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APPY > SEC Filings for APPY > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for ASPENBIO PHARMA, INC.

Form 10-Q for ASPENBIO PHARMA, INC.


7-Nov-2012

Quarterly Report


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

Management's plans and basis of presentation:

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced recurring losses and negative cash flows from operations. At September 30, 2012, following the completion of its June 2012 public offering, the Company had cash and liquid investments of $10,226,000, working capital of $6,396,000, total stockholders' equity of $8,762,000 and an accumulated deficit of $71,729,000. To date, the Company has in large part relied on equity financing to fund its operations. The Company expects to continue to incur losses from operations for the near-term and these losses could be significant as product development, clinical and regulatory activities, contract consulting and other product development related expenses are incurred. The Company believes that its current working capital position will be sufficient to meet its estimated cash needs for the remainder of 2012 and at least into 2013. If the Company does not obtain additional capital, the Company would potentially be required to reduce the scope of its research and development activities or cease operations. The Company continues to explore obtaining additional financing. The Company is closely monitoring its cash balances, cash needs and expense levels. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result should the Company be unable to continue as a going concern.

The ability for the Company to continue as a going concern is dependent on management's ability to further implement its strategic plans, which includes the following:

- continuing to advance development of the Company's products, particularly AppyScore;
- pursuing additional capital raising opportunities;
- continuing to explore prospective partnering or licensing opportunities with complementary opportunities and technologies; and
- continuing to monitor and implement cost control initiatives to conserve cash.

Results of Operations

Comparative Results for the Nine Months Ended September 30, 2012 and 2011

Sales of the Company's antigen products for the nine months ended September 30, 2012 totaled $41,000, which is a $134,000 or 77% decrease from the 2011 period. The decrease in sales is primarily attributable to the Company's strategic decision to suspend antigen production in 2010 and focus available scientific resources on the appendicitis and single-chain animal product developments.

In July 2012, the Company entered into an Exclusive License Agreement (the "License Agreement") with a licensee ("Licensee") under which the Company granted the Licensee an exclusive royalty-bearing license to the Company's intellectual property and other assets, including patent rights and know-how, relating to recombinant single chain reproductive hormone technology for use in non-human mammals (the "Company's Animal Health Assets"). The net total payments received under this agreement were recorded as deferred revenue and are being recognized as revenue over future periods. During the period ended September 30, 2012, $4,500 of such license payments was recognized as revenue. In November 2011, the Company entered into the Novartis Termination Agreement which terminated the Novartis License Agreement. Accordingly, the Company did not recognize any revenue related to the Novartis license agreement in the nine months ended September 30, 2012. During the nine months ending September 30, 2011, $53,000 of such Novartis license revenue was recognized.

Cost of sales for the nine months ended September 30, 2012 decreased $15,800 compared to the 2011 period. As a percentage of sales, gross profit was 99.5% in the 2012 period as compared to gross profit of 90.9% in the 2011 period.

Selling, general and administrative expenses in the nine months ended September 30, 2012, totaled $3,945,000, which is a $425,000 or 10% decrease as compared to the 2011 period. A reduction in personnel from 2011 to 2012 resulted in a decrease in compensation related costs of approximately $249,000. Total stock-based compensation and non-qualified option expenses were approximately $314,000 lower in the 2012 period, primarily due to lower values associated with options granted in 2012. During the nine months ended September 30, 2012, expenses associated with legal and accounting fees decreased $109,000, public company expenses decreased $23,000, travel and related costs decreased $30,000 and office related expenses decreased $44,000. These decreases were offset with increases of $290,000 in expenses associated with marketing and commercialization activities in the 2012 period and additional insurance costs of approximately $68,000 due generally to normal price increases.


Research and development expenses in the nine months ended September 30, 2012 totaled $2,623,000, which is a $1,750,000 or 40% decrease as compared to the 2011 period. Appendicitis test development and research expenses decreased by approximately $1,230,000 in 2012 as compared to 2011, primarily due to reductions in investigational work, including the pilot trial that was completed in 2011. Expenses incurred for the single-chain animal product development decreased by approximately $339,000 in the 2012 period. Patent related expenses, including patent impairment expenses in 2012 decreased by approximately $70,000 over 2011 amounts. A reduction in personnel from 2011 to 2012 resulted in a decrease in compensation related costs of approximately $116,000.

Interest and other expense for the nine months ended September 30, 2012, increased to $185,000, compared to $126,000 in the 2011 period. The increase in interest expense is primarily due to imputed interest expense under the Novartis Termination Agreement and the financing of certain insurance obligations.

No income tax benefit was recorded on the net loss for the nine months ended September 30, 2012 and 2011, as management was unable to determine that it was more likely than not that such benefit would be realized.

Comparative Results for the Three Months Ended September 30, 2012 and 2011

Sales of the Company's antigen products for the three months ended September 30, 2012 totaled $6,200, which is a $16,000 or 72% decrease from the 2011 period. The decrease in sales is primarily attributable to the Company's strategic decision to suspend antigen production in 2010 and focus available scientific resources on the appendicitis and single-chain animal product developments.

In July 2012, the Company entered into the License Agreement with the Licensee under which the Company granted the Licensee an exclusive royalty-bearing license to the Company's intellectual property and other assets, including patent rights and know-how, relating to recombinant single chain reproductive hormone technology for use in non-human mammals. The net total payments received under this agreement were recorded as deferred revenue and are being recognized as revenue over future periods. During the period ended September 30, 2012, $4,500 of such license payments was recognized as revenue. In November 2011, the Company entered into the Novartis Termination Agreement which terminated the Novartis License Agreement. Accordingly, the Company did not recognize any revenue related to the Novartis license agreement in the three months ended September 30, 2012. During the three months ending September 30, 2011, $18,000 of such Novartis license revenue was recognized.

Cost of sales for the three months ended September 30, 2012 decreased $400 as compared to the 2011 period. As a percentage of sales, gross profit was 100% in the 2012 period as compared to gross profit of 98% in the 2011 period.

Selling, general and administrative expenses in the three months ended September 30, 2012, totaled $1,346,000, which is a $60,000 or 4% decrease as compared to the 2011 period. A reduction in personnel from 2011 to 2012 resulted in a decrease in compensation related costs of approximately $87,000. Total stock-based compensation and non-qualified option expenses were approximately $104,000 lower in the 2012 period, primarily due to lower values associated with options granted in 2012. During the three months ended September 30, 2012, the expenses associated with legal and accounting fees decreased $26,000, public company expenses decreased $14,000, travel and related costs decreased $17,000 and office related expenses decreased $7,000. These decreases were offset with increases $173,000 in increased expenses associated with marketing and commercialization activities in the 2012 period and additional insurance costs of approximately $29,000 due generally to normal price increases.

Research and development expenses in the three months ended September 30, 2012 totaled $1,066,000, which is a $579,000 or 35% decrease as compared to the 2011 period. Appendicitis test development and research expenses decreased by approximately $322,000 in 2012 as compared to 2011, due primarily to reductions in investigational work, including the pilot trial that was completed in 2011. Expenses incurred for the single-chain animal product development decreased by approximately $49,000 in the 2012 period. Patent related expenses, including patent impairment expenses in 2012 decreased by approximately $161,000 over 2011 amounts. A reduction in personnel from 2011 to 2012 resulted in a decrease in compensation related costs of approximately $47,000.

Interest and other expense for the three months ended September 30, 2012, increased to $58,000, compared to $52,000 in the 2011 period. The increase in interest expense is primarily due to imputed interest expense under the Novartis Termination Agreement and the financing of certain insurance obligations.


Liquidity and Capital Resources

At September 30, 2012, we had working capital of $6,396,000, which included cash, cash equivalents and short term investments of $10,226,000. We reported a net loss of $6,708,000 during the nine months ended September 30, 2012, which included $1,081,000 in non-cash expenses relating to stock-based compensation of $706,000 and $375,000 for depreciation, amortization and impairment charges.

Currently, our primary focus is to continue the development activities on our acute appendicitis diagnostic test, including advancement of such test with the steps required for FDA clearance, as well as CE marking in Europe (EU) and related intellectual property.

In June 2012, the Company completed a public offering of securities consisting of 6,100,000 shares of common stock at an offering price of $2.00 per share, generating approximately $12.2 million in total proceeds. Fees and other expenses totaled $1,261,000, including a placement fee of 7%. Under the terms of the Underwriting Agreement, the underwriter received warrants to purchase a total of 305,000 shares of Common Stock. The exercise price of the warrants was $2.50 per share; the warrants become exercisable in June 2013 and expire in June 2017. The purpose of the offering was to raise funds for working capital, new product development and general corporate purposes.

We expect to continue to incur losses from operations for the near-term and these losses could be significant as we incur product development, clinical and regulatory activities, contract consulting and other product development and commercialization related expenses. We believe that our current working capital position will be sufficient to meet our estimated cash needs for the remainder of 2012 and at least into 2013. The Company is actively looking to obtain additional financing; however, there can be no assurance that the Company will be able to obtain sufficient additional financing on terms acceptable to the Company, if at all. We are closely monitoring our cash balances, cash needs and expense levels. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result in the possible inability of the Company to continue as a going concern.

We expect that our primary development expenditures will be to continue toward commencement of a clinical trial for AppyScore later this year and to advance towards commercialization of our appendicitis test in Europe following successful completion of CE marking. In-house and field testing of the cassette and instrument reader components of AppyScore will also continue, to ensure performance and reliability of the system. Based upon our experience clinical trial expenses can be significant costs. During the nine months ended September 30, 2012 and 2011, we expended approximately $1,466,000 and $2,332,000, respectively, in direct costs for AppyScore development and related efforts. Steps to achieve commercialization of the acute appendicitis product will be an ongoing and evolving process with expected improvements and possible subsequent generations being made in the test. Should we be unable to achieve FDA clearance of the AppyScore appendicitis test and generate revenues from the product, we would need to rely on other business or product opportunities to generate revenues and costs that we have incurred for the acute appendicitis patent may be deemed impaired.

In November 2011, the Company entered into the Novartis Termination Agreement. Under the Novartis Termination Agreement, the termination obligation totaled $1,374,000, which was payable as $150,000 upon signing the Novartis Termination Agreement and six equal subsequent quarterly installments of $204,000 each. The Company discounted these obligations at an assumed interest rate of 7% (which represents the rate management believes it could have borrowed at for similar financings). At September 30, 2012, the remaining outstanding discounted termination obligation totaled $591,295. This obligation requires total payments of $204,000 in the remainder of 2012 and $408,000 due in 2013.

During July 2012, the Company entered into the License Agreement with the Licensee, under which the Company granted the Licensee an exclusive royalty-bearing license to the Company's Animal Health Assets. The License Agreement includes a sublicense of the technology licensed to the Company by WU. Under the terms of the WU License Agreement, a portion of license fees and royalties AspenBio receives from sublicensing agreements will be paid to WU. The obligation for such license fees due to WU is included in accrued expenses at September 30, 2012.

Under the License Agreement as of September 30, 2012, the following future license fees and milestone payments are provided, assuming future milestones are successfully achieved:

License fees of $612,000 payable in quarterly installments;

Milestone payments, totaling up to a potential of $1.1 million in the aggregate, based on the satisfactory conclusion of milestones as defined in the License Agreement;

Potential for milestone payments of up to an additional $2 million for development and receipt of regulatory approval for additional licensed products; and

Royalties, at low double digit rates, based on sales of licensed products.


Revenue recognition related to the License Agreement and WU Agreement is based primarily on the Company's consideration of Accounting Standards Codification No. 808-10-45 (EITF 07-1), "Accounting for Collaborative Arrangements", paragraphs 16-20. For financial reporting purposes, the license fees and milestone payments received from the License Agreement, net of the amounts due to third parties, including WU, have been recorded as deferred revenue and are amortized over the term of the License Agreement. License fees and milestone revenue totaling a net of $1,036,000 commenced being amortized into income with the date of achievement. As of September 30, 2012, deferred revenue of $63,444 has been classified as a current liability and $968,286 has been classified as a long-term liability. The current liability includes the next twelve months' portion of the amortizable milestone revenue. During the nine months ended September 30, 2012, $4,490 was recorded as the amortized license fee revenue arising from the License Agreement.

We have entered and expect to continue to enter into additional agreements with contract manufacturers for the development / manufacture of certain of our products for which we are seeking FDA approval. The goal of this development process is to establish current good manufacturing practices (cGMP) required for those products for which we are seeking FDA approval. These development and manufacturing agreements generally contain transfer fees and possible penalty and /or royalty provisions should we transfer our products to another contract manufacturer. We expect to continue to evaluate, negotiate and execute additional and expanded development and manufacturing agreements, some of which may be significant commitments during 2012 and 2013. We may also consider acquisitions of development technologies or products, should opportunities arise that we believe fit our business strategy and would be appropriate from a capital standpoint.

Capital expenditures, primarily for production, laboratory and facility improvement costs for the year ending December 31, 2012 are anticipated to total approximately $50,000-$75,000. We anticipate these capital expenditures to be financed through working capital.

The Company periodically enters into generally short-term consulting and development agreements primarily for product development, testing services and in connection with clinical trials conducted as part of the Company's FDA clearance process. Such commitments at any point in time may be significant but the agreements typically contain cancellation provisions.

We have a permanent mortgage on our land and building that commenced in July 2003. The mortgage is held by a commercial bank and includes a portion guaranteed by the U. S. Small Business Administration. The loan is collateralized by the real property and is also personally guaranteed by a former officer of the Company. The interest rate on the bank portion is one percentage over the Wall Street Journal Prime Rate (minimum 7%), with 7% being the approximate effective rate, and the SBA portion bears interest at the rate of 5.86%. The commercial bank portion of the loan requires total monthly payments of approximately $14,200, which includes approximately $9,500 per month in contractual interest, through July 2013 when the then remaining principal balance is due which is estimated to be approximately $1,578,000 at that time. The SBA portion of the loan requires total monthly payments of approximately $9,200 through July 2023, which includes approximately $4,200 per month in contractual interest and fees.

In April 2008, the Board authorized a stock repurchase plan to purchase shares of our common stock up to a maximum of $5.0 million. Purchases may be made in routine, open market transactions, when management determines to effect purchases and any purchased shares of common stock are thereupon retired. Management may elect to purchase less than $5.0 million. The repurchase program allows us to repurchase our shares in accordance with the requirements of the Securities and Exchange Commission on the open market, in block trades and in privately negotiated transactions, depending upon market conditions and other factors. A total of approximately 7,733 common shares were purchased and retired in 2008 at a total cost of approximately $992,000. No repurchases have been made since 2008.

Due to recent market events that have adversely affected all industries and the economy as a whole, management has placed increased emphasis on monitoring the risks associated with the current environment, particularly the investment parameters of the short term investments, the recoverability of current assets, the fair value of assets, and the Company's liquidity. At this point in time, there has not been a material impact on the Company's assets and liquidity. Management will continue to monitor the risks associated with the current environment and their impact on the Company's results.

Operating Activities

Net cash consumed by operating activities was $3,602,000 during the nine months ended September 30, 2012. Cash was consumed by the loss of $6,708,000, less non-cash expenses of $706,000 for stock-based compensation and $375,000 for depreciation and amortization, impairment and other non-cash items. For the nine months ended September 30, 2012, decreases in accounts receivable generated cash of $32,000. Decreases in prepaid and other current assets of $330,000 provided cash, primarily related to routine changes in operating activities. A $351,000 increase in accounts payable and accrued expenses generated cash in the nine months ended September 30, 2012, primarily due to the Company's AppyScore clinical and regulatory activities. An increase of $276,000 in accrued compensation provided cash. Cash provided by operations included an increase of $1,036,000 in deferred revenue, following the execution of the License Agreement for the Company's animal health assets.


Net cash consumed by operating activities was $6,415,000 during the nine months ended September 30, 2011. Cash was consumed by the loss of $8,657,000, less non-cash expenses of $1,020,000 for stock-based compensation and $421,000 for depreciation, amortization and impairment charges. For the nine months ended September 30, 2011, decreases in accounts receivable associated with lower antigen production and sales generated cash of $70,000. A decrease in prepaid and other current assets of $315,000 provided cash, primarily related to routine changes in operating activities. A $587,000 increase in accounts payable and accrued expenses generated cash in the nine months ended September 30, 2011, primarily due to the Company's AppyScore pre-clinical trial activities. A decrease of $172,000 in accrued compensation consumed cash, due to a decrease in amounts accrued for incentive pay for the 2011 period.

Investing Activities

Net cash inflows from investing activities generated $512,000 during the nine months ended September 30 2012. Sales of marketable securities investments totaled approximately $1,213,000 and marketable securities purchased totaled approximately $599,000. A $102,000 use of cash was attributable to additional costs incurred from capitalized patent filings and equipment additions.

Net cash inflows from investing activities generated $282,000 during the nine months ended September 30, 2011. Marketable securities investments purchased totaled approximately $793,000 and sales of marketable securities totaled approximately $1,333,000. A $258,000 use of cash was attributable to additional costs incurred from capitalized patent filings and equipment additions.

Financing Activities

Net cash inflows from financing activities generated $9,959,000 during the nine month period ended September 30, 2012. The Company received net proceeds of $10,939,000 from the sale of common stock in a public offering of securities and repaid $980,000, in scheduled payments under its debt agreements.

Net cash outflows from financing activities consumed $374,000 during the nine months ended September 30, 2011 related to scheduled payments under its debt agreements.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, impairment analysis of intangibles and stock-based compensation.

The Company's financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to get a full understanding of the Company's financial statements, one must have a clear understanding of the accounting policies employed. A summary of the Company's critical accounting policies follows:

Investments: The Company invests excess cash from time to time in highly liquid debt and equity securities of highly rated entities which are classified as trading securities. Such amounts are recorded at market and are classified as current, as the Company does not intend to hold the investments beyond twelve months. Such excess funds are invested under the Company's investment policy but an unexpected decline or loss could have an adverse and material effect on the carrying value, recoverability or investment returns of such investments. Our Board has approved an investment policy covering the investment parameters to be followed with the primary goals being the safety of principal amounts and maintaining liquidity of the fund. The policy provides for minimum investment rating requirements as well as limitations on investment duration and concentrations.

Intangible Assets: Intangible assets primarily represent legal costs and filings associated with obtaining patents on the Company's new discoveries. The Company amortizes these costs over the shorter of the legal life of the patent or its estimated economic life using the straight-line method. The Company tests intangible assets with finite lives upon significant changes in the Company's business environment. The testing resulted in approximately $45,000 and $103,000 of patent impairment charges during the nine months ended September 30, 2012 and 2011, respectively.


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 Company reviews for impairment whenever there is an indication of impairment. The required annual testing resulted in no impairment charges being recorded to date.

Revenue Recognition: The Company's revenues are recognized when products are shipped or delivered to unaffiliated customers. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 104, provides guidance on the application of generally accepted accounting principles to select revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with SAB No. 104. Revenue is recognized under development and distribution agreements only after the following criteria are met: (i) there exists adequate evidence of the transactions; (ii) delivery of goods has occurred or services have been rendered; and (iii) the price is not contingent on future activity and (iv) collectability is reasonably assured.

Stock-based Compensation: ASC 718 (formerly - SFAS No. 123(R)), Share-Based Payment, defines the fair-value-based method of accounting for stock-based employee compensation plans and transactions used by the Company to account for its issuances of equity instruments to record compensation cost for stock-based employee compensation plans at fair value as well as to acquire goods or services from non-employees. Transactions in which the Company issues stock-based compensation to employees, directors and consultants and for goods or services received from non-employees are accounted for based on the fair . . .

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