on expanding our business into other
uses of purified proteins, principally for diagnosis and treatment of humans and
animals. An important factor in the diagnostics business is the vastly reduced
times required from product conception to saleable product as compared to
therapeutic products which often require many years to market, due to
significantly more stringent FDA requirements for those types of products. With
this in mind we have started a diagnostic test division developing lateral flow
test strips for use initially in the lab and research and development sectors.
To date we have developed nine tests with an additional approximately dozen
tests currently in the early stages of development. We anticipate having a total
of approximately twenty tests finished and ready to go to market before the end
of 2004. The Company is in discussions with a number of potential marketers of
these types of products. We are hopeful that we will enter into agreements with
the best-suited marketers/distributors for each individual test. Furthermore
many of these tests may have multiple markets as their availability and ease of
use and time saving features become known.
We are engaged in the discovery, development, manufacturing and marketing
of industry-leading products for human and animal healthcare. We leverage our
expertise as the dominant supplier of antigens for diagnostic kit manufacturers
to target and validate potential products of significant economic value while
focusing our resources on areas of animal and human healthcare where we believe
there are clearly unmet needs. We apply our advanced understanding of the
purification processes of antigens to develop products off a broadly applicable
technological platform. Our product pipeline consists of product candidates in
various stages of clinical and pre-clinical development. One of our business
strategies is to pursue and develop products and technologies which we believe
have a relatively short time line to revenue, i.e., 18-24 months in addition to
others where the time to market maybe substantially greater. We pursue
technologies under "in-licensing" agreements with universities, researchers or
doctors; complete research and development on the technologies through proof of
concept, and then either "out-license" to "Big Pharma" companies and \ or go to
product introduction and launch.
Our first out licensed product was the Early Detection Bovine Pregnancy
Test. On March 31, 2003, we announced a Global Development and Distribution
Agreement covering the Early Detection Bovine Pregnancy Test with Merial Limited
("Merial"), the world's leading animal health company. Merial (preliminary
Merial web site for the AspenBio pregnancy test is -
http://us.merial.com/bovinetest) is a joint venture between Merck & Co., Inc.
(MRK: NYSE) and Aventis SA (AVE: NYSE). The total potential market size for the
Early Detection Bovine Pregnancy Test is 58 million dairy cows, each of which is
potentially checked twice annually. Of the 58 million dairy cows 25 million are
readily accessible thru sophisticated existing channels of distribution. Under
the terms of the Agreement, following successful completion of the test, Merial
must achieve sales goals of 1.5 million units in 2004, 4.0 million units in 2005
and 5.0 million units in each calendar year thereafter during the full term of
the Agreement. In addition to product development fees totaling $1.9 million, we
will also receive 33% of all gross sales of the product under the terms of the
Agreement subject to a minimum of $1.75/ test. To date we have not successfully
completed the clinical trial required to resolve an issue relating to the test's
sensitivity in order to be able to go to commercialization of this product.
Accordingly, the product has not been released for distribution to date and we
are continuing to work on improving the sensitivity of the test.
-1-
Products and Status of Products
Human Antigens - We currently manufacture more than thirty human antigens and
tumor markers. These are proteins that we manufacture from human tissues and
fluids, using our proprietary purification processes, so that they are in an
especially pure form. These proteins are used as part of diagnostic test kits
manufactured and sold by others. The test kits diagnose tumor marker levels
within the blood or hormone imbalances by measuring the presence and/or levels
of certain proteins. The proteins supplied by us are typically used to determine
whether the test is functioning correctly, more commonly know as controls. We
have manufactured human antigen products since 1990 and can produce additional
proteins through our proprietary purification process. Our human diagnostic
antigen product division has represented our base revenue stream to date. Our
products are used as standards and controls in diagnostic test kits, antibody
purification and in research projects. The approximate $.7 million annual
revenues derived from this division provides a consistent revenue stream to help
support the Company and its ongoing research and development activities.
Recently we have begun work on a number of new antigen products in response to
expanding customer requests. Some of these are in the research and development
phase, which typically should be finished and available for customer testing
approximately 90-120 days after we commence our work.
In order to distribute our human antigen products, we manufacture the
purified proteins at our facility, and then lyophilize (freeze dry) the
ingredients contained in a glass vial. We then send the products out to
customers in vials with tops that allow the use of a syringe to reconstitute the
product enabling the end user to remove and use the products from the vial.
Ungulate Pregnancy Test - The ungulate pregnancy test is designed to determine
the pregnancy status of cows within approximately 18 days after artificial
insemination prior to the end of the cow's cycle. Pregnancy is necessary for
milk production and the dairy industry relies on artificial insemination to
impregnate the cows to assure genetics and reduce the breakdown of cows thru the
natural reproductive process. The traditional way of determining pregnancy is
via palpation, a physical examination by a veterinarian. Ultrasound is also
being used on a limited basis. The test kit we intend to produce would permit
pregnancy status to be determined sooner than the traditional methods, which, in
turn, would permit a herd manager to repeat the artificial insemination process
at an earlier date on cows determined not to be pregnant. Also, our test does
not include any physical risk to the calf. We believe pregnancy in other hoofed
animals can be determined using the same antigen. The pig, elk, bison, and sheep
industries also utilize artificial insemination, and we plan to develop these
pregnancy test kits as well where feasible.
Our bovine pregnancy test consists of a plastic cartridge containing a
membrane, which has been sprayed with an antibody. The antibody was created from
rabbits that were exposed to a specific purified antigen manufactured at our
facility. Once a blood sample from a cow is exposed to the antibody on the
membrane it will cause the strip to change color indicating the presence of a
certain antigen which is only present in the blood of a pregnant cow. This
reaction occurs approximately at day 18, following artificial insemination to
enable the determination of pregnancy. The test strip will be sealed in a foil
package along with a pipette. Within the kit there will be a needle for drawing
the blood sample, a blood collection tube, a holder for the needle, and a bottle
containing a buffer reagent. The exact configuration of the kit is not complete
as we are continuing development on the test.
Once the development work is complete we anticipate that in order to create
commercial quantities of test kits, we will produce the active ingredients and
send them to a company that specializes in large-scale manufacturing of test
strips. This company would place the active ingredients onto the test strips and
then ship the sealed and packaged pregnancy test kits to our warehouse or to our
customers for distribution.
-2-
We entered into licensing agreements with the University of Idaho and the
University of Wyoming in fall, 2001, to obtain the exclusive rights to
manufacture the protein used in the bovine pregnancy test kit. We have filed two
provisional patent applications, as well as a trademark application for
"Surbred," the name of the bovine pregnancy test kit. This technology has been
in development for 12 years at the universities.
On March 29, 2003 we entered into a distribution agreement described above,
with Merial. Merial is a joint venture between Merck and Aventis. We have
granted Merial exclusive rights to market and distribute the bovine pregnancy
test worldwide. Based on findings of an expanded field trial we concluded that
improvements need to be made to the test before marketing can begin. We have
recently contracted with a recognized industry expert in this field to assist
our internal efforts in development of the test. The test was not launched by
October 2003, as previously anticipated, and the receipt of the second
development payment of $700,000 from Merial has been delayed. Development
efforts are ongoing with the goal being to try and have product ready to
introduce at the World Dairy Expo that occurs in the fall. As a result of the
delays we are experiencing in the introduction of the test, Merial may reduce
the second development payment, or eliminate it if we are not able to deliver
the test or terminate the agreement. Should Merial elect to terminate the
agreement, they may also request a refund of 50% ($100,000) of the development
payment received to date. To date they have been supportive of our efforts to
resolve the sensitivity issues surrounding the pregnancy test.
Bovine LH/ Staybred- A complementary technology to the early detection bovine
pregnancy test is our Bovine LH drug. This product was developed, under the
trade name "StayBred" in collaboration with Dr. Kevin McSweeny, DVM. Initially
the product utilized hCG injected into dairy cows intended to play the role of
LH to reduce the rate of pregnancy loss. Currently up to 70% of dairy cows
absorb or abort causing significant financial loss to the dairy. We are on track
to complete the development of StayBred (rBovine LH) by the end of the year
2004. We plan to begin to market and test the product in the field on a very
limited basis via veterinary prescription unless a licensing arrangement is
entered into with a partner that wants to delay introduction until the product
can be sold with a major advertising rollout. We will also file with the FDA an
Abbreviated New Drug Application ("ANDA") and begin the registration process as
soon as practical after a successful large-scale clinical using recombinant LH.
The Company, upon launching the project, filed a Provisional Patent Application
to protect the concept and methods of product use. Further, the Company has been
amending the Provisional Patent Application with clinical and field results. We
plan to continue and expand the protection of our product and findings, as
results become known.
It is estimated that there are approximately 58,000,000 artificially
inseminated dairy cows worldwide. The product StayBred would be an applicable
and beneficial application to dairy cows at the average rate of 1.75 times per
year as a therapeutic to maintain pregnancy. Total potential annual market size
(assuming only those cows in timed breeding programs is 25,000,000) is therefore
estimated to approximate 40-50 million doses. We do not currently have an
estimate of our, or a potential marketing partner's ability to penetrate the
total market, should the product continue to provide the results experienced to
date in the native form. We plan to begin discussions and negotiations with
major pharmaceutical companies who have shown an interest in
licensing/distributing/purchasing the StayBred product. We are in various stages
of preliminary discussions with interested parties regarding the LH technology.
We anticipate that as we proceed to a large clinical trial of a recombinant form
of LH we will have additional discussions and determine what course of action is
best.
Although the product is still in its development stage and must still be
tested for effectiveness (and although we can provide no assurance that such
development and testing efforts will be successful), we anticipate the "value"
of the StayBred product to the dairy cow industry may be summarized as follows:
o Percentage of cows maintaining pregnancy may significantly increase by
approximately 30-45%.
o Saves the additional cost and manipulation to the animal of repeated
reproduction treatments. o Reduces average days a cow is "open"
(un-bred), thereby improving milk and calf production.
o Anticipated cost per application is easily cost justified to the
dairy.
o The product is easy to administer.
o Technology is Patent Pending.
-3-
Lateral Flow Test Technology Kits -AspenBio has created a Lateral Flow Division
for the development and manufacturing of immunochromatographic rapid test
devices. The devices determine the presence or absence of minute quantities of
target analyte in unknown samples within a few minutes. Typically, these devices
are used by the human and animal healthcare industries as clinical diagnostic
tools. The most commonly known test of this nature is the home pregnancy test.
We have found additional applications for the lateral flow device in the
biotechnology and laboratory field. Since the devices are sensitive and yield
results quickly, they are ideal for research and development projects that
include protein expression and/or purification. This device can save up to 12
hours of laboratory time by replacing immunoblotting in some cases. AspenBio has
developed nine different tests thus far. We are currently investigating a number
of partners to team up with to market and distribute these time and money saving
devices to laboratories, universities and a broad range of other applications.
Equine Proteins - The purified equine protein products we are developing would
have both diagnostic and therapeutic uses for horses. We began purifying equine
pituitary-derived antigens in 2001, and are currently working on development of
diagnostic test kits and recombinant antigens. The diagnostic test kits can be
used to measure hormone levels affecting fertility, thyroid, growth and
lactation. Uses of the recombinant antigens include inducing fertility,
improving healing of wounds, and inducing lactation. The purification processes
we use for the human antigens can be used in manufacturing equine proteins. The
therapeutic use of the equine proteins is currently in limited testing on horse
farms. The results to date based on discussions with the doctors in the field
have been encouraging. AspenBio's preliminary products appear to solve some of
the therapeutic problems related to breeding problems in horses as well as an
anti-aging drug for horses over eighteen years old.
Insulin/PZI - We are working on developing a recombinant form of bovine and
porcine insulin, which is commonly referred to as PZI. PZI was previously
manufactured by Eli Lilly and was used for treatment of human diabetes, until it
was phased out of production in the mid-1990s and replaced by recombinant human
insulin. We expect to use PZI initially for treatment of feline diabetes. The
available human insulin does not successfully replace the cat's own insulin and
bovine insulin is more similar in molecular structure to feline insulin. We are
currently working to create a recombinant form of PZI that exactly matches the
PZI previously manufactured by Eli Lilly. We hope to begin selling PZI in 2005,
if we can obtain a compassionate drug exemption from the Food and Drug
Administration to begin manufacturing and marketing PZI while formal approval is
pending. We can apply for a compassionate drug exemption based on the need for
PZI to treat feline diabetes when there are no other comparable products. Based
on our investigation of this process, we are hopeful that we will be able to
obtain an exemption. The manufacture and bottling of PZI will be done by an
outside entity because of clean room and FDA requirements. We hope to enter into
arrangements for marketing the product once we have finished with our
development work with a pharmaceutical company.
Human Appendicitis Test - Appendicitis is a common acute surgical problem
affecting patients of a wide age range. There are approximately 700,000 cases
annually in the United States. An accurate diagnosis at a sufficiently early
stage is a significant factor in achieving a successful outcome. An accurate and
early diagnosis, however, is difficult because there is considerable overlap of
genuine appendicitis with other clinical conditions. Furthermore, to date there
appears to be no individual sign, symptom, test, or procedure capable of
providing a reliable indication of appendicitis. Misdiagnosis of appendicitis
can lead not only to unnecessary surgery but also to delay of proper therapy for
the actual underlying condition. A dilemma for surgeons is minimizing the
negative appendectomy rate without increasing the incidence of perforation among
patients referred for suspected appendicitis. AspenBio aims to address this
problem by identifying novel diagnostic markers through genomic and proteomic
screening approaches in collaboration with Dr. John Bealer, a pediatric surgeon
with extensive experience in the area. AspenBio has filed a patent application
entitled "METHODS RELATING TO DIAGNOSIS OF APPENDICITIS". The project is in
Research and Development phase as serum and tissue samples are now being
harvested and banked. Testing is ongoing for a marker that could be used to
assist in or determine the diagnosis of the condition.
CEA - Carcinoembryoinc antigen is a tumor marker found in patients suffering
from colon cancer. Currently, serum CEA levels are closely monitored in a cancer
patient to assist in treatment of the disease. Native CEA is derived from human
liver tissue extracts. Liver tissue positive for CEA is difficult to obtain and
the need for cell culture derived CEA is of high importance. AspenBio has cells
in culture that produce the antigen, however, the cultures are being optimized
to induce the cells to produce optimal levels of CEA to make the production of
CEA most cost effective. AspenBio has a patent pending for methods used for
purification of CEA.
-4-
Raw Materials
The human antigens are purified from human tissue or fluids. We have
several sources available for the materials needed.
We have recombinant sources for both the protein for the bovine pregnancy
test and the PZI. We have also cultured cell lines and recombinant material for
both human and animal proteins, which can be used for therapeutic applications,
when produced in a GMP facility. Ultimately, we expect that this type of
production will replace the need for tissue or fluids as a source material,
thereby reducing the chance of contamination from possible impurities.
Intellectual Property
We have not filed patents for our human diagnostic antigens, although we
treat our protein purification process as proprietary. Much of the purification
work is considered an art form and the processes are trade secrets. We have
filed for a patent or provisional patent on a number of our technologies. The
total number of provisional patent applications, patents pending or licensed or
pending patents is in excess of 25.
With respect to the ungulate pregnancy test, we entered into exclusive
licensing agreements with the University of Idaho and the University of Wyoming
in fall, 2001, for the manufacture, use, sale and distribution of the pregnancy
proteins used in the test. We have titled the pregnancy test "Surbred 15"and
titled the LH product "Staybred" and have applied for trademark protection. We
have also filed provisional patent applications for the bovine pregnancy test as
well as the LH product, among a number of others.
Due to its previous manufacture by Eli Lilly and the availability of the
methods and formulations in the public domain, PZI is not a patentable product
and we have not filed a patent on the protein purification process. We do not
think it is likely that our development of recombinant PZI will result in
patentable products in the near term because of use of existing methods.
However, we are hopeful that as we continue this development process we may
develop intellectual property regarding purification of recombinant insulin.
Due to the status of development to date, we have not yet filed patent
applications with respect to the equine protein products.
Marketing/Competitive Conditions
Product Markets
Human diagnostic antigens - The total market for human antigens and tumor
markers is estimated at approximately $2 million, annually. We believe we
currently are the largest supplier in our market, and all of our revenues to
date have come from sales of these products. We expect to continue adding
products to our diagnostic protein line. Our primary competitor for supply of
human pituitary antigens is Dr. Albert Parlow, a professor at UCLA. We believe
that we have displaced Dr. Parlow as the largest supplier.
Lateral Flow Test Technology Kits -We have recently created a Lateral Flow
Division for the development and manufacturing of immunochromatographic rapid
test devices. The devices determine the presence or absence of minute quantities
of target analyte in unknown samples within a few minutes. This device can save
up to 12 hours of laboratory time by replacing immunoblotting in some cases.
AspenBio has developed nine different tests thus far and has a number of others
in various stages of development. We are currently investigating a number of
partners to market and distribute these devices to laboratories, universities
and a broad range of other applications.
-5-
Ungulate Pregnancy Test - The bovine pregnancy tests currently available in the
marketplace cannot determine pregnancy status until at least 30 days from
insemination. Testing by palpation includes a risk of aborting the calf. Our
bovine pregnancy test is designed to determine status sooner and does not
involve a physical risk to the calf. Because the first attempt at artificial
insemination is often unsuccessful, cows in the same "heat" cycle can be
inseminated again if the pregnancy status is determined quickly enough. Our test
is an antigen-based test that detects the presence of a novel protein that is
designed to determine the pregnancy or open status of a cow. Success in any
operation of dairy or beef cattle depends on efficient reproduction. Producers
who can minimize the interval between first pregnancy and all subsequent bovine
pregnancies should achieve higher reproductive efficiency and we believe
enhanced profitability. This early detection method gives operators the
opportunity to breed open animals twice during every 21-day estrous cycle versus
the traditional once, without use of the test until a successful, healthy
pregnancy is achieved.
The worldwide population of dairy cows exceeds 100,000,000, of which
approximately 58,000,000 cows are located in North America, Europe and the
former Soviet Union. It has been estimated that approximately 70% of cows in the
North American and European dairy industry are artificially inseminated.
Although there are no published reports known to us regarding timed or
synchronized cow breeding programs, based on our discussions with industry
sources, we estimate that approximately 25,000,000 of the artificially
inseminated cows are involved in these programs and would represent our primary
target market for our bovine pregnancy test. We are currently assessing the
potential markets for an additional bovine pregnancy test to be used 35 days or
more after insemination for use in the beef industry and for pregnancy tests of
other ungulates.
If we are able to successfully complete the Surbred 15 product Merial will
provide us with sales projections and we will ship the product to Merial
pursuant to an order schedule. Merial will market and distribute the product
exclusively so long as target sales and other conditions are satisfied. As long
as there is no competing technology, Merial must sell at least 1.5 million
products in 2004, at least 4 million products in 2005 and at least 5 million
products in each calendar year thereafter during the term of the agreement. If
Merial does not satisfy the sales targets, then Merial will lose its exclusive
distribution rights.
With respect to each market in which Merial markets the product, the term
of the agreement will be the greater of five years or the term of the patent in
the country. We have also granted to Merial a right of first negotiation during
the first two years of the agreement to distribute future animal health products
developed by us independent of other collaborations.
The success of a modern dairy cow operation is highly dependent upon a
number of critical factors. Several of these factors are outside the control of
the dairyman, such as milk prices and costs for feed, nutrients and medicines.
Factors that are somewhat under their control include size of the operation
(number of head milked), labor costs and access to high quality bulk feed.
The amount of revenue derived from milk sales is a function of the quantity
of milk produced and the level of milk fat contained in the milk. The quantity
and the level of milk fat contained in milk correspond directly to the amount of
time that a cow is pregnant. The more days during a year that a cow remains
un-bred ("open"), the lower the annual milk production from that cow, hence the
lower the revenue received.
Over the last decade, the average number of days per year that a cow
remains open has steadily increased from the 130 days range to the 175 days
range. This has had a direct negative correlation on the average milk revenue
per head.
A significant percentage of dairy cows, when inseminated, do not
successfully become pregnant. This is due to a number of factors that cause the
cow to abort or absorb. The rate of a cow being successfully bred on the first
try when she is in heat has decreased over the past decade from the 50% range to
less than 35%. On average, 65-70% of cows that are AI'ed require a second
insemination, and approximately 40% will require a third, or may be culled from
the herd.
The total cost of artificially inseminating a cow, including the semen,
breeder time and the administration of Gonadorellin ("GnRH") and prostaglandin
("PGF") to promote ovulation, is estimated for an average dairyman to be in the
range of $40 to $55, per head per treatment, before the cost to ultrasound to
determine results. The majority of this cost is incurred again with each
subsequent AI, averaging at least two treatments per year to achieve successful
pregnancy.
-6-
It is believed that a combination of factors is contributing to the poor
reproduction rates. Among these are:
1. Nutritional factors such as High Protein Diets, Negative Energy
Balance, and Vitamin and Mineral Deficiencies.
2. Disease conditions such as Metritis, RFM, Ovarian Cysts, Twins, BVD
and Trichomoniasis.
3. Management issues including Industry Expansion, Cows Spending More
Time on Concrete, Less Time Spent Detecting Peak Heat Cycle, Heat
Stress, Inbreeding and Genetic Trends.
In recent decades, products to assist in achieving better AI success rates
have been introduced. The administration of GnRH during the estrous cycle
results in natural LH release, causing ovulation or luteinization of large
follicles present in the ovary, synchronizing the recruitment of a new
follicular wave, and equalizing follicle development waves. Subsequent
administration of PGF induces the regression of an original corpus leuteum (CL)
and allows final maturation of the synchronized dominant follicle. The cost
associated with these doses is appreciable, with GnRH at $12.80 per dose (Merial
being the dominate market player) and PGF at $3.30 per dose (Pfizer/Pharmacia
being the dominant market player), in addition to the average $25 - $40 cost of
the straw of semen and breeder time, used for the AI.
The following chart describes the ovulation synchronization protocol for
dairy cows using traditional synchronization protocol and our new StayBred(TM)
and SurBred15(TM) (Early Detection Bovine Pregnancy Test) products in
development. We are currently refining our approach to this reproduction
problem, and further studies are ongoing. This chart also describes the
potential savings to the dairy by using our StayBred(TM) product at Day 4 and
our SurBred15(TM) product at Day 18 post artificial insemination "AI":
OVULATION SYNCHRONIZATION
CURRENT PROTOCOL AND COST
- ------------------- ------- ------ ------- ----------- ----------- ----------
Day -10 | -3 -1 0 32 45
- ------------------ ------- ------ ------- ----------- ----------- ----------
Drug/ GnRH PGF GnRH AI Ultrasound Palpation
Procedure
- ------------------ ------- ------ ------- ----------- ----------- ----------
Approximate Cost $12.80 $3.30 $12.80 $15 to $25 $10 to $30 $1 to $2
per Dose/Procedure
- ------------------- ------- ------ ------- ----------- ----------- ----------
The total cost of AI under current protocol can range from $55 to $86. GnRH
is the name of the drug sold by Merial. PGF is also known as Lutelyze and sold
by Pfizer/Pharmacia.
OVULATION SYNCHRONIZATION PROTOCOL
USING STAYBRED(TM) AND SURBRED15(TM)
- ------------------- -------- ------ -------- ------------ -------------- -------------
Day -10 -3 -1 0 4 18
- ------------------- -------- ------ -------- ------------ -------------- -------------
Drug/ GnRH PGF GnRH AI StayBred(TM) SurBred15(TM)
Procedure Pregnancy
Test
- ------------------- -------- ------ -------- ------------ -------------- -------------
Approximate Cost $12.80 $3.30 $12.80 $15 to $25 Projected $8 Projected
per Dose/Procedure to $10 $5 to $7
- ------------------- -------- ------ -------- ------------ -------------- -------------
-7-
Because we believe the use of StayBred(TM) results in a higher number of
cows maintaining pregnancy (an increase from approximately 30% to approximately
50% in our initial field tests, using the native product) the overall costs of
reproduction decrease. This means the annual costs associated with GnRH, PGF &
AI will drop, and because the dairy's cows will retain approximately 20% more
calves from the first round of AI thereby eliminating the need to re-incur the
AI costs in these cows. When SurBred15(TM) is used to determine if a cow is open
at day 18 after AI, the operator is in a position to re-AI the open cow within
the same estrous cycle thereby reducing duplicate drug costs. Feed costs may
also be lowered through better herd management.
AspenBio is in field trials of a product to improve successful pregnancy
rates in cows. The Bovine LH product has been developed, under the trademark
"StayBred" in collaboration with Dr. Kevin McSweeny, DVM. AspenBio has
successfully completed initial studies using native highly purified (or natural)
bovine LH. AspenBio is on track to complete the initial Proof of Concept of
StayBred (rBovine LH, r=recombinant) during the first half of 2004.
It is the Company's plan to begin to market and test the product in the
field on a limited basis via veterinary prescription once the final formulation
has been successfully tested and a mass production process has been determined.
The Company will also file with the FDA an ANDA and begin the registration
process once the previously mentioned milestones have been achieved. The
Company, upon developing the project, filed a Provisional Patent Application to
protect the concept and methods of product use. Further, the Company has been
amending and enhancing the Provisional Patent Application with clinical and
field results, resulting in the filing of an additional Provisional Patent
Application. It is the plan of the Company to continue to expand the protection
for our product and findings, as results become known. We believe Bovine LH can
be sold by a pharmacy with a veterinarian's prescription as soon as we make it
available, although we cannot provide assurances that this will be the case. It
is worth noting that if we involve big pharma in this product they may not want
us to go to market with a product until final FDA approval has been obtained so
that they could fully gear up production and develop a significant market roll
out. No big pharma is currently involved in the production or pre-production of
Staybred.
By treating the recently inseminated cow with bovine LH, we have been able
to stimulate ovulation and the development of the corpus Luteum (which is
believed to result in the production of progesterone which nourishes the fetus),
which in turn has resulted in 37% higher retained pregnancy rates at day 32
ultrasound testing. We expect this product would probably be sold in conjunction
with the other market leaders to enhance the retained pregnancy rates.
Successful reproduction is the number one key to a successful dairy
operation. The product StayBred would be an applicable and beneficial
application to dairy cows as a therapeutic to maintain pregnancy.
Equine Proteins - Equine diagnostic kits and hormones for therapeutic use are
not currently commercially available, so we do not expect to encounter
competition in this market. However, we can offer no assurance that competitors
will not enter the market. Based on information developed by Dr. Clara Singular,
an independent consultant and doctor of veterinary medicine, we estimate a $10
million annual market for therapeutic use of proteins to induce fertility in
horses and a $7 million annual market for diagnostic use of proteins to measure
thyroid function. Preliminary studies indicate that one of these equine hormones
might be used as an anti-aging treatment for horses over eighteen years old.
Insulin/PZI - PZI is not currently distributed in the United States by any other
companies, so we do not expect that we will have competition in this area.
However, competitors capable of distributing PZI may enter the market at any
time. We are developing PZI as a product for the feline diabetes market at the
request of Idexx Pharmaceuticals. According to a study conducted by Idexx, there
are currently 66 million cats in the U.S. and approximately 20% are expected to
suffer from diabetes. We estimate this market to be approximately $15 million
annually once FDA approval is obtained for general distribution. Also, according
to the American Diabetes Association, there are approximately 300,000 human
diabetics whose bodies perform better on bovine/porcine insulin than the
recombinant human form of insulin currently available. These people would create
another potential market for PZI if we can obtain the necessary FDA approvals
and partner with a pharmaceutical company.
-8-
Customers/Marketing
Human Antigens Division - The customers for our human antigen products are the
manufacturers of the diagnostic test kits and research facilities and brokers
who sell to these same end users. Two of our larger customers are brokers,
Monobind and Golden West Biologics, which accounted for approximately eleven
percent (11%) and thirteen percent (13%) of our business, respectively, in 2001.
One of our customers, BioRad, accounted for approximately fifty-four percent
(54%) of our business in 2003. In 2002, BioRad accounted for 48% of our sales.
The loss of this customer would have a material adverse effect on this division
of our business.
The National Cancer Institute, and the universities that conduct its research,
are also customers for the purchase of CEA.
Lateral Flow Test Technology Kits - We are in negotiations with several
potential marketing partners to market and distribute these time and money
saving devices to laboratories, universities and a broad range of other
applications.
Ungulate Pregnancy Test -Merial will be responsible for the marketing of this
product. We expect that the customers for our bovine pregnancy test will be
primarily the artificial insemination (AI) providers. The AI providers include
three general categories of business: (1) pharmaceutical companies selling
prostaglandins, which are used to induce estrus in cows to be artificially
inseminated; (2) pharmaceutical companies selling cattle semen and providing the
actual AI services; and (3) AI equipment manufacturers and suppliers. There are
a limited number of these AI providers who service the dairy industry. We would
expect the AI providers to market the products as well. We also expect that
industry trade associations would market the bovine pregnancy test, by endorsing
the product and then receiving compensation based on the value realized from
such endorsements.
Bovine LH- We anticipate that the initial customers for this drug will be
commercial dairy operations using timed (synchronized) breeding programs. It may
also have further applications in all artificially inseminated cows. An
injection given shortly after insemination should increase the retention of a
healthy fetus by 30-50% based on initial studies using native LH and HcG. We
anticipate that marketing on a large scale will be developed by a significant
partner which will be determined as we complete our clinical trials on the
recombinant form of LH now being developed.
Equine Proteins - We anticipate that the ultimate customers for the equine
protein products would be veterinarians and horse owners. If we are successful
in the development of these products we anticipate entering into agreements with
a pharmaceutical company for marketing and distribution.
Insulin/PZI - We anticipate that the ultimate customers for the PZI would be
veterinarians and cat owners. If we are successful in developing the recombinant
form of PZI, we plan to seek to enter into an agreement with a pharmaceutical
company for marketing and distribution. We are attempting to develop recombinant
PZI that matches the original PZI manufactured by E.I. Lilly. If we pursue
approval to sell PZI to human diabetics, then they would provide an additional
customer base. We would expect to enter into arrangements with a pharmaceutical
company for marketing and distribution of PZI if such an expanded use is
possible.
General Operations
Backlog and inventory - Our business is not seasonal in nature, so we expect
demand to remain relatively steady. Because we produce proteins on demand, we do
not maintain a backlog of orders. We have reliable sources of raw materials, do
not require significant amounts of raw materials, and can manufacture all of our
protein. As a result, we do not expend large amounts of capital to maintain
inventory.
Payment terms - Because we currently act as a supplier to manufacturers of test
kits and research facilities, we do not provide extended payment terms.
-9-
Revenues - The vast majority of our revenues come from domestic customers. Less
than 2% of our revenues come from foreign customers.
Employees - We currently have twelve full-time employees and one part time
employee. We will hire additional personnel, as needed depending upon the
implementation and success of our new product lines.
Research and Development
We spent $540,000 on research and development in fiscal 2003 and $622,000
in fiscal 2002. We expect to spend significantly more over the next few years to
develop our new products, primarily on the equine proteins and ungulate
pregnancy tests. We will also continue research and development to improve and
add antigens to the bovine pregnancy test, in order to improve accuracy and
eliminate competition. If we reach an arrangement with a pharmaceutical company
to assess the potential for marketing PZI to humans, we would also expect to
spend research and development funds on those efforts.
Compliance
FDA
The Food and Drug Administration (FDA) has regulatory authority over
certain of our planned products. Our existing products require no approvals at
our level.
Human Patients - FDA approval is required for therapeutic uses of products. For
use on human patients, FDA extensively regulates the testing, manufacturing,
labeling, advertising, promotion, export and marketing of therapeutic products.
A therapeutic product administered to human patients is regulated as a drug or a
biologic drug and requires regulatory approval before it may be commercialized.
This would be applicable to AspenBio if we become involved in the manufacture of
either the CEA colon cancer vaccine, the sale of PZI to human diabetics or the
potential diagnostic for the treatment of Appendicitis.
Product approvals are granted after extensive clinical trials. Any product
approvals that are granted remain subject to continual FDA review, and newly
discovered or developed safety or efficacy data may result in withdrawal of
products from marketing. Moreover, if and when such approval is obtained, the
manufacture and marketing of such products remain subject to extensive
regulatory requirements administered by the FDA and other regulatory bodies,
including compliance with current Good Manufacturing Practices, adverse event
reporting requirements and the FDA's general prohibitions against promoting
products for unapproved or "off-label" uses. Manufacturers are subject to
inspection and market surveillance by the FDA for compliance with these
regulatory requirements. Failure to comply with the requirements can, among
other things, result in warning letters, product seizures, recalls, fines,
injunctions, suspensions or withdrawals of regulatory approvals, operating
restrictions and criminal prosecutions. Any such enforcement action could have a
material adverse effect on our business. Unanticipated changes in existing
regulatory requirements or the adoption of new requirements could also have a
material adverse effect on our business.
Ungulate Pregnancy Test - Because the ungulate pregnancy test will be a
diagnostic use only, it will not be subject to FDA regulation. However, we will
make a notification filing with the FDA, which advises the FDA of the expected
uses and labeling of the product.
LH Pregnancy Enhancing Drug - It is anticipated that an ANDA will be required to
be filed with the FDA before mass distribution can occur. During the initial
distribution phase management believes it will be able to sell the drug through
compounding pharmacies for distribution to diaries, with a veterinarian's
prescription.
Equine Proteins - As the equine proteins would have a therapeutic use, they
would require regulatory approval similar to that required for PZI.
-10-
PZI/Feline Diabetes Application - FDA approval will be necessary for PZI to be
used for treatment of feline diabetes. New drugs for companion animals must
receive New Animal Drug Application approval prior to marketing. The
requirements for such approval are similar to those for human drugs and may
require similar clinical testing. We plan to file a compassionate drug exemption
application, so that we can manufacture and use PZI while the FDA is conducting
the more comprehensive review. This application would be based on the need for
PZI to treat diabetic cats and the fact that there are no comparable products
manufactured by a USA company. We believe the exemption may be available based
upon discussions with an experienced potential industry partner. We are hopeful
that FDA approval will not be difficult to obtain because PZI was previously
approved for this use. If approval were obtained, we would once again be subject
to ongoing regulation, which exposes us to the risks associated with compliance
failures.
Environmental Protection
We are subject to various environmental laws pertaining to the disposal of
hazardous medical waste. We contract for disposal of our hazardous waste with a
licensed disposal facility. We do not expect to incur liabilities related to
compliance with environmental laws; however, we cannot make a definitive
prediction.
Other Laws
We are also subject to other federal, state and local laws, pertaining to
matters such as safe working conditions and fire hazard control.
RISK FACTORS
An investment in our common stock involves a high degree of risk.
Prospective investors should consider carefully the following factors and other
information in this report before deciding to invest in shares of our common
stock. If any of the following risks actually occur, our business, financial
condition, results of operations and prospects for growth would likely suffer.
As a result, the trading price of our common stock could decline and you could
lose all or part of your investment.
Our success depends on our ability to develop and commercialize new products
Our success depends on our ability to successfully develop new products.
Although we are engaged in human diagnostic antigen manufacturing operations and
all of our revenues are derived from this business, we believe our ability to
substantially increase our revenues and generate net income is contingent on
successfully developing one or more of our pipeline products. Our ability to
develop any of the pipeline products is dependent on a number of factors,
including funding availability to complete development efforts, to adequately
test and refine products, and to commercialize our products, thereby generating
revenues once development efforts prove successful. We have encountered in the
past and may again encounter in the future problems in the testing phase for
different pipeline products, sometimes resulting in substantial setbacks in the
development process. There can be no assurance that we will not encounter
similar setbacks with the products in our pipeline, or that funding from outside
sources and our revenues will be sufficient to bring any or all of our pipeline
products to the point of commercialization.
Our Agreement with Merial could be terminated
Our Agreement with Merial for SurBred15(TM) contemplated a product launch
date of October 1, 2003. The sales goals under the Agreement state that the
goals will be prorated by calendar quarter since the product launch did not
occur by October 1, 2003. We are actively engaged in research and development on
this product, but do not yet have a satisfactory working prototype.
Consequently, progress payments from Merial have been delayed, and until we
reach certain milestones, continued delays in developing a prototype could
result in substantial modifications to the Merial Agreement, and/or possibly
cancellation. As a result of problems associated with making the test into a
commercially acceptable lateral flow test we have recently engaged a specialist
with extensive experience in whole blood lateral flow tests to assist us in the
development of this product. Although Merial has expressed its desire to
continue working with us, if we are unable to meet milestones expected by Merial
and/or successfully develop a prototype, Merial may discontinue its support of
this product and cancel the Agreement and in the event of canceling, may request
a refund of 50% ($100,000) of the advance development fees they have paid to
date. The inability to successfully develop a prototype and/or cancellation of
the Agreement could have a material adverse effect on our business plan and
projected growth.
-11-
We Have Substantial Note Payments Due Within the Next Year
We have borrowed an aggregate of $248,502 under our bank line of credit,
which matured in February 2004. We currently anticipate that the bank will renew
the line of credit under terms substantially equivalent to those currently in
place for the line of credit. Any delays in refinancing this obligation or a
change in the terms of the line of credit could have an adverse impact on our
business and financial condition.
We Issued Securities in 2002 Which May Not Qualify For The Private Offering
Exemption.
On July 5, 2002, we made a convertible promissory note to a shareholder in
connection with a $500,000 loan from him. Of the $500,000, $350,000 was used to
establish an account at the bank providing our construction loan to be used as a
pledge for repayment of the construction loan. We used the balance of $150,000
for general corporate purposes. The note was convertible at the shareholder's
option into our common stock at $1.50 per share. We also issued to the
shareholder warrants to purchase up to 275,000 shares of our common stock at
$1.50 per share during a three-year period. During August 2003, we finalized an
agreement with the holder under which $150,000 plus accrued interest of $38,281
was converted into 188,281 shares of common stock and we repaid $350,000 of the
remaining debt in two payments during 2003. In connection with that transaction
we issued 250,000 warrants to the shareholder exercisable at $1.00. We also
obtained a $200,000 guaranty from another shareholder, Cambridge Holdings, Ltd.,
and we issued to Cambridge a warrant to purchase up to 100,000 shares of our
common stock at $1.50 per share for a three-year period. The notes and warrants
issued in these transactions are securities and are required to be registered
unless an exemption is available. We relied on the private offering exemption
from registration in making these issuances. The persons to whom we issued these
securities are sophisticated, experienced investors who were our shareholders
prior to these transactions and who are knowledgeable about the business,
financial condition and the risks of investing in the securities. These
transactions were made during the pendency of the processing of a registration
statement. Under certain circumstances, the SEC has determined that separate
offerings should be integrated which has the effect of destroying the private
offering exemption. We do not believe that these transactions should be
integrated with the sale of our shares by selling shareholders pursuant to the
prospectus, which was part of the registration statement. Nonetheless, the SEC
may take the position that the offering should be integrated and could challenge
the availability of the private offering exemption to us. In that event, we
could be subject to enforcement proceedings brought by the SEC and subject to
injunctive or other relief, and could be subject to possible civil action by the
two purchasers of these securities. It is also possible that the SEC could
require us to make a rescission offer through a registration statement to the
purchasers of the securities. Any such developments could be expensive and could
harm our reputation and result in an adverse impact on our business and
financial condition.
Our success will depend in part on establishing effective strategic partnerships
and business relationships.
A key aspect of our business strategy is to establish strategic
partnerships. We currently have license arrangements with the University of
Idaho, the University of Wyoming. Under a separate agreement with another
university the Company agreed to fund $46,550 payable over a six-month period
for consulting and research assistance on one of the Company's products in
development. It is likely that we will seek other strategic alliances. We also
intend to rely heavily on companies with greater capital resources and marketing
expertise to market some of our products, such as our agreement with Merial.
While we have identified certain candidates for other potential products, we may
not reach definitive agreements with any of them. Even if we enter into these
arrangements, we may not be able to maintain these collaborations or establish
new collaborations in the future on acceptable terms. Furthermore, these
arrangements may require us to grant certain rights to third parties, including
exclusive marketing rights to one or more products, or may have other terms that
are burdensome to us, and may involve the acquisition of our securities. Our
partners may decide to develop alternative technologies either on their own or
in collaboration with others. If any of our partners terminate their
relationship with us or fail to perform their obligations in a timely manner,
the development or commercialization of our technology in potential products may
be substantially delayed.
-12-
We have limited manufacturing experience, and we may experience manufacturing
problems that limit the growth of our revenue.
We purify human and animal antigens and tumor markers. In 2003, our
revenues from these sales were approximately $651,000. We intend to introduce
new products with substantially greater revenue potential. We may seek to
manufacture these products in-house or through contractual arrangements with
third parties. In either event, we may not be able to produce sufficient
quantities at an acceptable cost. In addition, we may encounter difficulties in
production due to, among other things, quality control, quality assurance and
component supply. These difficulties could reduce sales of our products,
increase our costs, or cause production delays, all of which could damage our
reputation and hurt our profitability. To the extent that we enter into
manufacturing arrangements with third parties, we will depend on them to perform
their obligations in a timely manner and in accordance with applicable
government regulations.
Our success depends upon our ability to protect our intellectual property
rights.
Our success will partially depend on our ability to obtain and enforce
patents relating to our technology and to protect our trade secrets. We may not
receive any patents. In addition, third parties may challenge, narrow,
invalidate or circumvent our patents. The patent position of biotechnology
companies is generally highly uncertain, involves complex legal and factual
questions and has recently been the subject of much litigation. Neither the U.S.
Patent Office nor the courts have a consistent policy regarding breadth of
claims allowed or the degree of protection afforded under many biotechnology
patents.
In an effort to protect our unpatented proprietary technology, processes
and know-how, we require our employees and consultants to execute
confidentiality agreements. However, these agreements may not provide us with
adequate protection against improper use or disclosure of confidential
information. These agreements may be breached, and we may not have adequate
remedies for any such breach. In addition, in some situations, these agreements
may conflict, or be subject to, the rights of third parties with whom our
employees or consultants have previous employment or consulting relationships.
Also, others may independently develop substantial proprietary information and
techniques or otherwise gain access to our trade secrets. We intend to market
our products in many different countries some of which we will not have patents
in or applied for. Different countries have different patent rules and we may
sell in countries that do not honor patents and in which the risk that our
products could be copied and we would not be protected would be greater.
We may be unable to retain key employees or recruit additional qualified
personnel.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical, and managerial personnel. There
is intense competition for qualified personnel in our business. Therefore, we
may not be able to attract and retain the qualified personnel necessary for the
development of our business. A loss of the services of existing personnel, as
well as the failure to recruit additional key scientific, technical and
managerial personnel in a timely manner would harm our development programs and
our business.
Roger Hurst has been our Chief Executive Officer and our largest
shareholder since our inception. We rely on him for his leadership and business
direction. We do not have an employment agreement with Mr. Hurst. The loss of
his services could significantly delay or prevent the achievement of our
business objectives.
Our competitors may have greater resources or research and development
capabilities than we have, and we may not have the resources necessary to
successfully compete with them.
Our business strategy has been to create a niche in the protein
purification area. We are aware of only one competitor in this area, Dr. Albert
Parlow, a UCLA professor. We believe that we have displaced Dr. Parlow as the
largest supplier of human antigens. However, we plan to expand our operations
into other areas as described above. The biotechnology business is highly
competitive, and we may face increasing competition. We expect that many of our
competitors will have greater financial and human resources and more experience
in research and development and more established sales, marketing and
distribution capabilities than we have. In addition, the healthcare industry is
characterized by rapid technological change. New product introductions or other
technological advancements could make some or all of our products obsolete.
-13-
Our common stock is classified as a "penny stock" under SEC rules and the market
price of our common stock is highly unstable.
A limited trading market exists for our common stock on the OTC Bulletin
Board. Since inception of trading in January 2003, our common stock has not
traded at $5 or more per share. Because our stock is not traded on a stock
exchange or on the Nasdaq National Market or the Nasdaq Small Cap Market, if the
market price of the common stock is less than $5 per share, the common stock is
classified as a "penny stock." SEC Rule 15g-9 under the Exchange Act imposes
additional sales practice requirements on broker-dealers that recommend the
purchase or sale of penny stocks to persons other than those who qualify as an
"established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination that investments in
penny stock are suitable for the customer and must make special disclosures to
the customers concerning the risk of penny stocks. Many broker-dealers decline
to participate in penny stock transactions because of the extra requirements
imposed on penny stock transactions. Application of the penny stock rules to our
common stock reduces the market liquidity of the shares, which in turn affects
the ability of holders of our common stock to resell the shares they purchase,
and they may not be able to resell at prices at or above the prices they paid.
A significant number of our shares are or will be eligible for future sale,
which may cause the price of our common stock to decline.
As of March 19, 2004, 10,477,031 shares of our common stock and an
aggregate of 3,986,662 options and warrants were outstanding. We also intend to
issue additional shares and warrants in order to raise additional capital on an
as-needed basis. We have granted registration rights to the holders of the
shares and certain warrants and convertible notes. Sales of a substantial number
of shares of our common stock in the public market or the exercise of a
substantial number of options or warrants to purchase shares of our common
stock, or the perception that such sales or exercises might occur, could cause
the market price of our common stock to decline.
Because one of our shareholders exercises voting power of more than 11% of our
common stock, he may be able to determine the outcome of all matters submitted
to our shareholders for approval, regardless of the preferences of the minority
shareholders.
Roger D. Hurst currently owns 37.2% of our outstanding common stock,
although he exercises voting power as to only 15.7% of our common stock due to a
voting agreement whereby he must vote 2,250,000 shares pro rata with the vote of
all other shareholders. Accordingly, he may have the ability to control matters
affecting us, including the composition of our board of directors, any
determinations with respect to mergers, or other business combinations, our
acquisition or disposition of assets and our financings. In addition, Mr. Hurst
may be able to prevent or cause a change in control of our company and may be
able to amend our articles of incorporation and bylaws without the approval of
any other shareholder, depending on the number of votes cast on any proposal.
His interests may conflict with the interests of our other shareholders.
We do not currently have insurance that covers product liability.
Our insurance policies do not currently cover claims and liability arising
out of defective products. As a result, if a claim were brought against us, we
would not have any insurance that would apply and would have to pay any costs
directly. Because our products have only been used as part of diagnostic test
kits, we did not believe that this insurance would be necessary. However, as we
expand into other products, the risk of claims will increase and we will need to
evaluate the need to obtain insurance.
-14-
If we fail to obtain FDA approval, we cannot market certain products in the
United States.
Therapeutic products to be used by humans must be approved by the FDA prior
to marketing and sale. This would apply to our plan to potentially market PZI to
human diabetics, CEA and the Appendicitis test. In order to obtain approval, we
must complete extensive clinical trials and comply with numerous standards; this
process can take substantial amounts of time to complete. Even if we complete
the trials, FDA approval is not guaranteed. FDA approval can be suspended or
revoked, or we could be fined, based on a failure to continue to comply with
those standards.
FDA approval is also required for therapeutic products that will be used on
animals prior to marketing and sale, and can also require considerable time to
complete. New drugs for companion animals must receive New Animal Drug
Application approval. This type of approval would be required for the use of PZI
for treatment of feline diabetes and for our therapeutic equine protein
products. The requirements for obtaining FDA approval are similar to those for
human drugs described above and may require similar clinical testing. Approval
is not assured and, once FDA approval is obtained, we would still be subject to
fines and suspension or revocation of approval if we fail to comply with FDA
requirements. We plan to file a compassionate drug exemption application for the
use of PZI, so that we can manufacture and use PZI while the FDA is conducting
the more comprehensive review. However, the interim approval is also not
guaranteed and could delay marketing of PZI until the New Animal Drug
Application is approved.
If we fail to obtain regulatory approval in foreign jurisdictions, then we
cannot market our products in those jurisdictions.
We plan to market some of our products in foreign jurisdictions.
Specifically, we expect that the bovine pregnancy test will be aggressively
marketed in foreign jurisdictions. We may market our therapeutic products to
foreign jurisdictions, as well. We may need to obtain regulatory approval from
the European Union or other jurisdictions to do so and obtaining approval in one
jurisdiction does not necessarily guarantee approval in another. We may be
required to conduct additional testing or provide additional information,
resulting in additional expenses, to obtain necessary approvals.
ITEM 2. DESCRIPTION OF PROPERTY
We maintain our administrative office, laboratory and production operations
in a 40,000 square foot building in Castle Rock, Colorado, which was constructed
for us. We moved into our new facility in early 2003 and do not presently plan
any renovation, improvements, or development of this property.
AspenBio owns the property subject to a mortgage with an outstanding
balance of $3,263,287 at December 31, 2003, payable in monthly installments of
approximately $23,700 and bearing interest at an approximate average rate of
6.5%. The Company maintains adequate insurance coverage on the property.
ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
-15-
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the over-the-counter bulletin system operated
by NASDAQ under the symbol, APNB. Our common stock did not trade publicly during
2002. Trading commenced in February 2003 and high and low prices are summarized
as: Quarter ended High Low
March 31, 2003 $4.30 $3.50
June 30, 2003 $3.70 $1.20
September 30, 2003 $1.60 $1.25
December 31, 2003 $1.45 $1.07
As of March 19, 2004 we had 1,010 holders of record (excluding an indeterminable
number of shareholders whose shares are held in street or "nominee" name) of our
common stock.
We have never paid a dividend on our common stock, and we do not intend to
pay cash dividends for the foreseeable future. Instead, we currently plan to
retain earnings, if any, for use in the operation of our business and to fund
future growth.
Recent Sales of Unregistered Securities.
The following sets forth the equity securities sold by the Company during
the period covered by this report that were not registered under the Securities
Act.
On July 5, 2002, we made a convertible promissory note to a shareholder in
connection with a $500,000 loan from him. Of the $500,000, $350,000 was used to
establish an account at the bank providing our construction loan to be used as a
pledge for repayment of the construction loan. We used the balance of $150,000
for general corporate purposes. The note was convertible at the shareholder's
option into our common stock at $1.50 per share. We also issued to the
shareholder warrants to purchase up to 275,000 shares of our common stock at
$1.50 per share during a three-year period. During August 2003, we finalized an
agreement with the holder under which $150,000 plus accrued interest of $38,281
was converted into 188,281 shares of common stock and we repaid $350,000 of the
remaining debt in two payments during 2003. We relied on the private offering
exemption from registration contained in Section 4(2) of the Act in making these
issuances.
In 2003, we also obtained a $200,000 guaranty from another shareholder,
Cambridge Holdings, Ltd., and we issued to Cambridge a warrant to purchase up to
100,000 shares of our common stock at $1.50 per share for a three-year period.
We relied on the private offering exemption from registration contained in
Section 4(2) of the Act in making this issuance.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
Sales for the year ended December 31, 2003 totaled $651,000, which is a
$(95,000) or (13)% decrease from the year ended December 31, 2002. The decrease
in sales is primarily attributable to reduced shipment levels to a number of
existing customers, except for the Company's largest customer, to which sales
were virtually unchanged. It is not unusual for the orders from our customers to
vary by quarter and by year depending upon the customer's sales and production
needs. We cannot predict future sales volumes that could be expected from
existing or other customers.
Costs of sales for the year ended December 31, 2003 totaled $518,000, a $144,000
or 22% decrease as compared to the 2002 period. The change in cost of sales
resulted from a combination of factors, no one of which was significant. Gross
profit percentage increased to 20% in the year ended December 31, 2003, as
compared to 11% in the 2002 period. The change is generally attributable to more
efficient production out of our new facility, net of the increased operating
costs associated with the new facility.
-16-
Selling, general and administrative expenses in the year ended December 31,
2003, totaled $878,000, which is a $490,000 or 127% increase as compared to the
2002 period. The increase is primarily attributable to a combination of
additional personnel on staff, higher operating expenses in our new facility and
the costs of now being a public reporting entity.
Research and development expenses in the year ended December 31, 2003 totaled
$540,000, which is an $82,000 or 13% decrease as compared to the 2002 period.
The decrease is due to the timing of when significant costs associated with the
acquisition and development of technologies, are incurred. During 2002
additional external costs were being incurred to acquire and develop the line of
technologies as compared to 2003 year. Current technologies being developed
include the bovine pregnancy tests and bovine pregnancy enhancement products and
several other technologies. Depending upon available cash, we expect research
and development expenses to increase at least back to the 2002 level for the
year ending December 31, 2004.
Interest expense for the year ended December 31, 2003, increased to $353,000 or
$219,000 more as compared to the $134,000 for the 2002 year. The increase was
primarily due to higher debt levels to fund the new facility and working capital
needs. We also recorded an $81,500 expense during the 2003 period for the
estimated non-cash cost associated with the revision in terms of a convertible
loan that was completed during 2003.
No income tax benefit was recorded on the loss for the year ended December 31,
2003, as management of the Company was unable to determine that it was more
likely than not that such benefit would be realized. At December 31, 2003, the
Company had a net operating loss for income tax purposes of approximately
$2,974,000, expiring through 2023.
Liquidity and Capital Resources
The Company reported a net loss of $1,717,000 during the year ended December 31,
2003. At December 31, 2003, the Company had a working capital deficit of
$202,000. Management believes that in order to continue with the technology
development activities and support the current level of operations, the Company
will need to continue to pursue its capital raising activities. Management's
plans also include continuing to fulfill the requirements under the global
development and distribution agreement signed in March 2003, to accomplish the
milestones and successful completion of the bovine pregnancy test to receive
additional development payments of up to $1,700,000. Under the terms of the
development agreement, development payments the Company may receive in the
future are subject to reduction due to delays in the test development. The
completion of this test has been delayed from the timeline originally agreed to
under the distribution agreement and the Company is attempting to achieve its
requirements in the next few months under the agreement. The Company is also
focused on generating increased product sales, and raising additional capital.
Capital expenditures, primarily for production, laboratory and facility
improvement costs for the fiscal year ending December 31, 2004, are anticipated
to total less than $50,000. Funding for the capital additions is contingent on
the Company's ability to obtain additional financing and available working
capital.
AspenBio anticipates that spending for research and development for the fiscal
year ending December 31, 2004, will increase from those incurred for the year
ended December 31, 2003. The primary expenditures will be to continue to file
patents on the Company's technologies as well as to fund development costs in
support of the current pipeline products. The principal products in development
currently consist of the bovine pregnancy tests and bovine pregnancy enhancement
products. Funding for such increased research and development expenses is
anticipated to be covered by additional capital raising efforts.
During February 2003, the Company secured a $250,000 line of credit with a bank
and as of December 31, 2003, $248,502 had been drawn and was outstanding under
the line of credit. The line of credit is currently being renewed under terms
that management believes will be substantially equivalent to those currently in
effect.
-17-
During June 2003, the Company closed on a $3,250,000 permanent mortgage facility
on its 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 the
Company's President. The average approximate interest rate is approximately 6.5%
and the loan requires monthly payments of approximately $23,700.
During June 2003, the Company's President agreed to consolidate the Company's
notes payable to him in the aggregate principal amount of $958,651, into one new
note with an interest rate of 6% per annum and the maturity date extended to
June 2008. An advance principal payment of $150,000 will be made to him if the
Company raises sufficient equity funding to meet certain other needs.
During August 2003, the Company finalized an agreement with the holder of a
$500,000 convertible note payable which matured in July 2003, to convert
$150,000, plus $38,281 in accrued interest into common stock, be repaid $300,000
in principal and have $50,000 remain outstanding under a new 10% note due
November 26, 2003. In consideration for the revisions that were made to the
note, the Company agreed to reduce the conversion price from the $1.50 per share
under the original note to $1.00 per share for the converted portion.
Additionally, the Company granted the holder a warrant to purchase shares of
common stock at $1.50 per share through July 2005. As a result of the reduction
in the conversion rate to $1.00 per share, the Company recorded a debt
conversion inducement expense of $81,500, representing the value of the
additional shares received as of the date of conversion. The value of the
250,000-share warrant granted to the holder was computed and allocated to the
components of the transaction. The value of the portion allocated to the new
debt was recorded as additional interest expense over the life of the new note.
In December 2003 the remaining $50,000 plus accrued interest was repaid to the
stockholder.
In the third quarter of the current fiscal year Cambridge Holdings, Ltd. a
stockholder of the Company, loaned a total of $40,000 under two notes to the
Company. The proceeds of the notes were used for working capital, with the notes
due on demand bearing interest at 10%. During December 2003 the notes plus
accrued interest were repaid to the stockholder.
During the fourth quarter of 2003 we completed the sale of 1,083,750 shares of
the Company's common stock, generating net proceeds to the Company of $923,000
after deducting offering expenses. Proceeds from this offering were used for
debt repayment, operating and development expenses and working capital.
During October 2003, the Company completed a $350,000 offering of convertible
debt. The unsecured notes bear interest at 8% and were due at the earlier of May
2004 or at the time $1,000,000 is raised in an equity offering. The debt
offering consisted of a note for $1.00 and one share of common stock for each
$1.00 invested in the notes. To reduce the amount of the dilution as a result of
the debt offering, the Company's president contributed 350,000 shares of common
stock to the Company that were used in the offering. The proceeds of the
offering have been allocated between the estimated value of the notes, the stock
and the warrant, based upon their respective estimated fair values. The amount
allocated to the non-debt elements will be accreted back to the debt as
additional interest expense over the life of the notes. The Placement Agent
selling the notes received fees and expenses of 13% of the proceeds raised plus
a warrant to acquire 150,000 shares of common stock at $1.50 per share
exercisable through June 2006. During December 2003 an equity offering exceeding
$1,000,000 was closed and accordingly, the bridge loans matured. Out of the
total $350,000, $205,000 was converted into common stock of the Company at $1.00
per share and $145,000 was repaid, with $45,000 of the amount outstanding at
December 31, 2003 and repaid in January 2004.
Operating Activities
Net cash consumed by operating activities was $396,000 during the year ended
December 31, 2003. Cash was consumed by the loss of $1,717,000, less non-cash
expenses of $278,000 for depreciation and amortization and $150,000 associated
with additional non-cash items. Decreases of $73,000 in accounts receivable and
$251,000 in inventories, arising from lower sales levels in 2003 and $350,000 in
restricted cash, from the release of the restrictions, provided funding for a
portion of the loss. A net increase in accounts payable and accruals of $27,000
during the period also funded a portion of the loss. During March 2003, cash of
$200,000 was received upon the execution of the global development and
distribution agreement, which has been recorded as deferred revenue until the
Company has completed the contingencies under the agreement.
-18-
Net cash outflows from operating activities consumed $765,000 during the year
ended December 31, 2002. Cash was consumed by the loss of $1,224,000, offset by
$121,000 in total depreciation and amortization expenses and $50,000 associated
with non-cash items. Operating cash flow benefited from a $135,000 reduction in
accounts receivable and a $120,000 reduction in inventories during 2002 due to
lower sales levels. Accounts payable and accrued expenses increased by $250,000
benefiting operating cash flow. The Company also used cash of $350,000 to fund a
restricted cash account. Expenditures associated with the development of the
bovine pregnancy test also increased the rate of cash outflow.
Investing Activities
Net cash outflows from investing activities consumed $228,000 during the year
ended December 31, 2003. The outflow was primarily attributable to purchases of
property and equipment and intangibles.
Net cash outflows from investing activities consumed $606,000 during the 2002
period. The outflow was attributable to purchases of property and equipment and
payments for intangibles.
Financing Activities
Net cash inflows from financing activities generated $640,000 during the year
ended December 31, 2003. The Company drew $249,000 under the new line of credit.
The construction loan was increased by $653,000, advanced directly to finalize
the construction of our new facility. This loan was converted into a $3,250,000
permanent mortgage in June 2003, and loan closing costs of $57,000 incurred.
During the year we received $79,000 in new loan proceeds above the amounts that
we repaid during the period. We also received net proceeds from the sale of
common stock totaling $718,000, exclusive of debt conversions, and repurchased
and retired $100,000 of common stock during the year.
Net cash inflows from financing activities generated $1,080,000 during 2002. The
Company received $300,000 in connection with the completion of sale of
securities and we received $1,191,000 from the issuance of notes payable. During
2002 $362,000 was used to reduce debt and $49,000 was paid out in dividends.
Critical Accounting Policies
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:
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 collectibility 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 other
operating expenses in the Company's statements of operations. Write-offs of
uncollectible accounts are charged against the allowance for doubtful accounts.
Inventories: The Company's inventory is a significant component of current
assets and is stated at the lower of cost or market. The Company regularly
reviews inventory quantities on hand and records provisions for excess or
obsolete inventory based primarily on its estimated forecast of product demand,
market conditions, production requirements and technological developments.
Significant or unanticipated changes to the Company's forecasts of these items,
either adverse or positive, could impact the amount and timing of any additional
provisions for excess or obsolete inventory that may be required.
-19-
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 periodically reviewed 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. For the years ended December 31, 2003 and
2002, the required annual testing resulted in no impairment charge.
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. 101, "Revenue Recognition"
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. 101. 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
collectibility is reasonably assured.
Recent Accounting Policies
Accounting for Guarantees - In November 2002, FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45) was issued. FIN 45
requires a guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for the fair
value of the obligation undertaken in issuing the guarantee. Interpretation 45
applies prospectively to guarantees the Company issues or modifies subsequent to
December 31, 2002. The Company has historically not issued guarantees and
therefore FIN 45 did not have a material effect on its 2003 financial
statements.
Stock-Based Compensation - In December 2002, the FASB issued FASB No. 148 (SFAS
148), Accounting for Stock-Based Compensation - Transition and Disclosure. This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. It also amends disclosure requirements to require prominent
disclosures in both annual and interim financial statements about the method and
the effect of the method used for stock based compensation on reported results.
The statement is effective for fiscal years ending after December 15, 2002.
Adoption of SFAS 148 did not have a material effect on the Company's financial
statements.
Variable Interest Entities - In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN
46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, for certain entities which do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities will be required to
be consolidated by their primary beneficiary. The primary beneficiary of a
variable interest entity is determined to be the party that absorbs a majority
of the entity's expected losses, receives a majority of its expected returns, or
both, as a result of holding variable interests, which are ownership,
contractual, or other pecuniary interests in an entity. In December 2003, the
FASB approved a partial deferral of FIN 46 along with various other amendments.
The effective date for this interpretation has been extended until the first
fiscal period ending after December 15, 2004. However, prior to the required
application of this interpretation, a public company that is a small business
issuer shall apply this interpretation to those entities that are considered to
be special purpose entities no later than the end of the first fiscal reporting
period after December 15, 2003. The Company does not have any variable interest
entities, and therefore, the adoption of the provisions of FIN 46 will not have
a material effect on the financial condition or results of operations of the
Company.
-20-
Revenue Arrangements - In November 2002, the Emerging Issues Task Force ("EITF")
reached a consensus on Issue 00-21, Accounting for Revenue Arrangements with
Multiple-Deliverables (EITF 00-21). EITF 00-21 addresses how to account for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The consensus mandates how to identify
whether goods or services or both which are to be delivered separately in a
bundled sales arrangement should be accounted for separately because they are
"separate units of accounting." The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into in fiscal years beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, Accounting Changes.
The Company does not believe the adoption of EITF 00-21 had a material impact on
its financial position or results of operations.
Financial Instruments - In May 2003 the FASB issued Statement of Financial
Accounting Standards No. 150 ("SFAS 150"), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in its balance
sheet certain financial instruments with characteristics of both liabilities and
equity. In accordance with this standard, financial instruments that embody
obligations of the issuer are required to be classified as liabilities. SFAS No.
150 is effective for all financial instruments entered into or modified after
May 31, 2003, except for those provisions relating to mandatorily redeemable
non-controlling interests, which have been deferred. . For existing financial
instruments, SFAS No. 150 is effective at the beginning of the fiscal quarter
commencing July 1, 2003. The adoption of SFAS No. 150 did not have an effect on
the Company's financial position, results of operations or cash flows. If the
deferred provisions of SFAS No. 150 are finalized in their current form,
management does not expect adoption to have a material impact on the financial
position, results of operations or cash flows.
-21-
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
AspenBio, Inc.
We have audited the accompanying balance sheet of AspenBio, Inc. (a
Colorado corporation) (the "Company") as of December 31, 2003, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
two years in the period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AspenBio, Inc. as of
December 31, 2003, and the results of its operations and its cash flows for the
two years in the period then ended in conformity with accounting principles
generally accepted in the United States of America.
GELFOND HOCHSTADT PANGBURN, P.C.
/s/ Gelfond Hochstadt Pangburn, P.C.
- ------------------------------------
Denver, Colorado
March 17, 2004
-22-
AspenBio, Inc.
Balance Sheet
December 31, 2003
ASSETS
Current assets:
Cash $ 148,132
Accounts receivable, net (Note 5) 21,349
Inventories (Notes 2 and 5) 259,972
Prepaid expenses 18,718
-----------
Total current assets 448,171
-----------
Property and equipment, net (Notes 3 and 6) 3,764,008
-----------
Other assets:
Goodwill 387,239
Other intangibles (Note 4) 242,735
-----------
Total other assets 629,974
-----------
Total assets $ 4,842,153
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 72,074
Accrued expenses (Note 7) 182,417
Lines of credit (Note 5) 277,480
Notes payable (Note 6):
Mortgage note - current portion 73,026
Other 45,000
-----------
Total current liabilities 649,997
-----------
Mortgage note payable, less current portion (Note 6) 3,190,262
Note payable, related party (Note 7) 958,651
Deferred revenue (Note 8) 200,000
-----------
Total liabilities 4,998,910
-----------
Commitments and contingencies (Notes 8, 11 and 12)
Stockholders' equity (deficit) (Notes 9 and 12):
Common stock, no par value, 15,000,000 shares authorized;
10,102,031 shares issued and outstanding 2,712,035
Accumulated deficit (2,868,792)
-----------
Total stockholders' equity (deficit) (156,757)
-----------
Total liabilities and stockholders' equity (deficit) $ 4,842,153
===========
See Accompanying Notes to Financial Statements
-23-
AspenBio, Inc.
Statements of Operations
Years ended December 31,
2003 2002
---- ----
Sales $ 650,575 $ 745,427
Cost of sales 518,493 662,817
----------- -----------
Gross profit 132,082 82,610
----------- -----------
Operating expenses:
Selling, general and administrative 877,562 387,202
Research and development 540,292 622,460
----------- -----------
Total operating expenses 1,417,854 1,009,662
----------- -----------
Operating loss (1,285,772) (927,052)
----------- -----------
Other income (expense):
Interest expense (353,342) (134,411)
Debt conversion inducement expense (Note 7) (81,500) --
Interest income 3,437 7,522
Expenses incurred with registration statement -- (175,608)
----------- -----------
Total other (expense) income (431,405) (302,497)
----------- -----------
Net loss before income tax benefit (1,717,177) (1,229,549)
----------- -----------
Income tax benefit (Note 10) -- 5,298
----------- -----------
Net loss $(1,717,177) $(1,224,251)
=========== ===========
Basic and diluted loss per share $ (.19) $ (.13)
=========== ===========
Basic and diluted weighted average shares outstanding 9,239,909 9,204,110
=========== ===========
See Accompanying Notes to Financial Statements
-24-
AspenBio, Inc.
Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2003 and 2002
Retained
Deferred earnings
Common Stock consulting (accumulated
Shares Amount cost deficit) Total
----------- -------------- -------------- ------------ --------------
Balance, December 31, 2001 8,800,000 $ 1,261,769 $ (32,880) $ 72,636 $ 1,301,525
Issuance of common stock for cash 500,000 300,000 300,000
Dividends (48,999) (48,999)
Warrants issued in connection with
note payable 43,000 43,000
Amortization of deferred consulting cost 32,880 32,880
Net loss for the year (1,224,251) (1,224,251)
----------- -------------- ------------ ------------- --------------
Balance, December 31, 2002 9,300,000 1,555,770 -- (1,151,615) 404,155
Debt converted into common stock 188,281 272,365 272,365
Common stock and warrants
issued with debt offering 350,000 188,510 188,510
Common stock contributed by
stockholder for debt offering (350,000) (161,490) (161,490)
Common stock issued for cash, net of
offering expenses of $160,770 1,083,750 922,980 922,980
Common stock repurchased for cash (500,000) (100,000) (100,000)
Common stock issued for services 30,000 33,900 33,900
Net loss for the year (1,717,177) (1,717,177)
----------- -------------- ------------ ------------- --------------
Balance, December 31, 2003 10,102,031 $ 2,712,035 $ -- $ (2,868,792) $ (156,757)
=========== ============== ============= ============= ===============
See Accompanying Notes to Financial Statements
-25-
AspenBio, Inc.
Statements of Cash Flows
Years ended December 31,
2003 2002
---- -----
Cash flows from operating activities
Net loss (1,717,177) $(1,224,251)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation and amortization 277,735 121,413
Stock issued for services 133,705 --
Amortization of deferred consulting cost -- 32,880
Amortization of discount of note payable 16,000 16,000
Change in provision for doubtful accounts -- 1,600
(Increase) decrease in:
Accounts receivable 73,088 135,392
Inventories 251,487 120,302
Restricted cash 350,000 (350,000)
Prepaid expenses (7,418) 108,902
Other assets -- 22,500
Increase (decrease) in:
Accounts payable (177,130) 227,880
Accrued liabilities 204,107 22,098
Deferred revenue 200,000 --
----------- -----------
Net cash used by operating activities (395,603) (765,284)
----------- -----------
Cash flows from investing activities
Purchases of property and equipment (176,435) (487,439)
Patent and trademark application costs (60,467) (119,091)
Reductions in other assets 8,925 --
----------- -----------
Net cash used by investing activities (227,977) (606,530)
----------- -----------
Cash flows from financing activities
Proceeds from the issuance of notes payable 745,464 1,191,442
Payment of mortgage loan costs (57,085) --
Repayment of notes payable (666,427) (362,614)
Proceeds from issuance of common stock 717,980 300,000
Repurchase of common stock (100,000) --
Payment of dividends -- (48,999)
----------- -----------
Net cash provided by financing activities 639,932 1,079,829
----------- -----------
Continued
-26-
AspenBio, Inc.
Statements of Cash Flows (Continued)
Years ended December 31,
2003 2002
---- ----
Net increase (decrease) in cash 16,352 (291,985)
----------- -----------
Cash at beginning of year 131,780 423,765
----------- -----------
Cash at end of year $ 148,132 $ 131,780
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest $ 222,551 $ 97,299
Income tax benefit -- (5,298)
Schedule of non-cash investing and financing transactions:
Common stock issued for debt conversion and services $ 427,181 $ --
Value of 350,000 common shares contributed by shareholder 161,490 --
Warrants issued in connection with note payable 29,603 11,000
Construction in progress financed by construction loan 653,252 2,596,748
Construction loan refinanced to mortgage 3,250,000 --
See Accompanying Notes to Financial Statements
-27-
AspenBio, Inc.
Notes to financial statements
1. Organization and summary of significant accounting policies:
Nature of operations:
AspenBio, Inc. (the "Company" or "AspenBio") was organized on July 24,
2000, as a Colorado corporation. AspenBio is a biotechnology company that
is a purifier of human and animal antigens, and manufactures over 30
products. The antigens are used as standards and controls in diagnostic
test kits, antibody purification and in research projects. The research and
development activities of the Company are primarily performed internally on
new product technology.
Products being developed are currently projected for use in the diagnosis
and treatment of animals. A new product, which is in advanced stages of
development, is an antigen pregnancy test for dairy cows.
Revenue recognition and accounts receivable:
The Company recognizes revenue when product is shipped or delivered. The
Company extends credit to customers generally without requiring collateral.
The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses. The Company sells primarily throughout
North America. At December 31, 2003, no one customer accounted for more
than 10% of total accounts receivable. One customer accounted for 54% and
48% of total net sales for the years ended December 31, 2003 and 2002.
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
collectibility is reasonably assured.
Accounts receivable are stated net of an allowance for doubtful accounts of
approximately $1,600 at December 31, 2003.
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 purchases
substantially all of its raw materials from one supplier.
Property and equipment:
Property and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets,
generally twenty-five years for the building, ten years for land
improvements and five years for equipment.
-28-
1. Organization and summary of significant accounting policies (continued):
Goodwill and other intangible assets:
Goodwill, arising from the initial formation of the Company represents the
purchase price paid and liabilities assumed in excess of the fair market
value of tangible assets acquired. In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. Effective January
1, 2002, SFAS No. 142 no longer allows the amortization of goodwill and
intangible assets with indefinite useful lives. SFAS No. 142 requires that
these assets be reviewed for impairment at least annually, or whenever
there is an indication of impairment. Intangible assets with finite lives
will continue to be amortized over their estimated useful lives and
reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
SFAS No. 142 requires companies to allocate goodwill to identifiable
reporting units, which are then tested for impairment using a two-step
process detailed in the statement. The first step requires comparing the
fair value of each reporting unit with its carrying amount, including
goodwill. If the fair value exceeds the carrying amount, goodwill of the
reporting unit is considered not impaired, and the second step of the
impairment test is not necessary. If the fair value of the reporting unit
does not exceed the carrying amount, the second step of the goodwill
impairment test must be performed to measure the amount of impairment loss,
if any. This step requires the allocation of the fair value of the
reporting unit to the reporting unit's assets and liabilities (including
any unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination and the fair value of the reporting unit
was the price paid to acquire the reporting unit. The excess of the fair
value of the reporting unit over its re-evaluated net assets would be the
new basis for the reporting unit's goodwill, and any necessary goodwill
write down to this new value would be recognized as an impairment expense.
The Company adopted SFAS No. 142 on January 1, 2002 and completed the first
step of the transitional goodwill impairment test as required under the
statement. It was determined that the Company has one reporting unit. The
fair value of the reporting unit exceeded the carrying value of the
reporting unit and accordingly, as of that date, there was no goodwill
impairment. The Company has also performed a goodwill impairment test in
the fourth quarter of each year and determined that there has been no
goodwill impairment. A goodwill impairment test will be performed annually
in the fourth quarter or upon significant changes in the Company's business
environment.
Impairment of long-lived assets:
Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future cash
flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the
assets. Based on its review, management does not believe that any
impairment of long-lived assets exists at December 31, 2003.
Shipping and handling fees and costs:
The Company records shipping and handling fees billed to customers as
revenue, and shipping and handling costs incurred by the Company in cost of
sales.
-29-
1. Organization and summary of significant accounting policies (continued):
Research and development:
Research and development costs are charged to expense as incurred.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the balance sheet and the reported amounts of
revenue and expenses during the reporting periods. Actual results could
differ significantly from those estimates.
Fair value of financials instruments:
The fair value of the note payable, related party is not practicable to
estimate, due to the related party nature of the underlying transactions.
The carrying amounts of the Company's other financial instruments
approximate fair value because of their variable interest rates and \ or
short maturities.
Much of the information used to determine fair values is highly subjective
and judgmental in nature and, therefore the results may not be precise. In
addition, estimates of cash flows, risk characteristics, credit quality and
interest rates are all subject to change. Since the fair values are
estimated as of the balance sheet date, the amounts, which will actually be
realized or paid upon settlement or maturity of the various instruments,
could be significantly different.
Income taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. Under the asset and liability method of SFAS
No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109,
the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in operations in the period that includes the enactment date.
A valuation allowance is required to the extent any deferred tax assets may
not be realizable.
Stock-based compensation:
SFAS No. 123, Accounting for Stock Based Compensation, defines a
fair-value-based method of accounting for stock-based employee compensation
plans and transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees, and encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
employee stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25 ("APB No. 25"),
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, employee compensation cost for stock options is measured as
the excess, if any, of the estimated fair value of the Company's stock at
the date of the grant over the amount an employee must pay to acquire the
stock. The Company has provided pro forma disclosures of net income as if
the fair value based method of accounting for stock-based compensation, as
prescribed by SFAS No. 123, had been applied. Options issued to
non-employees or directors for services are accounted for in accordance
with SFAS No. 123.
-30-
The Company estimates 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 2003 and 2002, a dividend yield of
0%; a risk-free interest rate of 3.7% and 2.7%; an expected life ranging
from 5-10 years; and an expected volatility of 111% and 172%, respectively.
The following table illustrates the effect on net income (loss) and income
(loss) per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation to its stock-based employee plans.
2003 2002
---- ----
Net loss, as reported $(1,717,000) $(1,224,000)
Deduct: Total stock-based employee compen-
sation expense determined under fair value
based method for awards granted, modified
or settled, net of related tax effects (195,000) (2,000)
-------- ---------
Pro forma net loss $(1,912,000) $(1,226,000)
============ ============
Loss per share:
Basic and diluted - as reported $(0.19) $(0.13)
====== ======
Basic and diluted - pro forma $(0.21) $(0.13)
====== ======
Income (loss) per share:
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.
Comprehensive income:
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of
comprehensive income, which includes certain items not reported in the
statement of income, including unrealized gains and losses on
available-for-sale securities and foreign currency translation adjustments.
During the years ended December 31, 2003 and 2002, the Company did not have
any components of comprehensive income to report.
-31-
1. Organization and summary of significant accounting policies (continued):
Recently issued accounting pronouncements:
Accounting for Guarantees - In November 2002, FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN 45) was
issued. FIN 45 requires a guarantor entity, at the inception of a guarantee
covered by the measurement provisions of the interpretation, to record a
liability for the fair value of the obligation undertaken in issuing the
guarantee. Interpretation 45 applies prospectively to guarantees the
Company issues or modifies subsequent to December 31, 2002. The Company has
historically not issued guarantees and therefore FIN 45 did not have a
material effect on its 2003 financial statements.
Stock-Based Compensation - In December 2002, the FASB issued FASB No. 148
(SFAS 148), Accounting for Stock-Based Compensation - Transition and
Disclosure. This Statement amends FASB Statement No. 123; Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for
stock-based employee compensation. It also amends disclosure requirements
to require prominent disclosures in both annual and interim financial
statements about the method and the effect of the method used for stock
based compensation on reported results. The statement is effective for
fiscal years ending after December 15, 2002. Adoption of SFAS 148 did not
have a material effect on the Company's financial statements.
Variable Interest Entities - In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, for certain entities which do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties or in
which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest
entities will be required to be consolidated by their primary beneficiary.
The primary beneficiary of a variable interest entity is determined to be
the party that absorbs a majority of the entity's expected losses, receives
a majority of its expected returns, or both, as a result of holding
variable interests, which are ownership, contractual, or other pecuniary
interests in an entity. In December 2003, the FASB approved a partial
deferral of FIN 46 along with various other amendments. The effective date
for this interpretation has been extended until the first fiscal period
ending after December 15, 2004. However, prior to the required application
of this interpretation, a public company that is a small business issuer
shall apply this interpretation to those entities that are considered to be
special purpose entities no later than the end of the first fiscal
reporting period after December 15, 2003. The Company does not have any
variable interest entities, and therefore, the adoption of the provisions
of FIN 46 will not have a material effect on the financial condition or
results of operations of the Company.
-32-
Revenue Arrangements - In November 2002, the Emerging Issues Task Force
("EITF") reached a consensus on Issue 00-21, Accounting for Revenue
Arrangements with Multiple-Deliverables (EITF 00-21). EITF 00-21 addresses
how to account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. The
consensus mandates how to identify whether goods or services or both which
are to be delivered separately in a bundled sales arrangement should be
accounted for separately because they are "separate units of accounting."
The guidance can affect the timing of revenue recognition for such
arrangements, even though it does not change rules governing the timing or
pattern of revenue recognition of individual items accounted for
separately. The final consensus will be applicable to agreements entered
into in fiscal years beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change
in accounting principle in accordance with APB Opinion No. 20, Accounting
Changes. The Company does not believe the adoption of EITF 00-21 had
a material impact on its financial position or results of operations.
Financial Instruments - In May 2003 the FASB issued Statement of Financial
Accounting Standards No. 150 ("SFAS 150"), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
in its balance sheet certain financial instruments with characteristics of
both liabilities and equity. In accordance with this standard, financial
instruments that embody obligations of the issuer are required to be
classified as liabilities. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, except for those
provisions relating to mandatorily redeemable non-controlling interests,
which have been deferred. For existing financial instruments, SFAS No. 150
is effective at the beginning of the fiscal quarter commencing July 1,
2003. The adoption of SFAS No. 150 did not have an effect on the Company's
financial position, results of operations or cash flows. If the deferred
provisions of SFAS No. 150 are finalized in their current form, management
does not expect adoption to have a material impact on the financial
position, results of operations or cash flows.
2. Inventories:
Inventories consisted of the following at December 31, 2003:
Finished goods $ 170,799
Goods in process 33,419
Raw materials 55,754
---------------
$ 259,972
===============
3. Property and equipment:
Property and equipment consisted of the following at December 31, 2003:
Land and improvements $ 1,107,508
Building 2,589,231
Lab equipment 406,712
Office and computer equipment 72,306
---------------
4,175,757
Less accumulated depreciation 411,749
---------------
$ 3,764,008
===============
-33-
4. Intangible and other assets:
Intangible and other assets consisted of the following at December 31,
2003:
Patent and trademark applications $ 187,401
Deferred loan costs, net of accumulated
amortization of $1,751 55,334
---------------
$ 242,735
===============
The Company capitalizes legal costs and filing fees associated with
obtaining patents on its new discoveries. Once the patents have been
issued, the Company will amortize these costs over the shorter of the legal
life of the patent or its estimated economic life. Loan costs are being
amortized over the term of the related loan using the straight-line method.
5. Lines of Credit:
In February 2003, the Company entered into a one-year $250,000 revolving
line of credit agreement with interest at the New York Prime Rate plus 1%
(with an interest rate floor of 6.5%). Due to the floor interest rate, the
average interest rate on outstanding balances was 6.5% for 2003. The
average outstanding balance on the line of credit since it was obtained
during the year ended December 31, 2003 was $212,000. At December 31, 2003,
there was $248,502 outstanding under the line of credit. The line of credit
is collateralized by the assets of the Company and guaranteed by the
president of the Company. The Company is in the process of renewing the
line of credit and anticipates that the agreement will be renewed for a
one-year period under substantially equivalent terms to those currently in
place.
The Company also has a $36,000 line of credit with another bank bearing
interest at bank's daily periodic rate (16.75% at December 31, 2003). At
December 31, 2003 the outstanding balance under this line was $28,978.
6. Notes payable:
Notes payable consists of the following at December 31, 2003:
Mortgage note -
During June 2003, the Company closed on a $3,250,000 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. The loan is collateralized by the real property
and is also personally guaranteed by the Company's president. The interest
rate on the bank portion is one percentage over the Wall Street Journal
Prime Rate (minimum 7%) and the guaranteed portion bears interest at the
rate of 4.42%. The loan requires total monthly payments of approximately
$23,700. At December 31, 2003 the outstanding balance under the mortgage
totaled $3,263,287, inclusive of loan fees.
Prior to closing on the mortgage obligation, the Company utilized a
construction loan to finance construction of its new facility. Interest on
the construction loan was at the Wall Street Journal prime rate plus 1%
with a floor of 6%. The loan was collateralized by first deed of trust of
building and $350,000 restricted cash and was guaranteed by a stockholder.
In connection with the construction loan, the Company was required to
obtain a $395,593 letter of credit naming the Town of Castle Rock Public
Works Department as the beneficiary. The letter of credit expired with no
amounts having been drawn when the permanent mortgage was closed. For the
years ended December 31, 2003 and 2002, during the construction period,
interest expense on this loan of $27,401 and $21,431, respectively was
capitalized to construction in progress.
-34-
Bridge loans -
During October 2003, the Company completed a $350,000 offering of
convertible debt. The unsecured notes bear interest at 8% and were due at
the earlier of May 2004 or at the time $1,000,000 is raised in an equity
offering. The debt offering consisted of a note for $1.00 and one share of
common stock for each $1.00 invested in the notes. To reduce the amount of
the dilution as a result of the debt offering, the Company's president
contributed 350,000 shares of common stock to the Company that were used in
the offering. The proceeds of the offering have been allocated between the
estimated value of the notes, the stock and the warrant, based upon their
respective estimated fair values. The amount allocated to the non-debt
elements will be accreted back to the debt as additional interest expense
over the life of the notes. The Placement Agent selling the notes received
fees and expenses of 13% of the proceeds raised plus a warrant to acquire
150,000 shares of common stock at $1.50 per share exercisable through June
2006. During December 2003 an equity offering exceeding $1,000,000 was
closed and accordingly, the bridge loans matured. Out of the total
$350,000, $205,000 was converted into common stock of the Company at $1.00
per share and $145,000 was repaid, with $45,000 of the amount repaid
outstanding at December 31, 2003 and paid in January 2004.
Minimum annual principal payments due on long-term notes payable are as
follows:
Year ending Related
December 31, Notes payable Parties
------------ ------------- -------
2004 $ 118,026 $ -
2005 77,193 -
2006 81,613 -
2007 86,301 -
2008 91,275 958,651
Thereafter 2,853,880 -
---------------- ----------
Total $ 3,308,288 $ 958,651
=============== ===========
7. Notes payable - related parties:
During June 2003, the Company's president agreed to consolidate the
Company's previously outstanding notes payable to him in the aggregate
principal amount of $958,651, into one new note with an interest rate of 6%
per annum and the maturity date extended to June 2008. An advance principal
payment of $150,000 will be made to him if the Company obtains sufficient
financing to meet certain other needs.
-35-
During August 2003, the Company finalized an agreement with the holder of a
$500,000 convertible note payable which matured in July 2003, to convert
$150,000, plus $38,281 in accrued interest into common stock, be repaid
$300,000 in principal and have $50,000 remain outstanding under a new 10%
note due November 26, 2003. In consideration for the revisions that were
made to the note, the Company agreed to reduce the conversion price from
the $1.50 per share under the original note to $1.00 per share for the
converted portion. Additionally, the Company granted the holder a warrant
to purchase 250,000 shares of common stock at $1.50 per share through July
2005. As a result of the reduction in the conversion rate to $1.00 per
share, the Company recorded a debt conversion inducement expense of
$81,500, representing the value of the additional shares received as of the
date of conversion. The value of the warrant granted to the holder was
computed and allocated to the components of the transaction. The value of
the portion allocated to the new debt was recorded as additional interest
expense over the life of the new note. The $50,000 remaining balance under
the note plus accrued interest of $2,100 was repaid on December 3, 2003.
In the third quarter of the current fiscal year Cambridge Holdings, Ltd., a
stockholder of the Company, loaned a total of $40,000 under two notes to
the Company. The proceeds of the notes were used for working capital, with
the notes due on demand bearing interest at 10%. During December 2003 these
notes and accrued interest of $1,322 was repaid.
During the years ended December 31, 2003 and 2002, interest expense of
approximately $104,100 and $66,700, respectively, was incurred on notes
payable to stockholders. At December 31, 2003, accrued interest expense,
due to stockholders was approximately $21,500 and is included with accrued
expenses on the accompanying balance sheet. Also included in accrued
expenses is $13,333 in compensation accrued to an officer \ director.
8. Deferred revenue:
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 new, patent-pending diagnostic blood test. The test is designed
to be used approximately 18 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 June 2003, AspenBio determined that the results of its large-scale
field trial were not proceeding as anticipated. The results continue to be
analyzed and modifications to the test are ongoing. AspenBio believes
improvements to the test need to be achieved. Accordingly, the test was not
launched by October 2003 and receipt of the second development payment of
$700,000 from Merial also has been delayed. Such payment could be reduced
or eliminated if Merial is not satisfied with the test results or the
product. Should Merial elect to terminate the agreement, they may also
request a refund of 50% ($100,000) of the development payment received to
date. Pursuant to the agreement, if the Company terminates the agreement
within three years from the launch date, as defined in the agreement,
monies paid by the third party must be refunded on a pro-rata basis.
9. Stockholders' equity:
Common stock transactions:
During the fourth quarter of 2003 the Company completed the sale of
1,083,750 shares of the Company's common stock, generating net proceeds to
the Company of $923,000 after deducting offering expenses. In connection
with the offering the Company paid fees of 10%-13% to the placement agent
and also granted the agent warrants to purchase shares of common stock.
-36-
As of September 30, 2003 the Company repurchased and retired 500,000 shares
of common stock from a stockholder for total consideration of $100,000.
Stock options:
In 2002, the Board of Directors of the Company adopted the 2002 Stock
Incentive Plan for the benefit of certain employees and consultants. The
Company has reserved a total of 900,000 shares of its common stock for
issuance pursuant to the exercise of options to be granted. The Plan is
administered by an Option Committee of the Board of Directors. The exercise
prices of the options granted are determined by the Option Committee and
are established at the estimated fair value of the Company's common stock
at the date of grant. The Option Committee determines the term of each
option, the number of shares for which each option is granted and the rate
at which each option is exercisable. Options are granted with terms not to
exceed 10 years, and all the options granted to date have had ten year
lives. To date all options granted under the Plan, at the dates of the
grants, the exercise prices of the options were equal to the estimated fair
value of the Company's common stock, therefore, no compensation expense has
been recorded for the options granted.
Prior to the establishment of the 2002 Stock Incentive Plan, on August 1,
2001, the Board of Directors granted stock options to two directors to
acquire a total of 200,000 shares for $1 per share. The options were fully
vested on December 31, 2001 and expire August 1, 2006.
A summary of the status of the Company's stock options under the 2002 Stock
Incentive Plan as of December 31, 2003 and 2002, and changes during the
years then ended, is presented below:
2003 2002
-------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
Outstanding, beginning of year 250,000 $ 1.05 200,000 $ 1.00
====== ======
Granted 310,000 $ 1.49 250,000 $ 1.25
====== ======
Exercised -- --
Forfeited 300,000 200,000
------- --------
Outstanding, end of year 260,000 $ 1.45 250,000 $1.05
======= ====== ======= =====
Options exercisable end of year 16,667 $ 1.25 200,000 $1.00
====== ====== ======= =====
Common stock purchase warrants:
On December 28, 2001, the Company entered into an agreement to sell
1,000,000 shares of common stock and 830,000 warrants to purchase common
stock at $1.00 per share for total consideration of $600,000 and a
consulting contract. The warrants are currently exercisable and expire in
January 2007.
In July 2002 the Company issued a total of 375,000 warrants. The warrants
entitle the holders to exercise their warrants to purchase shares of common
stock at $1.50 per share at any time through July 2005.
-37-
In August 2003 the Company issued 250,000 warrants in connection with a
conversion of debt. The warrants entitle the holder to exercise their
warrants to purchase shares of common stock at $1.50 per share at any time
through June 2006.
During September to December 2003 the Company issued a total of 631,662
warrants in connection with bridge loans and common shares sold in the 2003
private placement of common stock. The warrants entitle the holders to
exercise their warrants to purchase shares of common stock at $1.50 per
share at any time through June 2006.
10. Income taxes:
Income taxes at the federal statutory rate are reconciled to the Company's
actual income taxes as follows:
2003 2002
---- ----
Federal income tax expense (benefit) at 34% $ (584,000) $ (418,000)
State income tax net of federal tax effect (57,000) (24,600)
Permanent items 28,000 (15,702)
Valuation allowance 613,000 463,600
------------ ------------
$ - $ (5,298)
=========== =============
As of December 31, 2003 the Company has net operating loss carryforwards of
approximately $2,974,000 for federal and state tax purposes, which are
available to offset future taxable income, if any, expiring through
December 2023. A valuation allowance was recorded at December 31, 2003 due
to the uncertainty of realization of deferred tax assets in the future.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 2003 are as
follows:
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 1,119,000
Accounts receivable 600
Property and equipment 22,200
Goodwill (2,000)
---------------
Deferred tax asset 1,139,800
Valuation allowance (1,139,800)
---------------
Net deferred tax asset (liability) $ -
===============
11. Commitments and contingencies:
Development and license agreements:
-38-
The Company has entered into three separate agreements under which the
Company obtained exclusive proprietary rights to certain patents, licenses
and technology to manufacture, market and sell newer developed products.
Under the agreements, the Company is obligated to make quarterly royalty
payments and milestone payments, as defined, based on a percentage of sales
of the products through the fourth year of commercial sales. For two of the
agreements, for the years ended December 31, 2003 and 2002, there were no
such commercial sales. Under one of the agreements, the Company paid the
annual minimum royalty which is to be credited against future earned
royalties.
In addition, under one of the agreements, the Company is to fund research
over a two-year period. Total research payments of $70,000 were expensed as
research and development expense for each of the years ended December 31,
2003 and 2002. Under a separate agreement with another university the
Company agreed to fund $46,550 payable over a six-month period for
consulting and research assistance on one of the Company's products in
development.
The Company with 30 days notice and without future obligations may
terminate the agreements.
12. Subsequent events:
Consulting agreement:
During January 2004 the Company entered into an agreement with a consulting
organization to provide investor relations services to the Company for a
term of twelve months. The consulting organization is being compensated at
the rate of $6,000 per month, until certain specified conditions are met
and then it is increased to $8,000 per month. The consultant was also
granted options, expiring in January 2009, to acquire 800,000 shares of
common stock of the Company at a price of $1.07 per share.
Private Placement Sale of common stock:
During February 2004 the Company sold 300,000 shares of common stock at
$1.00 per share. During March 2004 an additional 80,000 shares of common
stock was sold at $1.25 per share.
Amendment of agreement
During March 2004 a previous consulting agreement was amended whereby the
consultant agreed to terminate 50,000 options that the Company agreed to
issue and 5,000 common shares previously issued to the consultant were
returned to the Company.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements between the Company and its independent
accountants on any matter of accounting principles or practices, financial
statement disclosure.
ITEM 8A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, including the Chief Executive Officer and the Chief Financial
Officer, has conducted an evaluation of the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-14 under the Securities Exchange
Act of 1934 as of a date (the "Evaluation Date") within 90 days prior to the
filing date of this report. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that, as of the Evaluation
Date, our disclosure controls and procedures were effective in ensuring that all
material information relating to us to be filed in the annual report has been
made known to them in a timely manner.
-39-
(b) Changes in Internal Controls
There have been no significant changes made in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
Evaluation Date.
-40-
PART III
Information concerning matters in Items 9, 10, 11, 12 and 14 is being
incorporated by reference into a definitive proxy statement, which is expected
to be filed within 120 days after the close of our fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION
- ------------- ------------------------------------------------------------------
3.1 Articles of Incorporation filed July 24, 2000 (1)
3.1.1 Articles of Amendment to the Articles of Incorporation filed
December 26, 2001 (1)
3.2 Bylaws (1)
4.1(a) Specimen Certificate of Common Stock (1)
10.1 Agreement for Purchase of Assets and Assumption of Liabilities by
and among Vitro Diagnostics, Inc., Erik Van Horne, James Musick,
AspenBio, and Roger Hurst, dated August 7, 2000 (1)
10.4(a) Consulting Agreement, dated December 28, 2001, between
AspenBio and Cambridge Holdings, Ltd. 1
(b) Letter, dated March 14, 2002, confirming performance and
termination of the Consulting Agreement (1)
10.5 Shareholders Agreement, dated December 28, 2001, among AspenBio,
Cambridge Holdings and Roger Hurst (1)
10.6 Voting Agreement dated June 18, 2003 between AspenBio, Inc. and
Roger D. Hurst and extension thereto dated October 31, 2003
filed herewith
10.7 2002 Stock Incentive Plan (1)
10.8 Technology Transfer Agreement, dated October 29, 2001 between
AspenBio and the University of Wyoming (1)
10.9 License Agreement for Determination of Pregnancy Status
of Ungulates, dated September 25, 2001, between AspenBio
and the Idaho Research Foundation Inc. (1)
10.10 Promissory Note, dated August 7, 2000, made by AspenBio to
Roger D. Hurst (1)
10.11 Promissory Note, dated April 1, 2002 made by AspenBio to
Roger D. Hurst (1)
10.13 Stock Option Agreement, dated August 21, 2001, between AspenBio
and Gail Schoettler (1)
10.15 Promissory Note, dated May 6, 2002, made by AspenBio to
Roger D. Hurst (1)
10.16(a) Contract to Buy and Sell Real Estate, dated January 29, 2002,
between Roger D. Hurst and/or assigns and Urban Group, LLC (1)
(b) Agreement to Amend/Extend Contract, dated April 19, 2002 (1)
(c) Agreement to Amend/Extend Contract, dated May 23, 2002 (1)
10.17 Loan Agreement to be made between FirstBank of Tech Center and
AspenBio, Inc. regarding a construction loan in the principal
amount of $3,250,000 (1)
10.18(a) 6/% Convertible Promissory Note, dated July 5, 2002, by
AspenBio, Inc. to Michael S. Smith in the principal amount of
$500,000(1)
10.18(b) Pledge Agreement, dated July 5, 2002, by AspenBio, Inc. to
Michael S. Smith regarding account for $350,000 at FirstBank of
Tech Center (1)
10.18(c) Warrant, dated July 5, 2002, to purchase 275,000 shares of
AspenBio, Inc. common stock issued to Michael Smith (1)
10.18(d) Investor Rights Agreement, dated July 5, 2002, between
AspenBio, Inc. and Michael S. Smith(1)
10.19(a) Promissory Note, dated July 5, 2002, by AspenBio, Inc. to
Cambridge Holdings, Ltd. in the principal amount of $200,000 (1)
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EXHIBIT
NO. DESCRIPTION
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10.19(b) Warrant, dated July 5, 2002, to purchase 100,000 shares of
AspenBio, Inc. common stock issued to Cambridge Holdings, Ltd. (1)
10.19(c) Investor Rights Agreement, dated July 5, 2002, between
AspenBio, Inc. and Cambridge Holdings, Ltd. (1)
10.20 Agreement, dated February 26, 2002 and April 9, 2002 between
AspenBio, Inc. and Urban Construction, Inc.(1)
10.21 Distribution Agreement between AspenBio, Inc. and Merial Limited,
dated March 29, 2003(3)
10.22 Debt Modification Agreement dated June 13, 2003 with FirstBank
of Tech Center. Filed herewith.
10.23(a) Loan Agreement between AspenBio, Inc. and Front Range Regional
Economic Development Corporation dated June 13, 2003 for
$1,300,000 regarding loan for physical plant or capital equipment
acquisitions filed herewith.
10.23(b) Promissory Note dated June 13, 2003 by AspenBio, Inc. to Front
Range Regional Economic Development Corporation in principal
amount of $1,300,000 filed herewith.
10.23(c) Unconditional Guarantee dated June 13, 2003 by AspenBio, Inc. to
Front Range Regional Economic Development Corporation in principal
amount of $1,300,000 filed herewith.
16 Letter regarding change in certifying accountant (2)
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. Filed herewith.
* Portions of Exhibits 10.8 and 10.21 have been omitted from the publicly
filed copy and have been filed separately with the Secretary of the
Commission pursuant to requests for confidential treatment.
(1) Incorporated by reference from the registrant's Registration Statement on
Form S-1 (file no. 333-86190), filed April 12, 2002.
(2) Incorporated by reference from the registrant's report on Form 8-K/A on
January 10, 2003.
(3) Incorporated by reference from the registrant's report on Form 8-K on April
7, 2003.
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Reports on Form 8-K
On November 14, 2003, the Company filed an 8-K Report reporting under Items
7 and 12 the issuance of a press release announcing the Company's third
quarter results.
January 8, 2003, the Company filed an 8-K Report reporting under Items 5
and 7 the completion of a private placement of shares.
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SIGNATURES
In accordance with the requirements of Section 13 on 15(k) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf on March 26, 2004 by the undersigned thereto.
ASPENBIO, INC.
/s/ Roger D. Hurst
--------------------------------------------------
Roger D. Hurst, President, Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 26, 2004.
/s/ Roger D. Hurst
-------------------------------------------
Roger D. Hurst, Chief Executive Officer and
Director
/s/ Gregory Pusey
-----------------------------------------------
Gregory Pusey, Chairman, Secretary and Director
/s/ Gail S. Schoettler
-------------------------------------------
Gail S. Schoettler, Director
/s/ Douglas I. Hepler
-------------------------------------------
Douglas I. Hepler, Director
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