RIOT 10-Q Quarterly Report Sept. 30, 2011 | Alphaminr
Riot Blockchain, Inc.
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RIOT 10-Q Quarter ended Sept. 30, 2011

Balance Sheet
Cash Flow
Income Statement
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10-Q 1 appy_10q-093011.htm FORM 10-Q appy_10q-093011.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________


Commission file number: 001-33675

ASPENBIO PHARMA, INC.
(Exact name of registrant as specified in its charter)

Colorado
84-1553387
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

1585 South Perry Street, Castle Rock, Colorado 80104
(Address of principal executive offices) (Zip Code)

(303) 794-2000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).         Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o No x
The number of shares of no par value common stock outstanding as of November 9, 2011 was 8,028,321.

ASPENBIO PHARMA, INC.
Page
PART I - Financial Information
Item 1.
Condensed Financial Statements
Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010
2
Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)
3
Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
4
Notes to Condensed Financial Statements (Unaudited)
5
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20
Item 4.
Controls and Procedures
20
PART II - Other Information
Item 1.
Legal Proceedings
21
Item 1A.
Risk Factors
22
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
Item 6.
Exhibits
27
Signatures
28


1
PART I — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
AspenBio Pharma, Inc.
Balance Sheets
September 30,
2011
(Unaudited)
December 31,
2010
ASSETS
Current assets:
Cash and cash equivalents
$
2,400,866
$
8,908,080
Short-term investments (Note 1)
2,392,550
2,932,188
Accounts receivable (Note 7)
2,739
73,176
Inventories, finished goods
1,312
17,130
Prepaid expenses and other current assets
530,479
376,047
Total current assets
5,327,946
12,306,621
Property and equipment, net (Note 2)
2,889,886
3,107,134
Other long term assets, net (Note 3)
1,747,534
1,745,350
Total assets
$
9,965,366
$
17,159,105
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
1,451,819
$
1,126,172
Accrued compensation
55,757
227,570
Accrued expenses
1,294,127
357,685
Notes and other obligations, current portion (Note 4)
439,574
273,861
Deferred revenue, current portion (Note 7)
71,062
746,062
Total current liabilities
3,312,339
2,731,350
Notes and other obligations, less current portion (Note 4)
2,461,778
2,546,682
Deferred revenue, less current portion (Note 7)
580,339
633,636
Total liabilities
6,354,456
5,911,668
Commitments and contingencies (Note 7)
Stockholders' equity (Notes 5 and 6):
Common stock, no par value, 30,000,000 shares authorized;
8,028,321 shares issued and outstanding, each period
67,074,603
66,054,554
Accumulated deficit
(63,463,693
)
(54,807,117
)
Total stockholders' equity
3,610,910
11,247,437
Total liabilities and stockholders' equity
$
9,965,366
$
17,159,105

See Accompanying Notes to Unaudited Condensed Financial Statements
2
AspenBio Pharma, Inc.
Statements of Operations
Periods Ended September 30,
(Unaudited)
Three Months Ended
Nine Months Ended
2011
2010
2011
2010
Sales (Note 7)
$
22,381
$
80,483
$
175,019
$
281,748
Cost of sales
382
150,367
15,958
249,893
Gross profit (loss)
21,999
(69,884
)
159,061
31,855
Other revenue - fee (Note 7)
17,766
17,766
53,297
50,629
Operating expenses:
Selling, general and administrative
1,405,979
1,932,021
4,369,708
5,933,604
Research and development
1,644,995
1,043,156
4,373,325
4,398,588
Total operating expenses
3,050,974
2,975,177
8,743,033
10,332,192
Operating loss
(3,011,209
)
(3,027,295
)
(8,530,675
)
(10,249,708
)
Other, net (primarily interest)
(52,241
)
(24,755
)
(125,901
)
(96,028
)
Net loss
$
(3,063,450
)
$
(3,052,050
)
$
(8,656,576
)
$
(10,345,736
)
Basic and diluted net loss per share
$
(.38
)
$
(.38
)
$
(1.08
)
$
(1.33
)
Basic and diluted weighted average number
of shares outstanding (Notes 1 and 5)
8,028,321
8,027,665
8,028,321
7,789,487



See Accompanying Notes to Unaudited Condensed Financial Statements


3

AspenBio Pharma, Inc.
Statements of Cash Flows
Nine Months Ended September 30,
(Unaudited)
2011
2010
Cash flows from operating activities:
Net loss
$
(8,656,576
)
$
(10,345,736
)
Adjustments to reconcile net loss to
net cash used in operating activities
Stock-based compensation for services
1,020,049
1,847,450
Depreciation and amortization
371,008
354,279
Amortization of license fee
(53,297
)
(50,629
)
Impairment charges
102,952
198,589
Decrease in:
Accounts receivable
70,437
8,700
Inventories
14,990
96,195
Prepaid expenses and other current assets
300,398
35,298
Increase (decrease) in:
Accounts payable
325,647
(515,615
)
Accrued liabilities and deferred revenue
261,442
(186,336
)
Accrued compensation
(171,813
)
(14,021
)
Net cash used in operating activities
(6,414,763
)
(8,571,826
)
Cash flows from investing activities:
Purchases of short-term investments
(793,527
)
(6,904,888
)
Sales of short-term investments
1,333,165
2,152,221
Purchases of property and equipment
(83,201
)
(177,998
)
Patent and trademark acquisition costs
(174,867
)
(265,974
)
Net cash provided by (used in) investing activities
281,570
(5,196,639
)
Cash flows from financing activities:
Repayment of notes payable and other obligations
(374,021
)
(82,914
)
Proceeds from exercise of stock warrants and options
—
291,028
Net proceeds from issuance of common stock
—
9,116,529
Net cash (used in) provided by financing activities
(374,021
)
9,324,643
Net decrease in cash and cash equivalents
(6,507,214
)
(4,443,822
)
Cash and cash equivalents at beginning of period
8,908,080
13,366,777
Cash and cash equivalents at end of period
$
2,400,866
$
8,922,955
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
$
139,004
$
144,363
Schedule of non-cash investing and financing  transactions:
Acquisitions of current assets for installment obligations
$
454,830
—


See Accompanying Notes to Unaudited Condensed Financial Statements
4
AspenBio Pharma, Inc.
Notes to Condensed Financial Statements
(Unaudited)
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of AspenBio Pharma, Inc. (the “Company,”  “we,” “AspenBio” or “AspenBio Pharma”) have been prepared in accordance with the instructions for Quarterly Reports on Form 10-Q. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in financial position at September 30, 2011, and for all periods presented have been made. Certain information and footnote data necessary for fair presentation of financial position and results of operations in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted. It is therefore suggested that these financial statements be read in conjunction with the summary of significant accounting policies and notes to financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The results of operations for the period ended September 30, 2011, are not necessarily an indication of operating results for the full year.
On July 29, 2011, the Company effected a reverse stock split of its outstanding common stock at a ratio of one-for-five, whereby each five shares of common stock were combined into one share of common stock (the “Reverse Stock Split”). The Reverse Stock Split was authorized by the Company’s stockholders at the 2011 annual meeting held on July 8, 2011 and approved by the Board of Directors (the “Board”) thereafter. The Reverse Stock Split was effective with respect to shareholders of record at the close of business on July 28, 2011, and trading of our common stock on the NASDAQ Capital Market began on a split-adjusted basis beginning on July 29, 2011. As a result of the Reverse Stock Split, each five shares of common stock were combined into one share of common stock and the total number of shares of common stock outstanding was reduced from approximately 40.1 million shares to approximately 8.0 million shares.
All historical references to shares and share amounts in this quarterly report have been retroactively revised to reflect the Reverse Stock Split, the principal effects of which were to:
1.
reduce the number of shares of common stock issued and outstanding by a factor of 5;
2.
increase the per share exercise price of options and warrants by a factor of 5, and decrease the number of shares issuable upon exercise by a factor of 5, for all outstanding options and warrants entitling the holders to purchase shares of the Company’s common stock; and
3.
proportionately reduce the number of shares authorized and reserved for issuance under the Company’s existing equity compensation plans.
Note 1.  Significant Accounting Policies:
Cash, cash equivalents and investments:
The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. From time to time, the Company’s cash account balances exceed the balances as covered by the Federal Deposit Insurance System. The Company has never suffered a loss due to such excess balances.
The Company invests excess cash from time to time in highly-liquid debt and equity investments of highly-rated entities which are classified as trading securities. The purpose of the investments is to fund research and development, product development, United States Food and Drug Administration (the “FDA”) approval-related activities and general corporate purposes. Such amounts are recorded at market values using Level 1 inputs in determining fair value and are classified as current, as the Company does not intend to hold the investments beyond twelve months. Investment securities classified as trading are those securities that are bought and held principally for the purpose of selling them in the near term, with the objective of preserving principal and generating profits. These securities are reported at fair value with unrealized gains and losses reported as an element of other income (expense) in current period earnings. The Board has approved an investment policy covering the investment parameters to be followed with the primary goals being the safety of principal amounts and maintaining liquidity of the fund. The policy provides for minimum investment rating requirements as well as limitations on investment duration and concentrations. Based upon market conditions, the investment guidelines have been tightened to increase the minimum acceptable investment ratings required for investments and shorten the maximum investment term. As of September 30, 2011, 48% of the investment portfolio was in cash equivalents, which is presented as such on the accompanying balance sheet, and the remaining funds were invested in short-term marketable securities with none individually representing more than 21% of the portfolio and none with maturities past September 2012. To date, the Company’s cumulative realized market loss from the investments has not been in excess of $5,000. For the nine months ended September 30, 2011, there was approximately $8,785 in unrealized loss, $1,037 in realized income, and $8,193 in management fees.  For the nine months ended September 30, 2010, there was approximately $45,015 in unrealized loss, $1,920 in realized income, and $13,480 in management fees.
5
Fair value of financial instruments:
The Company accounts for financial instruments under Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC) 820 (formerly Statement of Financial Accounting Standard (SFAS) No. 157), Fair Value Measurements .  This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 — observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 — assets and liabilities whose significant value drivers are unobservable.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions.  Unobservable inputs require significant management judgment or estimation.  In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy.  In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement.  Such determination requires significant management judgment. There were no financial assets or liabilities measured at fair value, with the exception of cash, cash equivalents and short-term investments as of September 30, 2011 and December 31, 2010.
The carrying amounts of the Company’s financial instruments (other than cash, cash equivalents and short-term investments as discussed above) approximate fair value because of their variable interest rates and / or short maturities combined with the recent historical interest rate levels.
Recently issued and adopted accounting pronouncements:
In October 2009, the FASB issued ASU 2010-13, “ Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements .” This ASU eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the consideration that is attributable to items that already have been delivered. This may allow some companies to recognize revenue on transactions that involve multiple deliverables earlier than under the current requirements. Additionally, under the new guidance, the relative selling price method is required to be used in allocating consideration between deliverables and the residual value method will no longer be permitted. This ASU is effective prospectively for revenue arrangements entered into or materially modified beginning in fiscal year 2011. A company may elect, but will not be required, to adopt the amendments in this ASU retrospectively for all prior periods. The adoption of this ASU did not have a material impact on the Company’s financial statements.
In April 2010, the FASB issued ASU 2010-17, “ Revenue Recognition – Milestone Method (Topic 605):  Milestone Method of Revenue Recognition .”   The adoption of this ASU did not have a material impact on the Company’s financial statements.

On September 15, 2011, the FASB issued (ASU 2011-08),“ Testing Goodwill for Impairment ” which amends the guidance in ASC 350-20. The amendments in ASU 2011-08 provide entities with the option of performing a qualitative assessment before performing the first step of the two-step impairment test. If entities determine, on the basis of qualitative factors, it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, then performing the two-step impairment test would be unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. ASU 2011-08 also provides entities with the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the first step of the two-step impairment test. ASU 2011-08 will apply to the 2012 fiscal year.  The Company does not expect material financial statement implications relating to the adoption of this ASU.

6
Income (loss) per share:
ASC 260 (formerly - SFAS No. 128), Earnings Per Share , requires dual presentation of basic and diluted earnings per share (EPS) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic earnings (loss) per  share includes no dilution and is computed by dividing net earnings (loss) available to stockholders by the weighted average  number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution of securities that could share in the Company’s earnings (loss). The effect of the inclusion of the dilutive shares would have resulted in a decrease in loss per share. Accordingly, the weighted average shares outstanding have not been adjusted for dilutive shares. Outstanding stock options and warrants are not considered in the calculation, as the impact of the potential common shares (totaling approximately 1,387,400 shares as of September 30, 2011, and approximately 1,305,900 shares as of September 30, 2010) would be to decrease loss per share.

A reconciliation of historical basic and diluted weighted average number of shares outstanding retroactively adjusted for the Reverse Stock Split follows:

Three Months Ended 2010
Nine Months Ended 2010
Basic and diluted weighted average number
of shares outstanding
Pre-split
40,138,324 38,947,435
Post-split
8,027,665 7,789,487
Note 2. Property and Equipment:
Property and equipment consisted of the following:

September 30,
2011
(Unaudited)
December 31,
2010
Land and improvements
$ 1,107,508 $ 1,107,508
Building
2,589,231 2,589,231
Building improvements
251,049 235,946
Laboratory equipment
1,175,047 1,207,241
Office and computer equipment
393,770 378,431
5,516,605 5,518,357
Less accumulated depreciation
2,626,719 2,411,223
$ 2,889,886 $ 3,107,134

7
Note 3. Other Long Term Assets:
Other long term assets consisted of the following:

September 30,
2011
(Unaudited)
December 31,
2010
Patents and trademarks and applications, net of
accumulated amortization of $257,106 and $190,829, respectively
$
1,349,202
$
1,342,737
Goodwill
387,239
387,239
Other
11,093
15,374
$
1,747,534
$
1,745,350
The Company capitalizes legal costs and filing fees associated with obtaining and maintaining patents on its new discoveries. Once the patents have been issued, the Company amortizes these costs over the shorter of the legal life of the patent or its estimated economic life using the straight-line method. Based upon the current status of the above intangible assets, the aggregate amortization expense is estimated to be approximately $75,000 for each of the next five fiscal years.
Note 4. Notes and Other Obligations:
Notes payable and other obligations consisted of the following:
September 30,
2011
(Unaudited)
December 31,
2010
Mortgage notes
$
2,572,734
$
2,653,737
Other short-term installment obligations
328,618
166,806
2,901,352
2,820,543
Less current portion
(439,574
)
(273,861
)
$
2,461,778
$
2,546,682
Mortgage notes:
The Company has a mortgage facility on its land and building. The mortgage is held by a commercial bank and includes approximately 35% that is guaranteed by the U. S. Small Business Administration (the “SBA”). The loan is collateralized by the real property and is also personally guaranteed by a stockholder of the Company. The interest rate on the bank portion is one percentage over the Wall Street Journal Prime Rate (minimum 7%), with 7% being the approximate effective rate, and the SBA portion bears interest at the rate of 5.86%. The commercial bank portion of the loan requires total monthly payments of approximately $14,200, which includes approximately $9,800 per month in contractual interest through June 2013 when the then remaining principal balance is due and which is estimated to be approximately $1,607,000 at that time. The SBA portion of the loan requires total monthly payments of approximately $9,200 through July 2023, which includes approximately $4,400 per month in contractual interest and fees.

Future maturities:
The Company’s debt obligations require minimum annual principal payments of approximately $149,000 for the remainder of 2011, $320,000 in 2012, $1,669,000 in 2013, $65,000 in 2014, $68,000 in 2015, and $630,000 thereafter, through the terms of the agreements.  The Company’s Exclusive License Agreement with The Washington University ( “ WU ” ) also requires minimum annual royalty payments of $20,000 per year during its term.

Note 5. Stockholders’ Equity:

Upon the completion of the 2011 annual stockholders meeting on July 8, 2011 where such actions were approved, the Board of Directors approved an amendment to the Company’s Articles of Incorporation to reduce the authorized common shares from 60 million to 30 million.  The approval also authorized the Reverse Stock Split of the Company’s common stock that the Board implemented as of July 29, 2011.  All historical common stock and per share amounts in this Quarterly Report on Form 10-Q reflect the Reverse Stock Split.

During the nine months ended September 30, 2011, there were no exercises of stock options.  During the nine months ended September 30, 2010, advisors exercised options under the Company’s 2002 Stock Incentive Plan to purchase 52,209 shares of common stock generating $291,028 in cash proceeds to the Company.
8
In May 2010, the Company completed a registered direct offering consisting 481,928 “Units” for a negotiated price of $20.75 per Unit, generating approximately $9,117,000 in net proceeds to the Company.  Fees and expenses totaled $883,000, including a placement fee of 6.5%.  Each Unit consisted of one share of the Company’s no par value common stock and one warrant to purchase 0.285 shares of common stock. Accordingly, a total 481,928 common shares and warrants to purchase 137,349 shares were issued.  The exercise price of the warrants was $24.10 per common share and the warrants were exercisable upon issuance for an eight month term and expired in January 2011.

Note 6. Stock Options and Warrants:
Stock options:

The Company currently provides stock-based compensation to employees, directors and consultants under the Company’s 2002 Stock Incentive Plan, as amended (Plan).  In July 2011, the Company’s shareholders approved an amendment to the Plan to increase the number of shares reserved under the Plan from 1,360,000 to 1,500,000. The Company estimates the fair value of the share-based awards on the date of grant using the Black-Scholes option-pricing model (the “Black-Scholes model”).  Using the Black-Scholes model, the value of the award that is ultimately expected to vest is recognized over the requisite service period in the statement of operations.  Option forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The Company attributes compensation to expense using the straight-line single option method for all options granted.
The Company’s determination of the estimated fair value of share-based payment awards on the date of grant is affected by the following variables and assumptions:
▪
The grant date exercise price – the closing market price of the Company’s common stock on the date of the grant;
▪
Estimated option term – based on historical experience with existing option holders;
▪
Estimated dividend rates – based on historical and anticipated dividends  over the life of the option;
▪
Term of the option – based on historical experience, grants have lives of approximately 3-5 years;
▪
Risk-free interest rates – with maturities that approximate the expected life of the options granted;
▪
Calculated stock price volatility – calculated over the expected life of the options granted, which is calculated based on the daily closing price of the Company’s common stock over a period equal to the expected term of the option; and
▪
Option exercise behaviors – based on actual and projected employee stock option exercises and forfeitures.
The Company utilized assumptions in the estimation of fair value of stock-based compensation for the nine months ended September 30, as follows:
2011
2010
Dividend yield
0%
0%
Expected price volatility
119 to 120%
110 to 116%
Risk free interest rate
1.32 to 2.14%
1.60 to 2.62%
Expected term
5 years
5 years
The Company recognized total expenses for stock-based compensation during the periods ended September 30, as follows:

Three Months Ended
Nine Months Ended
2011
2010
2011
2010
Stock options to employees and directors
$ 300,632 $ 493,778 $ 910,075 $ 1,614,116
Stock options to consultants for:
Animal health activities
7,190 16,003 21,570 154,167
AppyScore activities
16,995 17,993 51,321 17,993
Investor relations activities
20,227 — 37,083 61,174
Total stock-based compensation
$ 345,044 $ 527,774 $ 1,020,049 $ 1,847,450

9
The above expenses are included in the accompanying Statements of Operations for the periods ended September 30, in the following categories:
Three Months Ended
Nine Months Ended
2011
2010
2011
2010
Selling, general and administrative expenses
$ 328,049 $ 527,774 $ 968,728 $ 1,847,450
Research and development expenses
16,995 — 51,321 —
Total stock-based compensation
$ 345,044 $ 527,774 $ 1,020,049 $ 1,847,450
A summary of stock option activity under the Company’s Plan for options to employees, officers, directors and consultants, for the nine months ended September 30, 2011, is presented below:
Shares
Underlying
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Outstanding at January 1, 2011
1,103,358
$
10.60
Granted
313,600
3.19
Exercised
—
—
Forfeited
(122,560
)
8.44
Outstanding at September 30, 2011
1,294,398
$
8.98
7.0
$
6,000
Exercisable at September 30, 2011
752,109
$
11.03
5.7
$
—
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on September 30, 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders been able to, and in fact had, exercised their options on September 30, 2011.
During the nine months ended September 30, 2011, 313,600 stock options were granted under the Plan to employees, officers, directors, and consultants with a weighted average fair value at the grant date of $3.19 per option. Included in the 313,600 options issued, existing directors and officers were granted a total of 245,000 options at an exercise price of $3.17 per share and existing employees were granted 25,900 options at an exercise price of $3.05 per share, all vesting over a three-year period annually in arrears and expiring in ten years.  Four newly hired employees were granted a total of 2,700 options at $3.31 per share, all vesting over a three-year period annually in arrears and expiring in ten years.  The Company also issued 40,000 non-qualified options to a consultant at an exercise price of $3.40 per share which expire in ten years.   These non-qualified options are performance related with vesting tied to achieving specific AppyScore™ clinical and regulatory milestones.

During the nine months ended September 30, 2011, a total of 122,560 options that were granted under the Plan were forfeited, 68,033 of which were vested and 54,527 which were unvested.  The options were exercisable at an average of $8.44 per share and were forfeited upon the employees’ terminations from the Company.  During the nine months ended September 30, 2011, no options were exercised.

During the nine months ended September 30, 2010, 279,000 stock options were granted under the Plan to employees, officers, directors and consultants exercisable at the then market price which averaged $10.70 per share, a weighted average fair value at the grant date of $8.55 per option. Existing directors and officers were granted a total of 135,000 options at $11.00 per share and existing employees were granted 23,700 options at $10.95 per share, all vesting over a three-year period annually in arrears and expiring in ten years.  The Company also issued 80,000 options to a newly hired officer exercisable at $11.40 per share which vest over a three-year period annually in arrears and expire in ten years.  Out of the 80,000 options, vesting of 20,000 options was accelerated, under their terms when performance achievements were reached.  One consultant was granted 8,000 options at $10.20 per share vesting in equal amounts after six months, twelve months, twenty-four months and thirty-six months from the date of grant and expiring in ten years.  A second consultant was granted 10,000 options at $11.15 per share vested at the grant date and expiring in five years.  Two additional consultants were granted a total of 16,000, 8,000 to each consultant, at $5.20 per share vesting in equal amounts after six months, twelve months, twenty-four months and thirty-six months from the date of grant and expiring in ten years.  Five newly-hired employees were granted a total of 6,300 options at an average exercise price of $8.45 per share, all vesting over a three-year period annually in arrears and expiring in ten years.

10
During the nine months ended September 30, 2010, advisors exercised 52,209 options outstanding under the Company’s Plan generating $291,028 in cash and which had an intrinsic value when exercised of $371,130.  During the nine months ended September 30, 2010, a total of 6,860 options were forfeited, 2,000 of which were vested and 4,860 were unvested.  The options were exercisable at an average of $11.45 per share and were forfeited upon the employees’ terminations from the Company.

The total fair value of stock options granted to employees, officers, directors and consultants that vested and became exercisable during the nine months ended September 30, 2011 and 2010, was $1,977,000 and $2,222,000, respectively.  Based upon the Company’s experience, approximately 85% of the outstanding stock options, or approximately 1,100,000 options, are expected to vest in the future, under their terms.
A summary of the activity of non-vested options granted to employees under the Company’s Plan to acquire common shares, directors and consultants during the nine months ended September 30, 2011, is presented below:
Nonvested Shares
Nonvested
Shares
Underlying
Options
Weighted
Average
Exercise
Price
Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 2011
506,063
$
10.80
$
8.33
Granted
313,600
3.19
2.64
Vested
(222,847
)
11.99
8.87
Forfeited
(54,527
)
7.95
7.10
Nonvested at September 30, 2011
542,289
$
6.14
$
4.94
At September 30, 2011, based upon employee, officer, director and consultant options granted to that point, there was approximately $1,395,000 of additional unrecognized compensation cost related to stock options that will be recorded over a weighted average future period of approximately two years.

Other common stock purchase options and warrants:

As of September 30, 2011, in addition to the stock options discussed above, the Company had outstanding 93,000 non-qualified options and warrants in connection with an officer’s employment and investor relation consulting services.

The Company utilized assumptions in the estimation of fair value of stock-based compensation for the nine month periods ended September 30, 2011 and 2010 as follows:
2011
2010
Dividend yield
0%
0%
Expected price volatility
119 to 145%
128 to 130%
Risk free interest rate
1.20 to 1.95%
1.26 to 1.70%
Contractual term
3-10 years
3 years

Operating expenses for the three months ended September 30, 2011 and 2010 include $29,000 and $0, respectively, for the value of the non-qualified options and warrants.  Operating expenses for the nine months ended September 30, 2011 and 2010 include $62,000 and $61,000, respectively, for the value of the non-qualified options and warrants.

11
Following is a summary of such outstanding options and warrants for the nine months ended September 30, 2011:
Shares
Underlying
Options/
Warrants
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Outstanding at January 1, 2011
182,855
$
25.15
Granted
70,000
4.00
Exercised
—
—
Forfeited
(159,855
)
26.54
Outstanding at September 30, 2011
93,000
$
6.83
5.0
$
—
Exercisable at September 30, 2011
38,000
$
11.32
1.5
$
—
During the nine months ended September 30, 2011, the Company hired a Vice President of Marketing and Business who previously had a consulting relationship with the Company.  As part of the employment arrangement, the Board approved an employment-inducement grant made outside of the Company’s Stock 2002 Incentive Plan, and he was granted 40,000 options for services which are exercisable at $3.25 per share. The options vest equally over a three year period on the first, second and third anniversary of the grant date and expire in ten years. Also, during the nine months ended September 30, 2011, an investor relations firm was granted 30,000 warrants to purchase shares of common stock which are scheduled to vest at 2,500 shares per month over the twelve months from the date of grant and are exercisable at $5.00 per share and expire in three years. During the nine months ended September 30, 2011, 22,506 investor relations consultant options were forfeited of which 9,000 were exercisable at $60.00 per share, 7,506 options were exercisable at $30.05 per share, and 6,000 options were exercisable at $27.85 per share.  In addition 137,349 warrants granted at $24.10 per share in connection with the 2010 public registered direct offering expired.

The total fair value of stock options granted to an investor relations consulting firm that vested and became exercisable during the nine months ended September 30, 2011 was $40,454.

A summary of the activity of non-vested, non-qualified options and warrants in connection with employment and investor relations consulting services during the nine months ended September 30, 2011, is presented below:

Nonvested Shares
Nonvested
Shares
Underlying
Options
Weighted
Average
Exercise
Price
Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 2011
—
$
—
$
—
Granted
70,000
4.00
2.69
Vested
(15,000
)
5.00
2.70
Forfeited
—
—
—
Nonvested at June 30, 2011
55,000
$
3.73
$
2.69

At September 30, 2011, there was approximately $126,000 in unrecognized cost for non-qualified options and warrants that will be recorded over a weighted average future period of approximately one year.
Subsequent to September 30, 2011, 4,000 investor relations options expired which were exercisable at $27.85 per share.
Note 7. Concentrations, Commitments and Contingencies:
Customer concentration:
At September 30, 2011, two customers accounted for 72% and 21% of total accounts receivable.   For the nine months ended September 30, 2011, four customers represented more than 10% of the Company’s sales, accounting for approximately 20%, 17%, 11% and 10% respectively, of the sales for the period.  For the three months ended September 30, 2011, four customers represented more than 10% of the Company’s sales, accounting for approximately 42%, 18%, 14% and 12% respectively, of the sales for the period. At December 31, 2010, two customers accounted for 63% and 20% of total accounts receivable.  For the nine months ended September 30, 2010, three customers represented more than 10% of the Company’s sales, accounting for approximately 23%, 15%, and 14%, respectively, of the sales for the period.  For the three months ended September 30, 2010, three customers represented more than 10% of the Company’s sales, accounting for approximately 45%, 15% and 14%, respectively, of the sales for the period.
12
Commitments:
Novartis Animal Health -
In April 2008, the Company entered into a long-term exclusive license and commercialization agreement with Novartis Animal Health, Inc. (“Novartis” or “ NAH ” ), to develop certain animal health products under the Company's animal health intellectual property (the “ NAH License Agreement”). The Company received an upfront cash payment of $2,000,000 under the license agreement with NAH, of which 50% was non-refundable upon signing the agreement, and the balance of which was subject to certain conditions. In 2010, the conditions associated with $100,000 of such milestones were satisfied. NAH has the right to request a refund of the $900,000 remaining milestone payment and/or terminate the agreement if the pilot study (as defined in the agreement) was not successful. This pilot study was completed during late 2010. NAH informed the Company that preliminary pilot study results revealed failure of the pilot study to demonstrate the outcomes as defined in the success criteria, and NAH requested a refund of the $900,000 milestone payment. The Company is currently in negotiations to resolve all outstanding issues under the license agreement, and related development agreement, with NAH. As a result of such negotiations, the Company expects that it will be making payments, on a designated payment schedule, to NAH, including the $900,000 remaining milestone payment, plus an amount under the Company's cost-sharing obligations under the license agreement and development agreement.  During the nine months ended September 30, 2011, the remaining unachieved milestone payment of $900,000 has been reclassified from the current portion of deferred revenue into accrued expenses as a current liability.

In 2004, the Company entered into an agreement with WU, under which the Company obtained exclusive proprietary rights to WU’s patent portfolio for use in the animal health industry.  The Exclusive License Agreement (the “WU License Agreement”) was entered into effective May 1, 2004, and grants AspenBio an exclusive license and right to sublicense WU’s technology (as defined under the WU License Agreement) for veterinary products worldwide, except where such products are prohibited for export under U.S. laws. The term of the WU License Agreement continues until the expiration of the last of WU’s licensed patents expire. AspenBio has agreed to pay minimum annual royalties of $20,000 during the term of the WU License Agreement and such amounts are creditable against future royalties.  Royalties payable to WU under the WU License Agreement for covered product sales by AspenBio carry a mid-single digit royalty rate, and for sublicense fees received by AspenBio, carry a low double-digit royalty rate.  The WU License Agreement contains customary terms for confidentiality, prosecution and infringement provisions for licensed patents, publication rights, indemnification and insurance coverage.  The WU License Agreement is cancelable by AspenBio with ninety days advance notice at any time and by WU with sixty days advance notice if AspenBio materially breaches the WU License Agreement and fails to cure such breach.  Under the terms of the WU License Agreement, a portion of license fees and royalties AspenBio receives from sublicensing agreements will be paid to WU. The obligation for such front end fees, totaling $440,000, was recorded upon receipt of the Novartis license fees and, in 2008, $190,000 was paid to WU.
Revenue recognition related to the NAH License Agreement and WU Agreement is based primarily on the Company’s consideration of Accounting Standards Codification No. 808-10-45 (EITF 07-1), “ Accounting for Collaborative Arrangements ”, paragraphs 16-20.  For financial reporting purposes, the up-front license fees received from the NAH License Agreement, net of the amounts due to WU, have been recorded as deferred revenue and are amortized over the term of the NAH License Agreement.  Milestone revenue was recognized into income commencing with the date such milestones are achieved. During the year ended December 31, 2010, milestones totaling $100,000 were achieved, triggering the commencement of amortization of $100,000 of deferred revenue. As of September 30, 2011, deferred revenue of $71,062 has been classified as a current liability and $580,339 has been classified as a long-term liability. The current liability includes the next twelve months’ portion of the amortizable milestone revenue.   During the nine months ended September 30, 2011 and 2010, $53,297 and $50,629, respectively, was recorded as the amortized license fee revenue arising from the NAH License Agreement.
A tabular summary of the milestone categories and amounts of deferred revenue/revenue recognition follows:

Category
Non-refundable
Milestone Contingent
Totals
Prepaid by NAH
$
1,000,000
$
1,000,000
$
2,000,000
Due to WU
$
(190,000
)
$
(250,000
)
$
(440,000
)
Net carrying amounts at signing
$
810,000
$
750,000
$
1,560,000
Milestones achieved in 2010
$
100,000
$
(100,000
)
$
-
Reclassification
$
-
(750,000
)
$
(750,000
)
Revenue amortization to September 30, 2011
$
(233,599
)
$
-
$
(233,599
)
Net carrying amounts at September 30, 2011
$
651,401
$
-
$
651,401
Commencement of revenue recognition
Upon signing / milestone achievement
N/A
Original amortization period
152 months
N/A


13
Other Commitments -
As of September 30, 2011, the Company has employment agreements with four officers providing aggregate annual minimum commitments totaling $875,000.  The agreements automatically renew at the end of each year unless terminated by either party and contain customary confidentiality and benefit provisions.

On October 15, 2011, Mr. Bennett resigned as an employee of the Company and from his officer position as Senior Vice President, Product Development and Manufacturing, and both parties mutually agreed to terminate, effective October 15, 2011, Mr. Bennett’s employment agreement which provided an annual minimum commitment of $225,000. The Company and Mr. Bennett have entered into a consulting agreement, with a minimum three-month term providing compensation of $5,000 per month, under which Mr. Bennett will provide transition services to the Company.

Contingencies:
On September 1, 2010, the Company received a complaint, captioned Mark Chipman v. AspenBio Pharma, Inc. , Case No. 2:10-cv-06537-GW-JC. The complaint was filed in the United States District Court in the Central District of California by an individual investor. The complaint includes allegations of fraud, negligent misrepresentation, violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10b-5, and violations of Sections 25400 and 25500 of the California Corporations Code, all related to the Company's blood-based acute appendicitis test in development known as AppyScore. On the Company's motion, the action was transferred to the U.S. District Court for the District of Colorado by order dated January 21, 2011. The action has been assigned a District of Colorado Civil Case No. 11-cv-00163-REB-KMT. On September 7, 2011, the plaintiff filed an amended complaint. Based on a review of the amended complaint, the Company believes that the plaintiff's allegations are without merit, and intends to vigorously defend against these claims. On October 7, 2011, the Company filed a motion to dismiss the amended complaint. The motion is currently pending with the plaintiff's response due on November 21, 2011.
On October 1, 2010, the Company received a complaint, captioned John Wolfe, individually and on behalf of all others similarly situated v. AspenBio Pharma, Inc. et al., Case No. CV10 7365. This federal securities purported class action was filed in the United States District Court in the Central District of California on behalf of all persons, other than the defendants, who purchased common stock of the Company during the period between February 22, 2007 and July 19, 2010, inclusive. The complaint names as defendants certain officers and directors of the Company during such period. The complaint includes allegations of violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 against all defendants, and of Section 20(a) of the Exchange Act against the individual defendants, all related to the Company's blood-based acute appendicitis test in development known as AppyScore. On the Company's motion, this action was also transferred to the U.S. District Court for the District of Colorado by order dated January 21, 2011. The action has been assigned a District of Colorado Civil Case No. 11-cv-00165-REB-KMT. On July 11, 2011, the court appointed a lead plaintiff and approved lead counsel. On August 23, 2011, the lead plaintiff filed an amended putative class action complaint, alleging the same class period. Based on a review of the amended complaint, the Company and the individual defendants believe that the plaintiffs' allegations are without merit and intend to vigorously defend against these claims. On October 7, 2011, the Company filed a motion to dismiss the amended complaint. The motion is currently pending with the plaintiffs' response due on November 21, 2011.
On January 4, 2011, a plaintiff filed a complaint in the U.S. District Court for the District of Colorado captioned Frank Trpisovsky v. Pusey, et al ., Civil Action No. 11-cv-00023-PAB-BNB, that purports to be a shareholder derivative action on behalf of the Company against thirteen individual current or former officers and directors. The complaint also names the Company as a nominal defendant. The plaintiff asserts violations of Section 14(a) of the Exchange Act, SEC Rule 14a-9, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. On motion of the Company and the individual defendants, the U.S. District Court has stayed this derivative action by order dated March 15, 2011, and this action continues to be stayed. The Company believes that the plaintiff lacks standing to proceed with this action and intends to challenge the plaintiff's standing if and when the stay is lifted.
14
In the ordinary course of business and in the general industry in which the Company is engaged, it is not atypical to periodically receive a third party communication which may be in the form of a notice, threat, or ‘cease and desist’ letter concerning certain activities. For example, this can occur in the context of the Company’s pursuit of intellectual property rights. This can also occur in the context of operations such as the using, making, having made, selling, and offering to sell products and services, and in other contexts. The Company intends to make a rational assessment of each situation on a case-by-case basis as such may arise. The Company periodically evaluates its options for trademark positions and considers a full spectrum of alternatives for trademark protection and product branding.
Note 8. Subsequent Events:

The Company has evaluated subsequent events in accordance with ASC Topic 855 and has determined that there are no reportable subsequent events.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements in Management’s Discussion and Analysis and other portions of this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. These statements relate to future events or the Company’s future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of the Company or its industry to be materially different from those expressed or implied by any forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or other comparable terminology. Please see the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2010, as amended, for a discussion of certain important factors that relate to forward-looking statements contained in this report. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Results of Operations:
Comparative Results for the Nine Months Ended September 30, 2011 and 2010
Sales of the Company’s antigen products for the nine months ended September 30, 2011 totaled $175,000, which is a $107,000 or 38% decrease from the 2010 period. The decrease in sales is primarily attributable to the Company’s strategic decision to suspend antigen production in 2010 and focus available scientific resources on the appendicitis product development.
In April 2008, the Company entered into a long term exclusive license and commercialization agreement with Novartis to develop and launch the Company’s novel recombinant single-chain products for bovine species. The total payments received under this agreement were recorded as deferred revenue and are being recognized over future periods, with approximately $53,000 and $51,000 of such license fee recognized in each of the nine months ended September 30, 2011 and 2010.
Cost of sales for the nine months ended September 30, 2011 totaled $16,000 which is a $234,000 or 94% decrease as compared to the 2010 period. As a percentage of sales, gross profit in the nine months ended September 30, 2011 was 91% as compared to gross profit of 11% in the 2010. The improvement in the gross profit percentage resulted from inventory write downs recorded in 2010 and no fixed production costs incurred in the 2011 period.
Selling, general and administrative expenses in the nine months ended September 30, 2011 totaled $4,370,000, which is a $1,564,000 or 26% decrease as compared to the 2010 period. Total stock-based compensation and non-qualified option expenses decreased $861,000 in the 2011 period, primarily due to fewer options being granted combined with lower computed Black-Scholes values attributable to the options granted. Additionally, compensation expenses decreased $301,000 in 2011 due to a reduced amount accrued for incentive pay for the 2011 period. Expenses associated with public company activities were approximately $306,000 lower in the 2011 period.

Research and development expenses in the 2011 period totaled $4,373,000, which is a $25,000 or 1% decrease as compared to the 2010 period. The completion of the Enzyme Linked Immunosorbant Assay (ELISA) based appendicitis clinical trial in mid-2010 resulted in a $1,263,000 decrease which was offset by $751,000 in AppyScore 2011 pilot which included $185,000 in trial costs incurred for the nine months ended September 30, 2011.  Current efforts related to the appendicitis test development and research increased expenses by approximately $395,000 compared to the 2010 period.  Expenses incurred for the single-chain animal product development decreased by approximately $169,000 in the 2011 period.  Research and development expenses increased by $182,000 in salaries expense primarily related to activities on the appendicitis test and discovery work. In addition, a $103,000 increase in patent impairment costs related to specific patents that we are no longer pursuing.
Primarily as a result of lower average cash and investment balances in 2011 as compared to 2010, interest income of approximately $25,000 was earned in 2011 as compared to $104,000 in 2010.

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

15
Comparative Results for the Three Months Ended September 30, 2011 and 2010

Sales for the three months ended September 30, 2011 totaled $22,000, which is a $58,000 or 72% decrease from the 2010 period. The decrease in sales is primarily attributable to the Company’s strategic decision to suspend antigen production in 2010 and focus available scientific resources on the appendicitis product development.

In April 2008, the Company entered into a long term exclusive license and commercialization agreement to develop and launch the Company’s novel recombinant single-chain bovine products. The total payments received under this agreement were recorded as deferred revenue and will be recognized in the future, with $18,000 of such license fee recognized in each of the respective three month periods ended September 30, 2011 and 2010.

Cost of sales for the three months ended September 30, 2011 totaled less than $1,000, which is a $150,000 decrease as compared to the 2010 period. As a percentage of sales, gross profit was 98% in the 2011 period as compared to gross loss of 87% in the 2010 period. The improvement in the gross profit percentage resulted from inventory write downs in 2010 and no fixed production cost incurred in the 2011 period.
Selling, general and administrative expenses in the three months ended September 30, 2011 totaled $1,406,000, which is a $526,000 or 27% decrease as compared to the 2010 period. Total stock-based compensation and non-qualified option expenses decreased $173,000 in the 2011 period, primarily due to fewer options being granted combined with lower computed Black-Scholes values attributable to the options granted.  Legal expense decreased $78,000 in the 2011 period as costs up to the policy deductible levels were paid in 2010.  Additionally, compensation expenses decreased $70,000, which was net of a $24,000 increase in 2011 incentive pay accrual.  Expenses associated with public company activities were approximately $159,000 lower in the 2011 period.

Research and development expenses in the three months ended September 30, 2011 totaled $1,645,000, which is a $602,000 or 58% increase as compared to the 2010 period.  The ELISA-based appendicitis clinical was substantially completed in the second quarter of 2010 while in 2011 $507,000 in AppyScore pilot trial costs were incurred for the three months ended September 30, 2011.  Current efforts related to the appendicitis test development and discovery research increased expenses by approximately $140,000 compared to the 2010 period.  Expenses incurred for the single-chain animal product development decreased by approximately $82,000 in the 2011 period.  Research and development expenses increased by $118,000 in salary expense primarily related to the focus on the appendicitis test.
Primarily as a result of the lower levels of cash and reduced investment balances in 2011 as compared to 2010, interest income of approximately $6,000 was earned in 2011 as compared to $65,000 in 2010.
Liquidity and Capital Resources

At September 30, 2011, we had working capital of $2,016,000, which included cash, cash equivalents and short term investments of $4,793,000.  We reported a net loss of $8,657,000 during the nine months ended September 30, 2011, which included $1,441,000 in non-cash expenses including stock-based compensation of $1,020,000.

Currently, our primary focus is to continue the development activities on our acute appendicitis diagnostic test, including advancement of such test with the FDA, and achieve value out of our of animal health single-chain products.

We expect to continue to incur losses from operations for the near-term and these losses could be significant as we incur product development, contract consulting and other product development related expenses. We are closely monitoring our cash balances, cash needs and expense levels.  We are likely to need to generate additional capital within the next twelve months.  We have recently filed a shelf registration statement that could facilitate a funding and also are exploring alternative methods of raising cash.  We believe that our current working capital position will be sufficient to meet our estimated cash needs for the remainder of 2011.  Our investments are maintained in short term, high quality investment instruments, to ensure we have ready access to cash as needed.  The accompanying financial statements do not include any adjustments that might result from the outcome of this funding uncertainty.

Capital expenditures, primarily for production, laboratory and facility improvement costs for the fiscal year ending December 31, 2011 are anticipated to total $50,000 to $100,000. We anticipate these capital expenditures to be financed through working capital.

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We anticipate that expenditures for research and development for the fiscal year ending December 31, 2011 will be in line with the amounts expended in 2010.  Development and testing costs in support of the current pipeline products as well as costs to file patents and revise and update previous filings on our technologies will continue to be substantial. Our principal development products consist of the AppyScore test and the single-chain animal-health hormone products. As we continue towards commercialization of these products, including evaluation of alternatives for possible product management and distribution alternatives and implications of product manufacturing and associated carrying costs such evaluation and related decisions will impact our future capital needs. Certain costs such as manufacturing and license / royalty agreements have different financial, logistical and operational implications depending upon the ultimate strategic commercialization path determined.
We expect that our primary development expenditures will be to continue to advance product development and testing of the cassette and instrument version of AppyScore. During the nine months ended September 30, 2011 and 2010, we expended approximately $2,332,000 and $2,842,000, respectively, in direct costs for the acute appendicitis test development and related efforts. Steps to achieve commercialization of the acute appendicitis product will be an ongoing and evolving process with subsequent generations and expected improvements being made in the test. Should we be unable to achieve FDA clearance of the AppyScore appendicitis  test and generate revenues from the product, we would need to rely on other product opportunities to generate revenues and costs that we have incurred for the acute appendicitis patent may be deemed impaired.
In April 2008, the Company entered into a long-term exclusive license and commercialization agreement with NAH, to develop certain animal health products under the Company's animal health intellectual property. The Company received an upfront cash payment of $2,000,000 under the license agreement with NAH, of which 50% was non-refundable upon signing the agreement, and the balance of which was subject to certain conditions. In 2010, the conditions associated with $100,000 of such milestones were satisfied. NAH has the right to request a refund of the $900,000 remaining milestone payment and/or terminate the agreement if the pilot study (as defined in the agreement) was not successful. This pilot study was completed during late 2010. NAH informed the Company that preliminary pilot study results revealed failure of the pilot study to demonstrate the outcomes as defined in the success criteria, and NAH requested a refund of the $900,000 milestone payment. The Company is currently in negotiations to resolve all outstanding issues under the license agreement, and related development agreement, with NAH. As a result of such negotiations, the Company expects that it will be making payments, on a designated payment schedule, to NAH, including the $900,000 remaining milestone payment, plus an amount under the Company's cost-sharing obligations under the license agreement and development agreement.  During the nine months ended September 30, 2011, the remaining unachieved milestone payment of $900,000 has been reclassified from the current portion of deferred revenue into accrued expenses as a current liability.
The NAH License Agreement contains customary terms for confidentiality, prosecution and infringement provisions for the license patent rights, indemnification and insurance coverage.  The NAH License Agreement is cancelable by NAH on 180 days advance notice; immediately if a change in control transaction occurs and NAH’s rights are not accommodated in good faith by the successor entity; or on 30 days notice on a country-by-country basis in the event designated legal or regulatory issues arise.  AspenBio can terminate the agreement immediately if NAH challenges the validity or enforceability of licensed patent rights or other licensed intellectual property.  Either party may terminate if the other party materially breaches the NAH License Agreement, and fails to cure such breach, becomes insolvent or if either party disposes of substantially all of the assets necessary for its performance under the terms of the agreement.  In the event there is a change of ownership in AspenBio, NAH may choose to assume all obligations under the agreement and generally remit net excess royalty amounts to the successor entity.

In 2004, the Company entered into an agreement with WU, under which the Company obtained exclusive proprietary rights to WU’s patent portfolio for use in the animal health industry.  The WU License Agreement between AspenBio and WU was entered into effective May 1, 2004, and grants AspenBio an exclusive license and right to sublicense WU’s technology (as defined under the WU License Agreement) for veterinary products worldwide, except where such products are prohibited for export under U.S. laws.   The term of the WU License Agreement continues until the expiration of the last of WU’s patents (as defined in the WU License Agreement) to expire.  AspenBio has agreed to pay minimum annual royalties of $20,000 during the term of the WU License Agreement and such amounts are creditable against future royalties.  Royalties payable to WU under the WU License Agreement for covered product sales by AspenBio carry a mid-single digit royalty rate and sublicense fees received by AspenBio, carry a low double-digit royalty rate.  The WU License Agreement contains customary terms for confidentiality, prosecution and infringement provisions for licensed patents, publication rights, indemnification and insurance coverage.  The WU License Agreement is cancelable by AspenBio with ninety days advance notice at any time and by WU with sixty days advance notice if AspenBio materially breaches the WU License Agreement and fails to cure such breach.  Under the terms of the WU License Agreement, a portion of license fees and royalties AspenBio receives from sublicensing agreements will be paid to WU. The obligation for such front end fees, totaling $440,000, was recorded upon receipt of the Novartis license fees and, in 2008; $190,000 was paid to WU.
For financial reporting purposes, the up-front license fees received from the NAH License Agreement, net of the amounts due to WU, have been recorded as deferred revenue and are amortized over the term of the NAH License Agreement.  Milestone revenue is or will be recognized into income commencing with the date such milestones are achieved. During the year ended December 31, 2010, milestones totaling $100,000 associated with NAH's evaluation of additional products were achieved, triggering the commencement of amortization of $100,000 of deferred revenue.  As of September 30, 2011, deferred revenue of $71,000 has been classified as a current liability and $580,000 has been classified as a long-term liability. The current liability includes the next twelve months’ portion of the amortizable milestone revenue.   During each of the nine months ended September 30, 2011 and 2010, approximately $53,000 and $51,000 was recorded as the amortized license fee revenue arising from the NAH License Agreement.
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We have entered and expect to continue to enter into additional agreements with contract manufacturers for the development / manufacture of certain of our products for which we are seeking FDA approval. The goal of this development process is to establish current good manufacturing practices (cGMP) required for those products for which we are seeking FDA approval. These development and manufacturing agreements generally contain transfer fees and possible penalty and /or royalty provisions should we transfer our products to another contract manufacturer. We expect to continue to evaluate, negotiate and execute additional and expanded development and manufacturing agreements, some of which may be significant commitments during 2011. We may also consider acquisitions of development technologies or products, should opportunities arise that we believe fit our business strategy and would be appropriate from a capital standpoint.
The Company periodically enters into generally short-term consulting and development agreements primarily for product development, testing services and in connection with clinical trials conducted as part of the Company’s FDA clearance process. Such commitments at any point in time may be significant but the agreements typically contain cancellation provisions.
We have a permanent mortgage facility on our land and building that commenced in July 2003. The mortgage is held by a commercial bank and includes a portion guaranteed by the U. S. Small Business Administration. The loan is collateralized by the real property and is also personally guaranteed by a stockholder (our former president). The interest rate on the bank portion is one percentage over the Wall Street Journal Prime Rate (minimum 7%), with 7% being the approximate effective rate, and the SBA portion bears interest at the rate of 5.86%. The commercial bank portion of the loan requires total monthly payments of approximately $14,200, which includes approximately $9,800 per month in contractual interest, through June 2013 when the then remaining principal balance is due which is estimated to be approximately $1,607,000 at that time. The SBA portion of the loan requires total monthly payments of approximately $9,200 through July 2023, which includes approximately $4,400 per month in contractual interest and fees.
In April 2008, the Board authorized a stock repurchase plan to purchase shares of our common stock up to a maximum of $5.0 million. Purchases may be made in routine, open market transactions, when management determines to effect purchases and any purchased shares of common stock are thereupon retired. Management may elect to purchase less than $5.0 million. The repurchase program allows us to repurchase our shares in accordance with the requirements of the Securities and Exchange Commission on the open market, in block trades and in privately negotiated transactions, depending upon market conditions and other factors. A total of approximately 46,400 common shares were purchased and retired in 2008 at a total cost of approximately $992,000.  No repurchases have been made since 2008.
With the recent changes in market conditions, combined with our conservative investment policy and lower average investable balances due to cash consumption, we expect that our investment earnings in 2011 will be lower than in 2010. The Board has approved an investment policy covering the investment parameters to be followed with the primary goals being the safety of principal amounts and maintaining liquidity of the fund. The policy provides for minimum investment rating requirements as well as limitations on investment duration and concentrations. Commencing in the fourth quarter of 2008, based upon market conditions, the investment guidelines were tightened to raise the minimum acceptable investment ratings required for investments and shorten the maximum investment term. Current investment guidelines require investments to be made in investments with minimum ratings purchasing commercial paper with an A1/P1 rating, longer-term bonds with an A- rating or better, a maximum maturity of nine months and a concentration guideline of 10% with no security or issuer representing more than 10% of the portfolio upon purchase.  As of September 30, 2011, 48% of the investment portfolio was in cash equivalents which are included with cash and the remaining funds were invested in short term marketable securities with none individually representing more than 21% of the portfolio and none maturing past September 2012.  To date, we have not experienced a cumulative market loss from the investments that has exceeded $5,000.
Due to recent market events that have adversely affected all industries and the economy as a whole, management has placed increased emphasis on monitoring the risks associated with the current environment, particularly the investment parameters of the short term investments, the recoverability of current assets, the fair value of assets, and the Company’s liquidity. At this point in time, there has not been a material impact on the Company’s assets and liquidity. Management will continue to monitor the risks associated with the current environment and their impact on the Company’s results.
Operating Activities
Net cash consumed by operating activities was $6,415,000 during the nine months ended September 30, 2011. Cash was consumed by the loss of $8,657,000, less non-cash expenses of $1,020,000 for stock-based compensation and $421,000 for depreciation, amortization and impairment charges.  For the nine months ended September 30, 2011, decreases in inventories and accounts receivable associated with lower antigen production and sales generated cash of $85,000. A decrease in prepaid and other current assets of $300,000 provided cash, primarily related to routine changes in operating activities.  A $588,000 increase in accounts payable and accrued expenses generated cash in the nine months ended September 30, 2011, primarily due to the Company’s AppyScore pre-clinical trial.  A decrease of $172,000 in accrued compensation consumed cash, due to a decrease in amounts accrued for incentive pay for the 2011 period.
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Net cash consumed by operating activities was $8,572,000 during the nine months ended September 30, 2010. Cash was consumed by the loss of $10,346,000, less non-cash expenses relating to stock-based compensation totaling $1,847,000 and depreciation, amortization and other totaling $502,000, net of amortized license fee revenues of $51,000.  Included in the 2010 write down of assets is $95,000 in patent impairment costs related to specific patents that we are no longer pursuing and a $103,000 non-cash charge incurred to write down antigen raw material inventory. A decrease in accounts receivable of $9,000 resulting from lower base antigen sales levels provided cash. Inventory levels decreased by $96,000, from net sales activities associated with management’s decision late in 2009 to substantially suspend the production of antigen products as a result of its strategic decision to focus available scientific resources on appendicitis and single-chain animal product development.  A decrease in prepaid and other current assets of $35,000 provided cash.  Cash consumed in operations included a decrease of $716,000 in accounts payable and accrued expenses, primarily due to the decrease in expenses related to the recent completion of the Company’s AppyScore clinical trial.
Investing Activities
Net cash inflows from investing activities generated $282,000 during the nine months ended September 30, 2011. Marketable securities investments acquired totaled approximately $793,000 and sales of marketable securities totaled approximately $1,333,000.  A $258,000 use of cash was attributable to additional costs incurred from capitalized patent filings and equipment additions.
Net cash outflows from investing activities consumed $5,197,000 during the nine months ended September 30, 2010. Net purchases of marketable securities totaled approximately $4,753,000.  A $444,000 use of cash was attributable to additional costs incurred from patent filings and equipment additions.

Financing Activities
Net cash outflows from financing activities consumed $374,000 during the nine months ended September 30, 2011 related to scheduled payments under its debt agreements.
Net cash inflows from financing activities generated $9,325,000 during the nine months ended September 30, 2010. The Company received net proceeds of $9,117,000 from the sale of common stock and $291,000 in proceeds from the exercise of stock warrants and options. The Company repaid $83,000, in scheduled payments under its debt agreements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, impairment analysis of intangibles and stock-based compensation.
The Company’s financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to get a full understanding of the Company’s financial statements, one must have a clear understanding of the accounting policies employed. A summary of the Company’s critical accounting policies follows:

Investments: The Company invests excess cash from time to time in highly liquid debt and equity securities of highly rated entities which are classified as trading securities. Such amounts are recorded at market and are classified as current, as the Company does not intend to hold the investments beyond twelve months. Such excess funds are invested under the Company’s investment policy but an unexpected decline or loss could have an adverse and material effect on the carrying value, recoverability or investment returns of such investments. The Board has approved an investment policy covering the investment parameters to be followed with the primary goals being the safety of principal amounts and maintaining liquidity of the fund. The policy provides for minimum investment rating requirements as well as limitations on investment duration and concentrations.
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Long-Lived Assets: The Company records property and equipment at cost. Depreciation of the assets is recorded on the straight-line basis over the estimated useful lives of the assets. Dispositions of property and equipment are recorded in the period of disposition and any resulting gains or losses are charged to income or expense when the disposal occurs. The carrying value of the Company’s long-lived assets is reviewed at least annually to determine that such carrying amounts are not in excess of estimated market value. Goodwill is reviewed annually for impairment by comparing the carrying value to the present value of its expected cash flows or future value. The required annual testing resulted in no impairment charges being recorded to date.
Revenue Recognition: The Company’s revenues are recognized when products are shipped or delivered to unaffiliated customers. The Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 104, provides guidance on the application of generally accepted accounting principles to select revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with SAB No. 104. Revenue is recognized under development and distribution agreements only after the following criteria are met: (i) there exists adequate evidence of the transactions; (ii) delivery of goods has occurred or services have been rendered; and (iii) the price is not contingent on future activity and collectability is reasonably assured.
Stock-based Compensation: ASC 718 (formerly - SFAS No. 123(R)), Share-Based Payment, defines the fair-value-based method of accounting for stock-based employee compensation plans and transactions used by the Company to account for its issuances of equity instruments to record compensation cost for stock-based employee compensation plans at fair value as well as to acquire goods or services from non-employees. Transactions in which the Company issues stock-based compensation to employees, directors and advisors and for goods or services received from non-employees are accounted for based on the fair value of the equity instruments issued. The Company utilizes pricing models in determining the fair values of options and warrants issued as stock-based compensation. These pricing models utilize the market price of the Company’s common stock and the exercise price of the option or warrant, as well as time value and volatility factors underlying the positions.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
General
AspenBio has limited exposure to market risks from instruments that may impact the Balance Sheets, Statements of Operations, and Statements of Cash Flows, with such exposure associated primarily with changing interest rates on its mortgage notes and investments. Approximately 35% of the total mortgage balance is guaranteed by the SBA. While we periodically expend funds for products and services that are denominated in foreign country currencies we do not have any long term commitments for such purchases.
Investment Interest Rates
The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in diversified short-term interest bearing investments of high grade companies. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.
Item 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of the last day of the period of the accompanying financial statements.    Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of September 30, 2011.
Changes in Internal Control Over Financial Reporting .
There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1.    Legal Proceedings
On September 1, 2010, the Company received a complaint, captioned Mark Chipman v. AspenBio Pharma, Inc ., Case No. 2:10-cv-06537-GW-JC. The complaint was filed in the United States District Court in the Central District of California by an individual investor. The complaint includes allegations of fraud, negligent misrepresentation, violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5, and violations of Sections 25400 and 25500 of the California Corporations Code, all related to the Company's blood-based acute appendicitis test in development known as AppyScore. On the Company's motion, the action was transferred to the U.S. District Court for the District of Colorado by order dated January 21, 2011. The action has been assigned a District of Colorado Civil Case No. 11-cv-00163-REB-KMT. On September 7, 2011, the plaintiff filed an amended complaint. Based on a review of the amended complaint, the Company believes that the plaintiff's allegations are without merit, and intends to vigorously defend against these claims. On October 7, 2011, the Company filed a motion to dismiss the amended complaint. The motion is currently pending with the plaintiff's response due on November 21, 2011.
On October 1, 2010, the Company received a complaint, captioned John Wolfe, individually and on behalf of all others similarly situated v. AspenBio Pharma, Inc . et al., Case No. CV10 7365. This federal securities purported class action was filed in the United States District Court in the Central District of California on behalf of all persons, other than the defendants, who purchased common stock of the Company during the period between February 22, 2007 and July 19, 2010, inclusive. The complaint names as defendants certain officers and directors of the Company during such period. The complaint includes allegations of violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 against all defendants, and of Section 20(a) of the Exchange Act against the individual defendants, all related to the Company's blood-based acute appendicitis test in development known as AppyScore. On the Company's motion, this action was also transferred to the U.S. District Court for the District of Colorado by order dated January 21, 2011. The action has been assigned a District of Colorado Civil Case No. 11-cv-00165-REB-KMT. On July 11, 2011, the court appointed a lead plaintiff and approved lead counsel. On August 23, 2011, the lead plaintiff filed an amended putative class action complaint, alleging the same class period. Based on a review of the amended complaint, the Company and the individual defendants believe that the plaintiffs' allegations are without merit and intend to vigorously defend against these claims. On October 7, 2011, the Company filed a motion to dismiss the amended complaint. The motion is currently pending with the plaintiffs' response due on November 21, 2011.
On January 4, 2011, a plaintiff filed a complaint in the U.S. District Court for the District of Colorado captioned Frank Trpisovsky v. Pusey, et al ., Civil Action No. 11-cv-00023-PAB-BNB, that purports to be a shareholder derivative action on behalf of the Company against thirteen individual current or former officers and directors. The complaint also names the Company as a nominal defendant. The plaintiff asserts violations of Section 14(a) of the Exchange Act, SEC Rule 14a-9, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. On motion of the Company and the individual defendants, the U.S. District Court has stayed this derivative action by order dated March 15, 2011, and this action continues to be stayed. The Company believes that the plaintiff lacks standing to proceed with this action and intends to challenge the plaintiff's standing if and when the stay is lifted.
We are not a party to any other 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.
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Item 1A.  Risk Factors

If any of the following risks actually occur, they could materially adversely affect our business, financial condition or operating results. In that case, the trading price of our common stock could decline.
Risks Related to Our Business
If we fail to obtain FDA clearance, we cannot market certain products in the United States.
Therapeutic or human diagnostic products require FDA approval (or clearance) prior to marketing and sale. This applies to our ability to market, directly or indirectly, our AppyScore acute appendicitis test. As a new product, this test must undergo lengthy and rigorous testing and other extensive, costly and time-consuming procedures mandated by the FDA. In order to obtain required FDA clearance, we may determine to conduct additional specific clinical trials.  This process can take substantial amounts of time and resources to complete. We may elect to delay or cancel our anticipated regulatory submissions for new indications for our proposed new products for a number of reasons. There is no assurance that any of our strategies for obtaining FDA clearance or approval in an expedient manner will be successful, and FDA clearance is not guaranteed. The timing, which cannot be estimated at this point, of such completion, submission and clearance, could also impact our ability to realize market value from such tests. FDA clearance can be suspended or revoked, or we could be fined, based on a failure to continue to comply with those standards. Similar approval requirements and contingencies will also be encountered in a number of major international markets.
FDA approval is also required prior to marketing and sale for therapeutic products that will be used on animals, and can also require considerable time and resources to complete. New drugs for animals must receive New Animal Drug Application approval. This type of approval is required for the use of our therapeutic equine and bovine protein products. The requirements for obtaining FDA approval are similar to that for human drugs and will 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 ongoing FDA requirements.

If we fail to obtain FDA approval for our human diagnostic products or our animal health therapeutic products, we will not be able to market and sell our products in the U.S.  As a result, we would not be able to recover the time and resources spent on research and development of such products.
The successful development of a medical device such as our acute appendicitis test is highly uncertain and requires significant expenditures and time.
Successful development of medical devices is highly uncertain. Products that appear promising in research or development may be delayed or fail to reach later stages of development or the market for several reasons, including failure to obtain regulatory clearance or approval, manufacturing costs, pricing, reimbursement issues, or other factors that may make the product uneconomical to commercialize. In addition, success in pilot trials does not ensure that larger-scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit, or prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. If our large-scale clinical trials for a product are not successful, we will not recover our substantial investments in that product.
Factors affecting our R&D productivity and the amount of our R&D expenses include but are not limited to the number and outcome of clinical trials currently being conducted by us and/or our collaborators.
Clinical trials for our products are expensive and until completed their outcome is uncertain.
Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any products, we or our partners must demonstrate through clinical trials the efficacy of our products. We have incurred, and we will continue to incur, substantial expense for, and devote a significant amount of time to, pilot trial testing and clinical trials.
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In 2009 and 2010, we expended significant resources in the conduct of clinical trials on our ELISA-based AppyScore product. The statistical analysis report for the 2010 trial showed higher sensitivity (96%) and negative predictive value (92%) but lower specificity (16%) than seen in the 2008 ELISA-based study. The study report also revealed a wider range in prevalence of acute appendicitis between sites than had been anticipated. The overall prevalence of acute appendicitis was similar to that seen in the previous clinical trial conducted in 2008, however inter-site variability was notably larger, with a wider range of patients enrolled with acute appendicitis observed between sites. We believe that the large inter-site variability in the prevalence reported is an indication of the clinical challenge of diagnosing acute appendicitis and the judgment of individual ED physicians in evaluating acute abdominal pain. We performed, in conjunction with our consultants and scientific advisors, significant secondary analyses of the 2010 clinical trial results and data to explore the observed change in specificity in the 2010 trial as compared to the 2008 trial. These analyses suggested that the apparent differences between the two studies were primarily due to the conditions of transport for samples from the sites to the central laboratory, where the testing was conducted, in the 2010 trial. An increase in AppyScore test values that occurred in the “pre-measurement” phase between blood draw at the hospital and the testing at the central laboratory, which involved sample handling, time and transportation, resulted in an apparent increased level of false positives and, accordingly, decreased specificity. As a result of these analyses, we determined that we would not file a 510(k) premarket notification with the FDA based on the results of the 2010 AppyScore ELISA-based clinical trial.
We are currently conducting pilot studies of our cassette-based AppyScore product.  We currently expect to initiate at some time during 2012 a pivotal clinical trial of our cassette-based AppyScore product after we complete our pilot studies, assuming we obtain favorable results.
After the commencement of our pilot studies and based on our interim results from those studies as well as our interactions with the FDA, we decided to focus on a multi-marker approach to AppyScore’s development by utilizing certain additional biomarkers that we identified during our discovery work earlier this year.  After we complete our pilot studies, we plan to determine the final panel of biomarkers for the AppyScore product, including whether the MRP 8/14 biomarker that is the subject of one of our patents will be part of that panel. If we obtain unfavorable final results, for example, outcomes that fail to match our interim results or prior studies, or encounter unexpected issues, including issues relating to the multi-marker approach to AppyScore’s development, our ability to initiate a pivotal clinical trial could be further delayed.  Any such delay could have a material adverse effect on the Company.  Our business, results of operations and financial condition may be materially adversely affected by any delays in, or termination of, our pilot or clinical trials.
We face competition in the biotechnology and pharmaceutical industries.
We face intense competition in the development, manufacture, marketing and commercialization of diagnostic products such as ours from a variety of sources — from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies, including other companies with similar technologies, including those with platform technologies.  These platform technologies vary from very large analyzer systems to smaller and less expensive instruments similar to ours.  These competitors are working to develop and market other diagnostic tests, systems, products, and other methods of detecting, preventing or reducing disease.
The development of new technologies or improvements in current technologies for diagnosing acute appendicitis, including CT imaging agents and products that would compete with our acute appendicitis test could have an impact on our ability to sell the acute appendicitis tests or the sales price of the tests. This could impact our ability to market the tests and /or secure a marketing partner both of which could have a substantial impact on the value of our acute appendicitis products.
Among the many experimental diagnostics and therapies being developed around the world, there may be some that we do not now know of that may compete with our technologies or products.
Many of our competitors have much greater capital resources, manufacturing, research and development resources and production facilities than we do. Many of them also have much more experience than we do in preclinical testing and clinical trials of new drugs and in obtaining FDA and foreign regulatory approvals.
Major technological changes can happen quickly in the biotechnology and pharmaceutical industries, and the development of technologically improved or different products or technologies may make our product candidates or platform technologies obsolete or noncompetitive.
Our product candidates, if successfully developed and approved for commercial sale, will compete with a number of drugs and diagnostic tests currently manufactured and marketed by major pharmaceutical and other biotechnology companies. Our product candidates may also compete with new products currently under development by others or with products which may cost less than our product candidates. Physicians, patients, third party payors and the medical community may not accept or utilize our acute appendicitis test products when and if approved. If our products, if and when approved, do not achieve significant market acceptance, our business, results of operations and financial condition may be materially adversely affected.
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Medical reimbursement for our products under development, as well as a changing regulatory environment, may impact our business.
The U.S. healthcare regulatory environment may change in a way that restricts our ability to market our acute appendicitis tests due to medical coverage or reimbursement limits. Sales of our human diagnostic tests will depend in part on the extent to which the costs of such tests are paid by health maintenance, managed care, and similar healthcare management organizations, or reimbursed by government health payor administration authorities, private health coverage insurers and other third-party payors. These healthcare management organizations and third party payers are increasingly challenging the prices charged for medical products and services. The containment of healthcare costs has become a priority of federal and state governments. Accordingly, our potential products may not be considered cost effective, and reimbursement to the consumer may not be available or sufficient to allow us to sell our products on a competitive basis. Legislation and regulations affecting reimbursement for our products may change at any time and in ways that are difficult to predict and these changes may be adverse to us. Any reduction in Medicare, Medicaid or other third-party payer reimbursements could have a negative effect on our operating results.

We have very little sales and marketing experience and limited sales capabilities, which may make commercializing our products difficult.
We currently have very little marketing experience and limited sales capabilities. Therefore, in order to commercialize our products, once approved, we must either develop our own marketing and distribution sales capabilities or collaborate with a third party to perform these functions. We may, in some instances, rely significantly on sales, marketing and distribution arrangements with collaborative partners and other third parties. In these instances, our future revenues will be materially dependent upon the success of the efforts of these third parties.
We may not be able to attract and retain qualified personnel to serve in our sales and marketing organization, to develop an effective distribution network or to otherwise effectively support our commercialization activities. The cost of establishing and maintaining a sales and marketing organization may exceed its cost effectiveness. If we fail to develop sales and marketing capabilities, if sales efforts are not effective or if costs of developing sales and marketing capabilities exceed their cost effectiveness, our business, results of operations and financial condition would be materially adversely affected.

If we successfully obtain FDA clearance to market our acute appendicitis tests, we may experience manufacturing problems that could limit the near term growth of our revenue.
Our ability to successfully market the acute appendicitis tests once approved will partially depend on our ability to obtain sufficient quantities of the finished test from qualified GMP suppliers.  While we have identified and are progressing with qualified suppliers, their ability to produce tests or component parts in sufficient quantities to meet possible demand may cause delays in securing products or could force us to seek alternative suppliers. The need to locate and use alternative suppliers could also cause delivery delays for a period of time.  With respect to our animal health products, we, including NAH, have entered into contracts with companies who meet full cGMP requirements and are capable of large scale manufacturing batches of our devices and recombinant drugs for development, initial batch and study work as part of the FDA approval process for our business. Delays in finalizing and progressing under agreements with cGMP facilities may delay our FDA approval process and potentially delay sales of such products. In addition, we may encounter difficulties in production due to, among other things, the inability to obtain sufficient amounts of raw inventory, 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 financial condition. 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 results of operations could be affected by our royalty payments due to third parties.
Any revenues from products under development will likely be subject to royalty payments under licensing or similar agreements. Major factors affecting these payments include but are not limited to:
▪
our ability to achieve meaningful sales of our products;
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our use of the intellectual property licensed in developing the products;
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coverage decisions by governmental and other third-party payors; and
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the achievement of milestones established in our license agreements.
If we need to seek additional intellectual property licenses in order to complete our product development, our cumulative royalty obligations could adversely affect our net revenues and results of operations.
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Our success depends on our ability to develop and commercialize new products.
Our success depends on our ability to successfully develop new products. Although we were engaged in human diagnostic antigen manufacturing operations and historically substantially all of our revenues have been derived from this business, our ability to substantially increase our revenues and generate net income is contingent on successfully developing one or more of our pipeline products. Our ability to develop any of the pipeline products is dependent on a number of factors, including funding availability to complete development efforts, to adequately test and refine products, to seek required FDA approval, and to commercialize our products, thereby generating revenues once development efforts prove successful. We have encountered in the past, and may again encounter in the future, problems in the testing phase for different pipeline products, which sometimes resulted in substantial setbacks in the development process. There can be no assurance that we will not encounter similar setbacks with the products in our pipeline, or that funding from outside sources and our revenues will be sufficient to bring any or all of our pipeline products to the point of commercialization. There can be no assurance that the products we are developing will work effectively in the marketplace, nor that we will be able to produce them on an economical basis.
Our success will depend in part on establishing and maintaining effective strategic partnerships and business relationships.
A key aspect of our business strategy is to establish and maintain strategic partnerships. We currently have a license arrangement with WU and a license and commercialization agreement with NAH. It is likely that we will seek other strategic alliances. We also intend to rely heavily on companies with greater capital resources and marketing expertise to market some of our products, such as our agreement with NAH. We are currently evaluating study results from a pilot study conducted under the NAH License Agreement; the results of that evaluation could impact the future status as well as activities under the NAH License Agreement. While we have identified certain possible 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, future 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 issuance 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, or if we fail to perform our obligations in a timely manner, the development or commercialization of our technology in potential products may be affected, delayed or terminated.
We need to secure and protect our intellectual property rights.
Our success will partially depend on our ability to protect our trade secrets and obtain and enforce patents relating to our technology and processes including our ability to secure intellectual property protection related to recent discoveries regarding our multi-marker panel and the risk stratification method for AppyScore that we are currently evaluating.  Third parties may challenge, narrow, invalidate or circumvent our patents and processes and /or demand payments of royalties that would impact our product costs. The patent position of biotechnology companies is generally highly uncertain, involves complex legal and factual questions and has recently been the subject of much litigation. Neither the U.S. Patent Office nor the courts have a consistent policy regarding breadth of claims allowed or the degree of protection afforded under many biotechnology patents.
In an effort to protect our proprietary technology, trade secrets and know-how, we require our employees, consultants and prospective partners to execute confidentiality and invention disclosure 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 but in some of these countries we will not seek or have patents protection. 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 would be greater.
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 AppyScore will be aggressively marketed in foreign jurisdictions. We may market our therapeutic animal health products in foreign jurisdictions, as well. We may need to obtain regulatory approval from the European Union or other foreign 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.  If we fail to obtain approval in such foreign jurisdictions, we would not be able to sell our products in such jurisdictions, thereby reducing the potential revenue from the sale of our products.
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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. A loss of the services of our qualified 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.
Our product liability insurance coverage may not be sufficient to cover claims.
Our insurance policies currently cover claims and liabilities arising out of defective products for losses up to $2.0 million. As a result, if a claim was to be successfully brought against us, we may not have sufficient insurance that would apply and would have to pay any costs directly, which we may not have the resources to do.
Risks Related to Our Securities
We require additional capital for future operations and we cannot assure you that capital will be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to our existing stockholders.
We have historically needed to raise capital to fund our operating losses. We expect to continue to incur operating losses in the 2011 calendar year and at least into 2012. If capital requirements vary materially from those currently planned, we may require additional capital sooner than expected. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all, especially in light of the state of the current financial markets which could impact the timing, terms, and other factors in our attempts to raise capital. Any sale of a substantial number of additional shares may cause dilution to our existing stockholders and could also cause the market price of our common stock to decline.
Current challenges in the commercial and credit environment may adversely affect our business and financial condition.
The global financial markets have recently experienced unprecedented levels of volatility. Our ability to generate cash flows from operations, issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for the Company’s products or in the solvency of its customers or suppliers, deterioration in the Company’s key financial ratios or credit ratings, or other significantly unfavorable changes in conditions. While these conditions and the current economic downturn have not meaningfully adversely affected our operations to date, continuing volatility in the global financial markets could increase borrowing costs or affect the company’s ability to access the capital markets. Current or worsening economic conditions may also adversely affect the business of our customers, including their ability to pay for our products and services, and the amount spent on healthcare generally. This could result in a decrease in the demand for our potential products and services, longer sales cycles, slower adoption of new technologies and increased price competition. These conditions may also adversely affect certain of our suppliers, which could cause a disruption in our ability to produce our products.
We do not anticipate paying any dividends in the foreseeable future.
The Company does not intend to declare any dividends in the foreseeable future. Investors who require income from dividends should not purchase our securities.
Our stock price, like that of many biotechnology companies, is volatile.
The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future, particularly in light of the current financial markets. In addition, the market price of our common stock has been and may continue to be volatile, especially on the eve of Company announcements which the market is expecting, as is the case with clinical trial results. Among other factors, the following may have a significant effect on the market price of our common stock:
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announcements of clinical trial results, FDA correspondence or interactions, developments with regard to our intellectual property rights, technological innovations or new commercial products by us or our competitors.

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•
publicity regarding actual or potential medical results related to products under development or being commercialized by us or our competitors.

•
regulatory developments or delays affecting our products under development in the U.S. and other countries; and

•
new proposals to change or reform the U.S. healthcare system, including, but not limited to, new regulations concerning reimbursement programs.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
(a)           During the quarter covered by this report, the Company did not make any purchases of its common shares under the previously announced authorized common stock repurchase program of up to $5.0 million that may be made from time to time at prevailing prices as permitted by securities laws and other requirements and subject to market conditions and other factors and no purchases are anticipated in the near-term. The program is administered by management and may be discontinued at any time.
Item 6.     Exhibits
(a)   Exhibits
EXHIBIT DESCRIPTION
31.1
Rule 13a-14(a)/15d-14(a) - Certification of Chief Executive Officer. Filed herewith.
31.2
Rule 13a-14(a)/15d-14(a) - Certification of Chief Financial Officer. Filed herewith.
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Section 1350 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statement of Cash Flows and (iv) the Notes to Condensed Financial Statements. (1)
(1)
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be filed by the Company for purposes of Section 18 or any other provision of the Exchange Act of 1934, as amended.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
AspenBio Pharma, Inc.
(Registrant)
By:
/s/ Jeffrey G. McGonegal
Dated: November 14, 2011
Jeffrey G. McGonegal,
Chief Financial Officer and duly authorized officer



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