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, 2002
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() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-50019
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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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not 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
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The registrant had revenues of $745,427 for its most recent fiscal year
ended December 31, 2002.
The aggregate market value of the common stock of the registrant held by
non-affiliates as of March 31, 2003 was $13,511,112.
The number of shares outstanding of the registrant's common stock at March
31, 2003, was 9,300,000.
Transitional small business disclosure format. Yes No X
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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
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PART I
Item 1. Description of Business.........................................
Item 2. Description of Property.........................................
Item 3. Legal Proceedings...............................................
Item 4. Submission of Matters to a Vote of Security Holders.............
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........
Item 6. Management's Discussion and Analysis or Plan of Operation.......
Item 7. Financial Statements............................................
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.......................................
PART III
Item 9. Directors, Executive Officers, etc..............................
Item 10. Executive Compensation..........................................
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Meeting......................
Item 12. Certain Relationships and Related Transactions..................
Item 13. Exhibits, Financial Statements Schedules, and Reports
on Form 8-K.....................................................
Item 14. Controls and Procedures.........................................
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 refinancing the construction loan on our new facility, and the
risk factors described in Item 1 of this report.
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 this 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 expanded
this part of our business 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 efforts in 2002 and early 2003 were concentrated in testing, preparing for
manufacture, and making arrangements to market and distribute, our bovine
pregnancy test. Our test is designed to be used approximately 18 days after
insemination to determine the early pregnancy status of dairy and beef cattle.
We are currently in the final phase of our test and we expect to complete a
large-scale field trial this summer to validate its accuracy and reliability in
U.S. dairy herds.
On March 29, 2003 we entered into a distribution agreement with Merial Limited.
Merial is a joint venture between Merck and Aventis. We have granted Merial
exclusive rights to market and distribute the bovine pregnancy test worldwide.
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, as they require FDA approval.
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.
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 used to determine whether the test is functioning
correctly. We have manufactured human antigen products since 1990 and can
produce additional proteins through our purification process.
We are also manufacturing CEA as part of a colon cancer vaccine. CEA is produced
by cancerous tumors, especially of the colon or liver. Measurement of blood at
CEA levels is valuable in the management of cancer. CEA is elaborated by certain
tumor cells and was one of the first tumor markers. CEA is usually obtained from
a human liver. We are attempting to produce CEA through cell culture technology
rather than liver tissue so that larger quantities can be obtained and purified.
The colon cancer vaccine is expected to be part of NCI Phase III studies that
are currently anticipated to take place in 2003, and we are attempting to
produce the cell-line derived CEA for use in the studies. This protein would
have a therapeutic use, as opposed to the diagnostic use of our other human
antigen products. Total quantity needs for CEA have not been determined.
In order to distribute our human antigen products, we manufacture the purified
proteins at our facility, 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.
1
Ungulate Pregnancy Test - The ungulate pregnancy test initially determines the
pregnancy status of cows within approximately 18 days after artificial
insemination. Pregnancy is necessary for milk production and the dairy industry
relies on artificial insemination to increase pregnancy rates. 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, so we plan to develop these pregnancy test kits, as well.
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
and mice that were exposed to a specific purified antigen manufactured at
AspenBio. 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 either
approximately day 18 or day 35 to termination of pregnancy depending on which
test is used. 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.
In order to create commercial quantities of test kits, we will produce the
active ingredients and send them to a company that manufactures test strips.
This company would place the active ingredients onto the test strips and then
ship the pregnancy test kits to our cutomers or to our warehouse for
distribution.
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.
Insulin/PZI - We have developed 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 2004,
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. Initially, the manufacture and bottling of PZI will be done
by an outside entity because of clean room and FDA requirements. We desire to
enter into arrangements for marketing the products with a pharmaceutical company
prior to manufacturing them, and preliminary work has been undertaken to locate
an interested company. We are also exploring joint venture or other partnering
opportunities for reintroducing PZI to the human diabetes market.
We would produce PZI using our technology at a facility that meets the industry
standard of good manufacturing practices (GMP). The GMP facility would then ship
the products directly to a warehouse for storage or to distributors.
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 problem breeding situations in horses. We
have manufactured preliminary batches of antigens anticipated to be used in
equine test kits. If we determine to market these kits, we would probably try to
enter into a distribution agreement with a pharmaceutical company. We expect to
make a decision regarding release of these test kits in late 2003.
2
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 will initially utilize tissue from slaughterhouses for the
equine protein products. 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 on the process used to purify the CEA for the colon cancer vaccine,
because we anticipate that, if successful, the vaccine will be widely used and
we will need to protect AspenBio's part in the development.
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 proteins used in
the test. We have titled the pregnancy test "Surbred" and have applied for a
trademark to protect the name. We have also filed a provisional patent
application for the bovine pregnancy test. We have taken these steps because we
believe that the potential widespread use of the ungulate pregnancy test
requires protection of our product.
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. We are currently unable
to predict whether we will be able to obtain any patents in the future. Due to
the status of development to date, we have not 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 approximately $2 million, annually. We currently control
approximately 60% of the market, although we do not expect significant
additional growth in market share. 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, but we believe that we have displaced
Dr. Parlow as the largest supplier.
Ungulate Pregnancy Test - The available bovine pregnancy tests cannot determine
pregnancy status until at least 30 days from insemination. Testing by palpation
includes a risk of aborting the calf and testing by using a blood test requires
the use of a centrifuge. 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 breeding
programs are often inseminated more than once, so our test would then be used
more than once annually for each cow. The worldwide population of cows exceeds
120,000,000, 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 10% 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 the bovine pregnancy test to be used 35 days or more after
insemination and for pregnancy tests of other ungulates. We will compete against
the current pregnancy methods and tests for the bovine market, as well as in the
ovine and porcine market.
3
On March 29, 2003, we entered into a distribution agreement with Merial
Limited. Merial Limited is a joint venture between Merck and Aventis. We have
granted Merial exclusive rights to market and distribute our diagnostic test
which is designed to be used approximately 18 days after insemination to
determine the early pregnancy status of dairy and beef cattle. We are currently
in the final phase of development of our test and we expect to complete a
large-scale field trial this summer to validate its accuracy and reliability in
U.S. dairy herds.
We have granted to Merial the right to exclusively market, distribute and
sell our bovine pregnancy product worldwide. Merial is required to make
development payments to us totaling $1,900,000 as certain milestones are
satisfied. When the product development and testing is completed, we will
produce the product for Merial and Merial will pay us 33% of Merial's invoiced
sales price on all product sales.
We are currently engaged in completing the design and development of the
product. Merial made a payment to us of $200,000 upon signing of the agreement.
We have agreed to commence a field trial of at least 500 cows before April 30,
2003 and to supply the necessary components to complete the trial before July
15, 2003. We will receive $700,000 from Merial within 30 days of our final
report that the product conforms to the design of Merial. The amount of the
second installment will be reduced by $100,000 for each month that the final
report is not presented. Merial is also required to pay us our final $1,000,000
installment when the product is ready for launch in the first country.
Our plan is to complete the launch of our bovine pregnancy test by October
1, 2003. If we achieve this objective, we expect to receive in 2003 the
development payments from Merial totaling $1,900,000 as well as revenues from
product sales. If we are unable to launch the product by October 1, 2003, Merial
may terminate the agreement and we would be required to reimburse Merial 50% of
the payments made by Merial to us.
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.
So 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. The minimum sales targets will be reduced if the product launch does
not occur by October 1, 2003. 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.
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. 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 market for PZI if we can obtain the necessary FDA approvals and partner
with a pharmaceutical company.
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. 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.
4
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. In this area, we have a few large customers.
Monobind and Golden West Biologics, which are brokers, accounted for
approximately eleven percent (11%) and thirteen percent (13%) of our business,
respectively, in 2001. BioRad, an end user, accounted for approximately
thirty-nine percent (39%) of our business in 2001. In 2002, BioRad accounted for
48% of our sales. At December 31, 2001, 54% of our receivables were related to
Golden West Biologics and at December 31, 2002, 19% of our receivables were
related to BioRad, 31% of our receivables were related to Golden West Biologics
and 17% were related to Clinga. The loss of these customers could have a
material adverse effect on this division of our business.
The National Cancer Institute, through the universities that conduct its
research, are also customers for the purchase of CEA.
Ungulate Pregnancy Test -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. We would be involved in marketing
the bovine pregnancy test, as well, but do not expect to be primarily
responsible. We would anticipate a similar customer base and marketing approach
for the other ungulate pregnancy tests when they are developed. AspenBio is in
discussions with a number of companies positioned to effectively distribute
these products.
Insulin/PZI - We anticipate that the ultimate customers for the PZI would be
veterinarians and cat owners. We plan to seek to enter into an agreement with a
pharmaceutical company for marketing and distribution if we can develop
recombinant PZI that matches the 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.
Equine Protein - We anticipate that the ultimate customers for the equine
protein products would be veterinarians and horse owners. However, we anticipate
entering into agreements with a pharmaceutical company for marketing and
distribution if the clinical testing is successful.
General Operations
Backlog and inventory - Our business in 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. Our
agreement with Merial is that Merial will pay for the bovine pregnancy product
in two installments, consisting of a partial payment 30 days after Merial's
receipt of the product and the balance due 30 days after the end of each
calendar quarter during which the product is sold by Merial.
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 eight full-time employees. We will hire additional
personnel as needed depending upon the implementation and success of our new
product lines.
5
Research and Development
We spent $351,983 on research and development in fiscal 2001 and $622,460 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 colon cancer vaccine or the sale of PZI to human diabetics.
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.
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 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.
Equine Proteins - As the equine proteins would have a therapeutic use, they
would require regulatory approval similar to that required for PZI.
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.
6
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 commercialize new product offerings.
We are currently engaged in human diagnostic antigen manufacturing
operations. However, we believe the growth potential in this market is limited.
We are developing several other products which we believe have significantly
greater potential for higher revenues and increased profits. Our ability to
achieve these objectives is dependent on a number of factors, including our
ability to complete development efforts, including any necessary testing and
regulatory approvals, and successfully commercialize these products.
Through December 31, 2001 we had retained earnings of $72,636. However,
during fiscal 2002 we concentrated our efforts on developing our new bovine
pregnancy test and we incurred a net loss of over $1.2 million. Our ability to
resume profitable operations will depend upon our ability to quickly
commercialize our bovine pregnancy test and other new product offerings.
In order to achieve our business objectives, we will need to manufacture
these products (or arrange for manufacture) in commercial quantities at a
reasonable cost acceptable in the marketplace. Because of our limited
manufacturing experience, outside the antigen business, and the lack of a
marketing organization, we are likely to rely on other parties to perform one or
more tasks for the commercialization of our proposed products. We may incur
additional costs and delays while working with these parties, and these parties
may ultimately be unsuccessful in the manufacture or distribution of our
products.
We Have Substantial Note Payments Due Within the Next Year
We have constructed a new facility in Colorado using a $3.2 million
construction loan from a bank which is due in July 2003. We expect to be able to
obtain a long term mortgage, but have not finalized arrangements. We are also
indebted to our president in an aggregate amount of $959,368 of which $80,000 is
due in 2003, $675,000 is due in 2004 and the balance in 2005. Any delays in
refinancing these obligations 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 due July 2003. 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. The balance
of $150,000 has been used by us for general corporate purposes. The note is
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. As our
common stock is trading at a substantial premium to the conversion price of
$1.50 per share, we expect him to convert his note to our common stock. However,
we cannot assure that our stock will continue to trade at a premium or that he
will convert.We also obtained a $200,000 guaranty
7
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 and the University of Wyoming. 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. On
March 29, 2003, we entered into a global distribution agreement with Merial to
market our bovine pregnancy test. 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.
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 2002, our
revenues from these sales were approximately $745,000. 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.
8
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 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. Mr.
Hurst is our largest shareholder.
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.
Our common stock will likely be classified as a "penny stock" under SEC rules
and the market price of our common stock may be 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
will be 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 could adversely affect the market liquidity of the shares, which in
turn may affect 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.
9
As of March 31, 2003, 9,300,000 shares of our common stock, 250,000 options
and 1,205,000 warrants were outstanding. An aggregate of 1,489,280 shares are
being offered pursuant to an outstanding prospectus. Cambridge currently owns
503,704 shares which may be resold pursuant to Rule 144. Our president, Roger
Hurst, owns 4,246,757 shares, which are restricted from resale because of Mr.
Hurst's affiliate status, but may be resold in limited amounts under Rule 144.
The remaining outstanding shares which are privately held are also available for
sale under Rule 144. We have outstanding options to purchase up to 250,000
shares of our common stock, of which options to purchase 200,000 shares are
exercisable currently. The option to purchase the remaining 50,000 shares is
held by one employee and vests in one-fourth annual installments, commencing
November 25, 2003. The holding period for Rule 144 purposes would begin upon
exercise of the respective options. We also have issued warrants to purchase
1,205,000 shares which are currently exercisable and a $500,000 convertible
note, which may be converted at any time prior to repayment. We have granted
registration rights to the holders of the warrants and the convertible note.
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 owns more than 45% of our common stock, he
should 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 45.7% of our outstanding common stock.
Accordingly, it is expected that he will have the ability to control all 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
should 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. 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 is 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. Our agreement with Merial requires that
we maintain commercial general liability insurance of no less than $500,000
subject to $1,000,000 general aggregate limit.
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 market PZI to human
diabetics. 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.
10
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.
11
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 2003.
12
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.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
-------
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 January 2003 and of high and low prices from January
2003 through March 2003 were $4.65 and $2.00, respectively.
As of April 1, 2003, we had 980 holders of record of our common stock.
Since our S Corporation election was terminated in 2001, we have not 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.
14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
Revenue for fiscal 2002 decreased approximately $377,842 (34%) to $745,427 from
$1,123,269 for fiscal 2001. We believe the decrease was attributable to general
economic conditions.
Cost of sales for fiscal 2002 increased $404,494 (157%) to $662,817 from
$258,323 in fiscal 2001.
Research and development expenses for fiscal 2002 increased $270,477 (77%)
to $622,460 from $351,983 in fiscal 2001.
Total operating expenses for fiscal 2002 increased $395,479 (64%) to
$1,009,662 from $614,183 in fiscal 2001.
AspenBio, Inc. had a net loss of $(1,224,251) in fiscal 2002 compared to a net
income of $154,949 for fiscal 2001.
Liquidity and Capital Resources
At fiscal 2002 year end, the Company had negative working capital of
$(2,449,880) consisting of current assets of $1,087,676 and current liabilities
of $3,537,556. This represents a decrease in working capital of $685,032 from
fiscal 2001 year end. Included in current liabilities is the construction loan
on our new facility of $2,596,748, which we anticipate replacing in 2003 with a
long-term mortgage loan. During fiscal 2002, the Company's operations used,
rather than provided cash. During that time, the Company's operations used
$415,284 compared to cash used by operations of $111,420 during the fiscal 2001.
Management believes the decrease in cash flow is primarily attributable to two
factors: (i) expenses associated with becoming a public company and (ii)
expenses associated with the development of a bovine pregnancy test.
In order to facilitate the purchase of the land and construction of the new
facility, our President, Roger Hurst, loaned us $954,260 and we made promissory
notes to Mr. Hurst payable with interest at 8% per annum on various dates
through May 5, 2005. We may prepay the note at any time without penalty. We also
have a $36,000 line of credit with a bank, of which $33,072 was outstanding at
December 31, 2002. Since fiscal year end 2002, we obtained an additional
$250,000 revolving line of credit with a bank, of which $101,280 is outstanding.
We also borrowed $500,000 from a shareholder, of which $150,000 was used by the
Company for general corporate purposes. The balance of $350,000 has been placed
in an account and pledged to, the bank which is our construction lender. We made
a convertible promissory note to the shareholder for $500,000, plus interest at
6% payable on July 5, 2003 and issued to him warrants to purchase up to 275,000
shares of our common stock at $1.50 per share. Our construction lender also
required a guarantee of $200,000 of the construction loan which we obtained from
another shareholder, Cambridge Holdings, Ltd. We issued Cambridge warrants to
purchase up to 100,000 shares of our common stock at $1.50 per share in exchange
for the guaranty and made a promissory note to cover any funds used by Cambridge
in connection with the guaranty.
In connection with an equipment lease, we issued a note payable to Colorado
Business Leasing, of which $77,941 was outstanding at December 31, 2002. The
note is payable with interest at 10.75% per annum, in monthly installments of
$9,053, and matures on October 1, 2003.
The Company's focus during 2002 has been the continued testing and preparation
for marketing of a new bovine pregnancy test, for use by dairy and cow/calf
operators. On March 29, 2003, we entered into a distribution agreement with
Merial Limited.
Recent Accounting Pronouncements
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 also
performed a goodwill impairment test in the fourth quarter of 2002 and
determined that there was no goodwill impairment as of that test date. A
goodwill impairment test will be performed annually in the fourth quarter or
upon significant changes in the Company's business environment.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement. The Company adopted SFAS No. 144 on January 1,
2002 with no material impact to its financial statements.
16
ITEM 7. FINANCIAL STATEMENTS
ASPENBIO, INC
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 and 2001
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent auditors' report - Gelfond Hochstadt Pangburn, P.C. F-1
Report of prior independent auditor - Larry O'Donnell, CPA, P.C. F-2
Financial statements:
Balance sheet F-3
Statements of operations F-4
Statements of shareholders' equity F-5
Statements of cash flows F-6 - F-7
Notes to financial statements F-8 - F-18
INDEPENDENT AUDITORS' REPORT
Board of Directors
AspenBio, Inc.
Castle Rock, Colorado
We have audited the accompanying balance sheet of AspenBio, Inc. (the "Company")
as of December 31, 2002, and the related statements of operations, shareholders'
equity and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the financial position of AspenBio, Inc. as of
December 31, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 11 to the financial statements, the Company has restated
its previously issued financial statements for the year ended December 31, 2001,
resulting in an increase in the net income and basic and diluted net income per
common share outstanding of $53,765 and $.01, respectively. The Company also
increased the balance of the opening accumulated deficit as of January 1, 2001
by approximately $19,100.
As discussed in Note 1 to the financial statements, effective January 1, 2002,
the Company adopted the provision of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.
/s/ Gelfond Hochstadt Pangburn, P.C.
- ------------------------------------
Gelfond Hochstadt Pangburn, P.C.
Denver, Colorado
March 29, 2003
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
AspenBio, Inc.
Castle Rock, Colorado
I have audited the accompanying statements of operations, stockholders' equity
and cash flows of AspenBio for the year ended December 31, 2001. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that I 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. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of AspenBio, Inc.
for the year ended December 31, 2001 ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 11 to the financial statements, the Company has restated
its previously issued financial statements for the year ended December 31, 2001,
resulting in an increase in net income and basic and diluted net income per
common share outstanding of $53,765 and $.01, respectively. The Company also
increased the balance of the opening accumulated deficit as of January 1, 2001
by approximately $19,100.
/s/ Larry O'Donnell, CPA, P.C.
- ------------------------------
Larry O'Donnell, CPA, P.C.
Aurora, CO
February 4, 2002, except for Note 11
which is as of March 29, 2003
F-2
AspenBio, Inc.
Balance Sheet
December 31, 2002
ASSETS
Current assets:
Cash $ 131,780
Accounts receivable, net 94,437
Inventories (Note 2) 511,459
Restricted cash (Note 6) 350,000
------------
Total current assets 1,087,676
------------
Property and equipment, net (Note 3) 3,184,798
------------
Other assets:
Goodwill, net (Note 4) 387,239
Intangible assets, net (Note 5) 161,366
------------
Total other assets 548,605
------------
Total assets $ 4,821,079
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 6):
Related party, current portion $ 564,000
Other 2,707,761
Accounts payable and accrued expenses 265,795
------------
Total current liabilities 3,537,556
------------
Notes payable, related party, net of current portion (Note 6) 842,256
Other liabilities 37,112
------------
879,368
------------
Total liabilities 4,416,924
------------
Commitments and contingencies (Note 7 and 10)
Shareholders' equity (Note 9):
Common stock, no par value, 15,000,000 shares
authorized; 9,300,000 shares issued and outstanding 1,555,770
Accumulated deficit (1,151,615)
----------
Total shareholders' equity 404,155
------------
Total liabilities and shareholders' equity $ 4,821,079
============
See notes to financial statements
F-3
AspenBio, Inc.
Statements of Operations
Years ended December 31, 2002 and 2001
2002 2001
-------------- --------------
(as restated)
Sales $ 745,427 $ 1,123,269
Cost of sales 662,817 258,323
-------------- --------------
Gross profit 82,610 864,946
-------------- --------------
Operating expenses:
Selling, general and administrative 387,202 262,200
Research and development 622,460 351,983
-------------- --------------
Total operating expenses 1,009,662 614,183
-------------- --------------
Operating (loss) income (927,052) 250,763
-------------- --------------
Other (expense) income :
Interest income 7,522
Interest expense (134,411) (84,814)
Expenses incurred with registration statement (175,608)
--------------- --------------
Total other (expense) income (302,497) (84,814)
-------------- --------------
(Loss) income before income tax benefit (expense) (1,229,549) 165,949
-------------- --------------
Income tax benefit (expense) (Note 8) 5,298 (11,000)
-------------- --------------
Net (loss) income $ (1,224,251) $ 154,949
============== ==============
Basic and diluted (loss) earnings per share $ (.13) $ .02
============== ==============
Basic and diluted weighted average shares outstanding 9,204,110 7,964,749
============== ==============
PROFORMA INFORMATION ASSUMING THE COMPANY HAD
BEEN TAXED AS A REGULAR CORPORATION IN 2001:
Income before income taxes $ 165,949
Income taxes 59,700
--------------
Net income $ 106,249
==============
Basic and diluted earnings per share $ .01
==============
See notes to financial statements
F-4
AspenBio, Inc.
Statements of Shareholders' Equity
Years ended December 31, 2002 and 2001
Retained
Common Stock Deferred earnings
------------------------ consulting (accumulated
Shares Amount cost deficit) Total
--------- ---------- ------------ ------------ -----------
Balance, December 31, 2000 5,432,798 $ 500,000 $ (63,232) $ 436,768
Adjustment, see Note 11 (19,081) (19,081)
--------- ---------- ------------ ------------ -----------
Balance, December 31, 2000,
as restated 5,432,798 500,000 (82,313) 417,687
Issuance of common stock
for compensation 2,284,244 137,055 137,055
Issuance of common stock for cash 582,958 280,874 280,874
Issuance of common stock for cash and
warrants 500,000 300,000 300,000
Warrants issued for consulting services,
as restated 43,840 $ (43,840) -
Amortization of deferred consulting
cost, as restated 10,960 10,960
Net income, as restated 154,949 154,949
--------- ---------- ------------ ------------ -----------
Balance, December 31, 2001,
as restated 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 for guarantee of
note payable 11,000 11,000
Warrants issued as discount on note payable 32,000 32,000
Amortization of deferred consulting cost 32,880 32,880
Net loss (1,224,251) (1,224,251)
--------- ---------- ------------ ------------ -----------
Balance, December 31, 2002 9,300,000 $1,555,770 $ 0 $ (1,151,615) $ 404,155
========= ========== ============ ============ ============
See notes to financial statements
F-5
AspenBio, Inc.
Statements of Cash Flows
Years ended December 31, 2002 and 2001
2002 2001
---------- ------------
(as restated)
Cash flows from operating activities
Net (loss) income $(1,224,251) $154,949
Adjustments to reconcile net (loss) income to
net cash used by operating activities
Depreciation and amortization 121,413 103,196
Stock issued for compensation 137,055
Amortization of deferred consulting cost 32,880 10,960
Amortization of discount of note payable 16,000
Change in provision for doubtful accounts 1,600
(Increase) decrease in:
Accounts receivable 135,392 (190,664)
Inventories 120,302 (259,401)
Prepaid expenses 108,902 (33,320)
Other assets 22,500
Increase (decrease) in:
Accounts payable and accrued liabilities 249,978 (45,195)
Accrued income taxes 11,000
---------- --------
Net cash used by operating activities (415,284) (111,420)
---------- --------
Cash flows from investing activities
Purchases of property and equipment (487,439) (33,758)
Purchases of intangible assets (119,091) (37,842)
---------- --------
Net cash used by investing activities (606,530) (71,600)
---------- --------
Cash flows from financing activities
Proceeds from the issuance of notes payable
and warrants 1,191,442
Repayment of notes payable (362,614) (81,677)
Increase in restricted cash (350,000)
Proceeds from issuance of common stock 300,000 580,872
Payment of dividends (48,999)
---------- --------
Net cash provided by financing activities 729,829 499,195
---------- --------
Continued
F-6
AspenBio, Inc.
Statements of Cash Flows (Continued)
Years ended December 31, 2002 and 2001
2002 2001
---------- ------------
(as restated)
Net increase (decrease) in cash (291,985) 316,175
---------- --------
Cash at beginning of year 423,765 107,590
---------- --------
Cash at end of year $ 131,780 $423,765
========== ========
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest $ 97,000 $ 51,360
Income taxes 5,000 -
Schedule of non-cash investing and financing transactions
Warrants granted for consulting services $ 43,840
Warrants issued for guarantee of note payable $ 11,000
Construction in progress financed by construction loan 2,596,748
See notes to financial statements
F-7
AspenBio, Inc.
Years ended December 31, 2002 and 2001
Notes to financial statements
1. Organization, management's plans and summary of significant accounting
policies:
Nature of operations:
AspenBio, Inc. (the "Company" or "AspenBio") was organized on July 24,
2000, and, on August 7, 2000 purchased the assets and liabilities of Vitro
Diagnostic, Inc. The president and a shareholder of AspenBio was also the
president and a shareholder of Vitro Diagnostic, Inc.
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 has been developed, is an
antigen pregnancy test for dairy cows.
Management's plans:
The Company reported a net loss of $1,224,251 in 2002 and net income of
$154,949 in 2001. At December 31, 2002, the Company has a working capital
deficit of $2,449,880. Management believes that the Company's on-going and
long-term cash availability is sufficient to support operations for the
next 12 months. Management's plans include the following:
a. In March 2003, the Company entered into a global development and
distribution agreement with an outside-third party to market the
Company's bovine pregnancy test (Note 10). Upon execution of the
agreement the Company received $200,000. Although there is no
certainty that the conditions as stated in the agreement will
occur, management fully expects to meet the milestones as defined
in the agreement and receive additional development payments of
up to $1,700,000 during 2003.
b. The Company is currently negotiating with a bank to convert the
construction loan of $2,596,748 at December 31, 2002 to a
long-term mortgage loan during 2003.
c. In February 2003, the Company entered into a $250,000 revolving
line of credit (Note 10).
d. The Company is currently evaluating private or public stock
issuance possibilities although there is no assurance that these
activities will be successful.
Revenue recognition and accounts receivable:
The Company recognizes revenue when product is 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, 2002, three customers in aggregate accounted for
approximately 67% of total accounts receivable. For the year ended December
31, 2002, one customer accounted for 48% of total net sales, and for the
year ended December 31, 2001 three customers accounted for 39%, 13% and 11%
of total net sales.
Accounts receivable are stated net of an allowance for doubtful accounts of
approximately $1,600 at December 31, 2002.
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, for which
management believes that there are other suppliers that could generally
provide similar merchandise under substantially equivalent terms.
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 five years. Leasehold improvements are amortized over the shorter
of the term of the lease or the useful life of the improvement, and have
been fully amortized as of December 31, 2002.
F-8
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 also performed a goodwill impairment test in the
fourth quarter of 2002 and determined that there was no goodwill impairment
as of that test date. 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:
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS
No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains
many of the fundamental provisions of that Statement. The Company adopted
SFAS No. 144 on January 1, 2002 with no material impact to its financial
statements.
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.
F-9
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 financial instruments:
The fair value of the notes 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 short
maturities. The fair value of the letter of credit approximates the fees
paid to obtain the instrument.
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
At inception, the Company, with the consent of its shareholders, elected
under the Internal Revenue Code to be an S corporation. In lieu of
corporation income taxes, the shareholders of an S corporation are taxed on
their proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal income taxes has been provided from
inception to August 1, 2001. On August 1, 2001, the Company revoked its S
corporation election.
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.
F-10
1. Organization and summary of significant accounting policies (continued):
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.
Income (loss) per share:
Basic earnings (loss) per share includes no dilution and is computed by
dividing net earnings (loss) available to shareholders by the weighted
average 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 dilutive effect of options and
warrants was not sufficient to change the basic amounts per share disclosed
in the year ended December 31, 2001 and in 2002 the options and warrants
are anti-dilutive.
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, 2002 and 2001, the Company did not have
any components of comprehensive income to report.
Recently issued accounting pronouncements:
In June 2001, the Financial Accounting Standards Boards (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. This statement requires that the fair value of a
liability for an asset retirement be recognized in the period in which it
is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
value of the long-lived asset. This statement is effective for fiscal years
beginning after June 15, 2002. The Company is currently addressing the
impact, if any, that SFAS No. 143 may have on the financial condition or
results of operations of the Company.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others. This Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also requires
that a guarantor recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guaranty.
Under prior accounting principles, a guarantee would not have been
recognized as a liability until a loss was probable and reasonably
estimable. The disclosure requirements are effective for financial
statements for periods ending after December 15, 2002. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company is currently addressing the impact, if any,
Interpretation No. 45 may have on the financial condition or results of
operations of the Company.
F-11
Reclassifications:
Certain amounts reported in the 2001 financial statements have been
reclassified to conform to the 2002 presentation.
2. Inventories:
Inventories consist of the following at December 31, 2002:
Raw materials $ 157,375
Finished goods 348,234
Goods in process 5,850
---------
$ 511,459
=========
3. Property and equipment:
Property and equipment consist of the following at December 31, 2002:
Construction in progress $2,949,960
Laboratory equipment 335,144
Office equipment 60,966
Leasehold improvements 27,645
----------
3,373,715
Less accumulated depreciation
and amortization 188,917
----------
$3,184,798
==========
4. Goodwill
Goodwill at December 31, 2002 is $387,239, which is deductible for tax
purposes. As a result of the adoption of SFAS No. 142, there was no
goodwill amortization expense recorded for the year ended December 31,
2002. Amortization expense and net income of the Company for the year
of initial application and prior year follows:
2002 2001
----------- ----------
(as restated)
Reported net (loss) income $(1,224,251) $ 154,949
Add back goodwill amortization 60,712
----------- ----------
Adjusted net (loss) income $(1,224,251) $ 215,661
=========== ==========
Basic and diluted (loss) earnings per share:
Reported net (loss) income $ (.13) $ .02
Add back goodwill amortization .01
----------- ----------
Adjusted net (loss) income per share- basic
and diluted $ (.13) $ .03
========== ==========
F-12
5. Intangible and other assets:
Intangible and other assets consist of the following at December 31,
2002:
Patent and trademark applications $ 126,934
Deferred loan costs 40,013
Other 14,425
---------
181,372
Less accumulated amortization 20,006
---------
$ 161,366
=========
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 one year term of the related loan using the
straight-line method.
6. Notes payable:
Notes payable consists of the following at December 31, 2002:
Line of credit, interest at
bank's daily periodic rate
(16.75% at December 31, 2002) $ 33,072
Construction loan (maximum draw $3,250,000), interest
at the Wall Street Journal
prime rate plus 1% with a
floor of 6%, due July 1, 2003;
collateralized by first deed
of trust on building and
$350,000 restricted cash;
guaranteed by a shareholder 2,596,748
Note payable, interest at 10.75%,
payable in monthly installments,
including interest, of $9,053,
due October 2003, collateralized
by specific equipment, guaranteed
by the president of the Company and
the president's spouse 77,941
Note payable, shareholder; interest
at 8%, $80,000 due December 31, 2003,
$50,000 due April 15, 2004, final
principal and interest due
April 15, 2005; unsecured 267,501
Note payable, shareholder;
interest at 8%, due April
15, 2005; unsecured 29,755
F-13
Note payable, shareholder; $500,000
note payable, net of $16,000
unamortized discount, interest
at 6%, effective interest rate
at 12%, principal
and interest due July 6,
2003 convertible to common stock 484,000
Note payable, shareholder; interest
at 8%, principal and interest due
May 5, 2004; unsecured 625,000
----------
4,114,017
Less current maturities 3,271,761
----------
$ 842,256
==========
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 serves as a
performance bond on the construction of the building. At December 31, 2002,
no amounts were outstanding under this letter of credit.
During the year ended December 31, 2002, total interest expense on this
loan of $21,431 was capitalized to construction in progress.
Minimum annual principal payments due on outstanding debt are as follows:
Year ending December 31,
------------------------
2003 $ 3,271,761
2004 675,000
2005 167,256
---------------
Total $ 4,114,017
===============
During the years ended December 31, 2002 and 2001, interest expense of
approximately $66,700 and $34,700, respectively, was incurred on notes
payable to shareholders. At December 31, 2002, accrued interest expense,
shareholders is approximately $52,000.
7. Commitments and contingencies:
Development and license agreements:
The Company 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, 2002 and 2001, there were no
such commercial sales. Under one of the agreements, the Company paid the
annual minimum royalty of $25,000, 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 the year ended December 31, 2002. An
additional $70,000 is payable in 2003.
The agreements may be terminated by the Company with 30 days notice and
without future obligations.
F-14
8. Income taxes:
Income taxes at the federal statutory rate are reconciled to the Company's
actual income taxes as follows:
2002 2001
-------- --------
(as restated)
Federal income tax (benefit) expense at
statutory rate $(418,000) $ 56,400
State income tax net of federal tax effect (24,600) 3,300
Permanent items (21,000) (19,300)
Effect of graduated rates (10,000)
Effect of S Corporation election (19,400)
Valuation allowance 463,600
-------- --------
$ - $ 11,000
======== ========
As of December 31, 2002 the Company has net operating loss carryforwards of
approximately $1,320,000 for federal and state tax purposes, which are
available to offset future taxable income, if any, expiring in December
2022. A valuation allowance was recorded at December 31, 2002 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, 2002 are as
follows:
Current deferred tax assets (liabilities):
Net operating loss carryforwards $ 475,200
Research and development tax credit carryforward 62,300
Accounts receivable, due to allowance 600
Goodwill (10,800)
------------
Deferred tax asset 527,300
Valuation allowance (527,300)
------------
Net current deferred tax asset $ -
============
9. Shareholders' equity:
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 900,000 shares of its common stock for options which
may be issued under the plan. The Plan is administered by an option
committee. The exercise prices of the options are determined by the option
committee and are established at the 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.
F-15
During 2002, the Company granted options to purchase 250,000 shares at
$1.25 per share to certain key employees. The options vest 25% per year
over four years and expire in 2012. Of the 250,000 options granted in 2002,
200,000 were forfeited during 2002. 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, as determined by management. 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 options to two directors to acquire
200,000 shares of common stock 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 as of December 31,
2002 and 2001, and changes during the years then ended, is presented below:
2002 2001
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beginning of year 200,000 $ 1.00 -
======
Granted 250,000 $ 1.25 200,000 $ 1.00
====== ======
Exercised
Forfeited 200,000 $ 1.25
------- ======
Outstanding, end of year 250,000 $ 1.05 200,000 $1.00
======= ====== ======= =====
Options exercisable end of year 200,000 $ 1.00 200,000 $1.00
======= ====== ======= =====
Compensation expense for the year ended December 31, 2002, as computed
under the fair value based method , consistent with the guidance of SFAS
No. 123, was not material.
If the Company had elected to recognize compensation expense based upon the
fair value of the options at the date of grant for awards granted in 2001
the Company's net income and earnings per share would have approximated the
pro forma amounts below:
2001
-------------
(as restated)
Net income:
As reported $ 154,949
Pro forma net income $ 121,020
Earnings per share:
As reported $ .02
Pro forma net income $ .02
The weighted-average fair value of the options granted in 2002 and 2001 are
estimated on the date of grant using the Black-Scholes option pricing model
as follows:
2002 2001
---- ----
Assumptions:
Risk-free interest rate 2.65% 3.7%
Expected life in years 5 5
Expected volatility 172% 5%
Dividend yield 0% 0%
F-16
Common stock purchase warrants:
In 2002 the Company issued a total of 375,000 warrants. The warrants
entitled the holders to exercise their warrants and purchase common stock
for a $1.50 per share at any time through July 2003. The warrants contain a
cashless exercise option whereby the holders can receive a reduced number
of shares of stock upon exercise of the warrant in lieu of payment of the
exercise price.
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 Company has allocated 330,000 warrants to the
consulting contract. Upon signing the agreement, the Company received
$300,000. Upon completion of specified conditions, the remaining $300,000
was received by the Company in March 2002. The Company assigned $43,840 of
the proceeds to the consulting contract, which was completed in 2002. The
warrants are currently exercisable and expire in January 2007.
F-17
10. Subsequent events:
Revolving line 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%). The line of credit is collateralized
by the assets of the Company and guaranteed by the president of the
Company.
Global Development and Distribution Agreement:
In March 2003, the Company entered into a global development and
distribution agreement with an outside third-party. The agreement provides
the third party 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. AspenBio is currently in the
final phase of product development and expects to complete a large-scale
field trial to validate the accuracy and reliability of the pregnancy test
in U.S. dairy herds in July 2003.
11. Restatements:
In 2002, based upon an evaluation of its finished goods inventory, the
Company made a determination that labor and overhead had been excluded from
the price of finished goods in prior periods. As reported in the Company's
2001 financial statements, the Company disclosed that in its acquisition of
the assets and liabilities from Vitro Diagnostics, Inc. in August 2000, the
Company acquired inventory at a value of $140,315. Based on management's
further analysis and evaluation, it was determined that the acquired
inventory was understated by $194,883, and that goodwill was overstated by
an equal amount. In addition, the Company became aware of certain inventory
items that were valued incorrectly at December 31, 2001. Management has
determined that these inventory items were overstated by approximately
$47,500. Finally, in 2001, the Company granted warrants for consulting
services performed during the period from October 2001 through March 2002.
As a result, for the year ended December 31, 2001, the Company has recorded
consulting expense of approximately $11,000 associated with these warrants.
The Company has restated its previously issued financial statements for the
year ended December 31, 2001, resulting in an increase in the net income
and basic and diluted net income per common share outstanding of $53,765
and $.01, respectively. The Company also increased the balance of the
opening retained earnings accumulated deficit as of January 1, 2001 by
approximately $19,100, resulting from the allocation of labor and overhead
discussed above.
F-18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 20, 2002, we dismissed Larry O'Donnell, CPA, P.C. ("O'Donnell") as
our principal accountant. The decision to change accountants was approved by our
Board of Directors.
The Reports of O'Donnell on our financial statements for either of the past two
fiscal years ended December 31, 2001 and 2000 did not contain an adverse opinion
or disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or account principles.
We do not believe there were disagreements with O'Donnell for the years ended
December 31, 2000 and 2001 and for interim periods through December 20, 2002 on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of O'Donnell would have caused O'Donnell to make reference
to the subject matter of the disagreement in connection with its reports.
We have provided a copy of our Report on Form 8-KA to O'Donnell and requested
that O'Donnell furnish a letter addressed to the Commission stating whether
O'Donnell agrees with the statements made by us and, if not, stating the
respects in which it does not agree. A letter from O'Donnell was included as
Exhibit 16.1 to our Report on Form 8-KA, stating its agreement with the
statements made by us in that Report.
On December 20, 2002, we engaged Gelfond Hochstadt Pangburn, P.C. ("GHP") as our
certifying accountants to audit our financial statements for the fiscal year
ending December 31, 2002. During our two most recent fiscal years and the
interim period prior to our agreement to engage GHP as our principal
accountants, neither we nor anyone on our behalf has consulted GHP on either (i)
the application of accounting principles to any transaction (completed or
proposed) or (ii) the type of audit report that might be rendered on our
financial statements, or (iii) any matter that was either the subject of a
disagreement or reportable event as such terms are defined in Item 304 of
Regulation S-B.
We have delivered a copy of the Report on Form 8-KA to GHP and requested GHP to
furnish us with a letter addressed to the Commission stating whether GHP agrees
with the statements made by us, and, if not, stating the respects in which it
does not agree. A letter from GHP was included as Exhibit 16.2 to the Report on
Form S-8K, stating GHP's agreement with the statements made by us in this
Report.
32
PART III
--------
Information concerning matters in Items 9, 10, 11 and 12 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, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBIT
NO. DESCRIPTION
- -----------------------------------------------------------------------------
3.1 Articles of Incorporation of the Registrant filed
July 24, 2000
- -----------------------------------------------------------------------------
3.1.1 Articles of Amendment to the Articles of Incorporation of the
Registrant filed December 26, 2001
- -----------------------------------------------------------------------------
3.2 Bylaws of the Registrant
- -----------------------------------------------------------------------------
4.1(a) Specimen Certificate of Common Stock
- -----------------------------------------------------------------------------
(b) Specimen Warrant and Agreement to Amend Warrants
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
10.2(a) Securities Purchase Agreement, dated December 28, 2001,
between AspenBio and Cambridge Holdings, Ltd.
- -----------------------------------------------------------------------------
10.3 Investor Rights Agreement, dated December 28, 2001, between
AspenBio and Cambridge Holdings, Ltd.
- -----------------------------------------------------------------------------
10.4(a) Consulting Agreement, dated December 28, 2001, between
AspenBio and Cambridge Holdings, Ltd.
- -----------------------------------------------------------------------------
(b) Letter, dated March 14, 2002, confirming performance and
termination of the Consulting Agreement
- -----------------------------------------------------------------------------
10.5 Shareholders Agreement, dated December 28, 2001, among
AspenBio, Cambridge Holdings and Roger Hurst
- -----------------------------------------------------------------------------
10.6 Amended Investor Rights Declaration dated December 28, 2001,
between AspenBio and Shareholders of AspenBio
- -----------------------------------------------------------------------------
10.7 2002 Stock Incentive Plan
- -----------------------------------------------------------------------------
10.8 Technology Transfer Agreement, dated October 29, 2001 between
AspenBio and the University of Wyoming**
- -----------------------------------------------------------------------------
10.9 License Agreement for Determination of Pregnancy Status
of Ungulates, dated September 25, 2001, between AspenBio
and the Idaho Research Foundation Inc.
- -----------------------------------------------------------------------------
10.10 Promissory Note, dated August 7, 2000, made by AspenBio to Roger D.
Hurst and Amended and Restated Promissory Note, dated April 1, 2002
- -----------------------------------------------------------------------------
10.11 Promissory Note, dated April 1, 2002 made by AspenBio to Roger D.
Hurst.
- -----------------------------------------------------------------------------
10.12 Promissory Note, dated November 1, 2000, made by AspenBio to Colorado
Business Leasing
- -----------------------------------------------------------------------------
10.13 Stock Option Agreement, dated August 21, 2001, between AspenBio and
Gail Schoettler
- -----------------------------------------------------------------------------
10.14 Stock Option Agreement, dated August 21, 2001, between AspenBio and
Bruce Deal
- -----------------------------------------------------------------------------
10.15 Promissory Note, dated May 6, 2002, made by AspenBio to Roger D.
Hurst
- --------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
(b) Agreement to Amend/Extend Contract, dated April 19, 2002
- ------------------------------------------------------------------------------
(c) Agreement to Amend/Extend Contract, dated May 23, 2002
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
10.18(c) Warrant, dated July 5, 2002, to purchase 275,000 shares of AspenBio,
Inc. common stock issued to Michael Smith
- ------------------------------------------------------------------------------
10.18(d) Investor Rights Agreement, dated July 5, 2002, between
Inc. and Michael S. Smith
- ------------------------------------------------------------------------------
10.19(a) Promissory Note, dated July 5, 2002, by AspenBio, Inc. to
Cambridge Holdings, Ltd. in the principal amount of
$200,000
- ------------------------------------------------------------------------------
10.19(b) Warrant, dated July 5, 2002, to purchase 100,000 shares of
AspenBio, Inc. common stock issued to Cambridge Holdings, Ltd.
- ------------------------------------------------------------------------------
10.19(c) Investor Rights Agreement, dated July 5, 2002, between
AspenBio, Inc. and Cambridge Holdings, Ltd.
- ------------------------------------------------------------------------------
10.20 Agreement, dated February 26, 2002 and April 9, 2002 between
AspenBio, Inc. and Urban Construction, Inc.
- --------------------------------------------------------------------------------
10.21 Distribution Agreement between AspenBio, Inc. and Merial Limited,
dated March 29, 2003*
- --------------------------------------------------------------------------------
16 Letter regarding change in certifying accountant
- --------------------------------------------------------------------------------
99.1 Section 906 Certification**
*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. **Filed with this report.
All of the exhibits listed above that are not filed with this report were filed
as exhibits with the registrant's Registration Statement on Form S-1 (file no.
333-86190), except for Exhibit 16, which was filed with the registrant's report
on Form 8-K/A on January 10, 2003, and Exhibit 10.21, which was filed with the
registrant's report on Form 8-K on April 7, 2003. All of these exhibits are
incorporated by reference into this Report.
33
ITEM 14. 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.
(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.
34
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 April 14, 2003 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 April 14, 2003.
/s/ Roger D. Hurst
-----------------------------------------------
Roger D. Hurst, President, Chief Executive
Officer, Chief Financial Officer and Director
/s/ Gregory Pusey
-----------------------------------------------
Gregory Pusey, Secretary and Director
/s/ Gail S. Schoettler
-----------------------------------------------
Gail S. Schoettler, Director
35
CERTIFICATION
I, Roger Hurst, certify that:
1) I have reviewed this annual report on Form 10-KSB of AspenBio, Inc.;
2) Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: April 14, 2003 /s/ Roger D. Hurst
-----------------------------------
Roger D. Hurst, Chief Executive
Officer and Chief Financial Officer
36