FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008 OR (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT 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 Exchange Act 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 [_] 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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 126-2 of the Exchange Act. (Check one) Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_| 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 [_] No [X] The number of shares of no par value common stock outstanding as of August 11, 2008 was 31,125,258.
Transcript
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number: 001-33675
ASPENBIO PHARMA, INC.(Exact name of registrant as specified in its charter)
Colorado 84-1553387(State or other jurisdiction ofincorporation 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 Exchange Actduring the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 126-2 of the ExchangeAct. (Check one)
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_| 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 [_] No [X]
The number of shares of no par value common stock outstanding as of August 11, 2008 was 31,125,258.
ASPENBIO PHARMA, INC.
Page
PART 1—Financial Information
Item 1. Condensed Unaudited Financial Statements Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007 3 Statements of Operations For the Three and Six Months Ended June 30, 2008 and 2007 (unaudited) 4 Statements of Cash Flows For the Six Months Ended June 30, 2008 and 2007 (unaudited) 5 Notes to Unaudited Condensed Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 4. Controls and Procedures 16
PART II - Other Information Item 1. Legal Proceedings 17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits 18 Signatures 18
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PART I — FINANCIAL INFORMATION
AspenBio Pharma, Inc.Balance Sheets
June 30, 2008 December 31, 2007
(Unaudited)ASSETS
Current assets: Cash and cash equivalents $ 2,274,844 $ 17,376,757 Short-term investments 20,912,594 8,486,721 Accounts receivable, net (Note 8) 56,352 67,906 Inventories (Note 2) 562,511 607,324 Prepaid expenses and other current assets 153,652 156,441
Total current assets 23,959,953 26,695,149 Property and equipment, net (Notes 3 and 5) 3,419,223 3,529,291 Other long term assets, net (Note 4) 1,711,406 1,437,532
Total assets $ 29,090,582 $ 31,661,972
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 695,234 $ 313,072 Accrued compensation 196,001 740,331 Accrued expenses - other 655,850 257,916 Deferred revenue, current portion (Note 6) 913,947 100,000 Current portion of notes payable (Note 5) 658,765 694,150
Total current liabilities 3,119,797 2,105,469 Notes payable, less current portion (Note 5) 2,819,689 2,952,825 Deferred revenue, less current portion (Note 6) 830,066 100,000
Total liabilities 6,769,552 5,158,294
Commitments and contingencies Stockholders' equity (Notes 7 and 9): Common stock, no par value, 60,000,000 shares authorized; 31,089,258 and 30,865,825 shares issued and outstanding 43,091,504 42,887,192 Accumulated deficit (20,770,474) (16,383,514)
Total stockholders' equity 22,321,030 26,503,678
Total liabilities and stockholders' equity $ 29,090,582 $ 31,661,972
See Accompanying Notes to Unaudited Condensed Financial Statements
Operating expenses: Selling, general and administrative (includes non cash compensation of $303,706; $217,499; $676,802 and $498,694) 1,230,210 632,287 2,483,266 1,358,406 Research and development 1,563,397 544,296 2,361,189 838,601
Total operating expenses 2,793,607 1,176,583 4,844,455 2,197,007
Operating loss (2,818,027) (1,146,751) (4,708,152) (2,001,532)
Other income (expense): Interest income 187,110 122,144 455,997 167,851 Interest (expense) (61,049) (59,181) (121,799) (118,471) Rental income 14,518 — 60,218 — Other expense (73,224) — (73,224) —
Total other income 67,355 62,963 321,192 49,380
Net loss $ (2,750,672) $ (1,083,788) $ (4,386,960) $ (1,952,152)
Basic and diluted net loss per share $ (.09) $ (.04) $ (.14) $ (.08)
Basic and diluted weighted average number of shares outstanding 31,157,053 27,070,130 31,211,458 24,082,612
See Accompanying Notes to Unaudited Condensed Financial Statements
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AspenBio Pharma, Inc.Statements of Cash Flows
Six Months Ended June 30, 2008 and 2007(Unaudited)
2008 2007
Cash flows from operating activities: Net loss $ (4,386,960) $ (1,952,152) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 179,061 132,830 Stock based compensation for services 676,802 498,694 Noncash charges 73,224 — Amortization of license fee (15,987) — (Increase) decrease in: Short term investments (12,425,873) — Accounts receivable 6,555 315,561 Inventories 44,813 (197,151) Prepaid expenses and other current assets 7,789 3,837 Increase (decrease) in: Accounts payable 382,162 (264,225) Accrued expenses 397,934 (25,491) Accrued compensation (544,330) — Deferred revenue 1,560,000 —
Net cash used by operating activities (14,044,810) (1,488,097)
Cash flows from investing activities: Purchases of property and equipment (97,629) (211,668) Patent and trademark application costs (317,000) (250,365) Other long-term assets (1,464) 10,697
Net cash provided (used) by investing activities (416,093) (451,336)
Cash flows from financing activities: Repayment of notes payable (168,520) (91,570) Proceeds from exercise of stock warrants and options 519,386 9,662,652 Repurchase of stock (991,876) —
Addition to other long-term obligation — 648
Net cash (used) provided by financing activities (641,010) 9,571,730
Net increase (decrease) in cash and cash equivalents (15,101,913) 7,632,297 Cash and cash equivalents at beginning of period 17,376,757 3,529,262
Cash and cash equivalents at end of period $ 2,274,844 $ 11,161,559
Supplemental disclosure of cash flow information Cash paid during the period for interest $ 118,305 $ 115,685
Schedule of non-cash investing and financing transactions Acquisition of patent rights for installment obligation $ 57,097 $ —
See Accompanying Notes to Unaudited Condensed Financial Statements
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AspenBio Pharma, Inc.Notes to Condensed Financial Statements
(Unaudited)
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of AspenBio Pharma, Inc. (the “Company” or “AspenBio Pharma”) have been prepared inaccordance with the instructions to quarterly reports on Form 10-Q. In the opinion of management, all adjustments (which include onlynormal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in financial position atJune 30, 2008 and for all periods presented have been made. Certain information and footnote data necessary for fair presentation offinancial position and results of operations in conformity with accounting principles generally accepted in the United States of Americahave been condensed or omitted. It is therefore suggested that these financial statements be read in conjunction with the summary ofsignificant accounting policies and notes to financial statements included in the Company’s Annual Report on Form 10-KSB. The results ofoperations for the period ended June 30, 2008 are not necessarily an indication of operating results for the full year.
Note 1 — Significant accounting policies
Investments:
The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cashequivalents. From time to time the Company’s cash account balances exceeds the balances as covered by the Federal Deposit InsuranceSystem. The Company has never suffered a loss due to such excess balances.
The Company invests excess cash from time to time in highly liquid equity investments of highly rated entities which are classified astrading securities. Such amounts are recorded at market and are classified as current, as the Company does not intend to hold theinvestments beyond twelve months. Investment securities classified as trading are those securities that are bought and held principally forthe purpose of selling them in the near term with the objective of generating profits. These securities are reported at fair value withunrealized gains and losses reported as an element of current period earnings. For the six months ended June 30, 2008, $6,326 in unrealizedincome, $250 in realized loss, and $16,711 in management fees expense were included in interest income. The Company had no suchinvestments at June 30, 2007.
Income (loss) per share:
SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (EPS) with a reconciliation of thenumerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPSexcludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock wereexercised 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 theweighted number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities thatcould share in the Company’s earnings. The effect of the inclusion of the dilutive shares would have resulted in a decrease in loss per share.Accordingly, the weighted average shares outstanding have not been adjusted for dilutive shares. Outstanding stock options and warrantsare not considered in the calculation, as the impact of the potential common shares (totaling approximately 4,191,000 shares for the sixmonths ended June 30, 2008, and approximately 8,784,000 shares for the six months ended June 30, 2007) would be to decrease loss pershare.
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Note 2 — Inventories
Inventories consisted of the following:
June 30, 2008(Unaudited) December 31, 2007
Finished goods $ 318,976 $ 341,835 Goods in process 46,421 53,198 Raw materials 197,114 212,291
$ 562,511 $ 607,324
Note 3 — Property and Equipment
Property and equipment consisted of the following:
June 30, 2008(Unaudited) December 31, 2007
Land and improvements $ 1,107,508 $ 1,107,508 Building 2,589,231 2,589,231 Tenant improvements 118,660 166,660 Lab equipment 960,849 883,005 Office and computer equipment 155,370 138,826
4,931,618 4,885,230 Less accumulated depreciation 1,512,395 1,355,939
$ 3,419,223 $ 3,529,291
Note 4 — Other Long Term Assets
Other long term assets consisted of the following:
June 30, 2008(Unaudited) December 31, 2007
Patents and trademarks and applications, net of accumulated amortization of $44,018 and $31,581 $ 1,272,898 $ 965,482 Goodwill, net of accumulated amortization of $60,712 387,239 387,239 Deferred loan costs, net of accumulated amortization of $27,439 and $24,584 29,646 32,500 Lessee rent deposit and other 21,623 52,311
$ 1,711,406 $ 1,437,532
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The Company capitalizes legal costs and filing fees associated with obtaining patents on its new discoveries. Once the patents have beenissued, 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. Loan costs are being amortized over the term of the related agreements using the straight-line method.
In January 2008, the Company executed an amendment to its license agreement, which was originally signed for animal uses, with TheWashington University to expand the use of the licensed single-chain constructs of follicle-stimulating hormone (“FSH”), luteinizinghormone (“LH”), thyrotropin or thyroid-stimulating hormone (“TSH”) and human chorionic gonadotropin (“hCG”) for diagnostic use inhumans. In consideration of the amendment, the Company agreed to pay a total of $125,000 in cash, payable $65,000 at execution followedby four quarterly installments of $15,000, each. This obligation has been discounted at an assumed interest rate of 8% (which represents therate management believes it could borrow at for similar financings) resulting in an initial principal obligation of $122,097 (remainingbalance of $43,247 at June 30, 2008, is included with accrued expenses), which has been capitalized as additional patent costs at June 30,2008. The royalty provisions of the original agreement also apply to the expanded uses.
Note 5 — Debt Agreements
Notes payable and installment obligations consisted of the following as of June 30, 2008:
Total balance Current Long-term
Mortgage notes $ 2,898,361 $ 91,860 $ 2,806,501 Note payable - related party 391,715 391,715 — Other installment obligations 188,378 175,190 13,188
Totals $ 3,478,454 $ 658,765 $ 2,819,689
Mortgage Notes:
The Company has a permanent mortgage facility on its land and building in the original amount of $3,250,000. The mortgage is held by acommercial bank and includes approximately 39% that is guaranteed by the U. S. Small Business Administration (“SBA”).
Note Payable — Related Party:
The Company has a note payable to a stockholder (a former officer) in the aggregate principal amount of $391,715, at June 30, 2008,bearing interest at the rate of 6% per annum. The note required total monthly payments of $10,000 until June 2008, when the thenremaining balance was payable (paid off in July 2008).
Other Installment Obligations:
In August 2007, the Company executed an agreement with a manufacturer related to the transfer of certain manufacturing and developmentprocesses. Under the agreement, the Company agreed to pay a total of $350,000, in eight quarterly installments of $43,750, each. TheCompany has discounted this obligation at an assumed interest rate of 8% (which represents the rate management believes it could borrowat for similar financings) resulting in an initial principal obligation of $326,754, which was recorded as a research and developmentexpense in 2007. At June 30, 2008, this obligation totaled $166,534.
The Company has capitalized certain obligations under leases that meet the requirements of capital lease obligations. At June 30, 2008,such obligations totaled $21,844.
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Note 6 — License Agreement
In April 2008, the Company entered into a long term exclusive license and commercialization agreement with Novartis Animal Health, Inc.,to develop and launch the Company’s novel recombinant single-chain bovine products, BoviPure LH™ and BoviPure FSH™. The licenseagreement is a collaborative arrangement that provides for a sharing of product development activities, development and registration costsand worldwide product sales. The Company received an upfront cash payment of $2.0 million, of which 50% was non-refundable uponsigning the agreement and the balance is subject to certain conditions, which the Company expects to be substantially achieved in 2008.Ongoing royalties will be payable to the Company upon product launch based upon net direct product margins as defined and specifiedunder the agreement. AspenBio has agreed to fund its share of 35% of the product development and registration costs during thedevelopment period. Under the terms of the original license agreement that the Company has with the University of Washington(“University”), a portion of license fees and royalties AspenBio receives from sublicensing agreements, will be paid to the University. Theobligation for such front end fees (totaling $440,000) has been recorded and is included with accrued expenses on the accompanyingbalance sheet.
For financial reporting purposes the up-front license fees received from this agreement, net of the amounts due to the University have beenrecorded as deferred revenue and will be amortized over the life of the license agreement. As of June 30, 2008, deferred revenue of$913,947 has been classified as a current liability and $830,066 as a long-term liability. The current liability portion includes the net front-end fee amount that is subject to certain conditions. Each such amount also includes $100,000 of deferred revenue associated with theexisting Merial agreement. During the period ended June 30, 2008, $15,987 was recorded as the amortized license fee income from theNovartis agreement.
Note 7 — Stockholders’ Equity
During the six months ended June 30, 2008, employees exercised 400,433 options outstanding under the Company’s 2002 Stock IncentivePlan (“Plan”) generating $428,136 in cash proceeds and advisors exercised options for 55,000 shares of common stock generating $91,250in cash.
During the six months ended June 30, 2008, the Company’s board of directors authorized a stock repurchase plan to purchase shares of theCompany’s common stock up to a maximum of $5.0 million. Purchases are made in routine, open market transactions, when managementdetermines to effect purchases and any purchased common shares are thereupon retired. Management may elect to purchase less than $5.0million. The repurchase program allows the Company to repurchase its shares in accordance with the requirements of the Securities andExchange Commission on the open market, in block trades and in privately negotiated transactions, depending upon market conditions andother factors. The repurchase program is being funded using the Company’s working capital. A total of approximately 232,000 commonshares have been purchased through June 30, 2008 at a total cost of approximately $992,000.
During the six months ended June 30, 2007, the Company received cash proceeds of $9,583,485 from the exercise of 7,416,256 warrantsheld by investors in the 2004 and 2005 offerings. No fees were paid on any proceeds, and the proceeds were used for working capital, newproduct development and general corporate purposes. During the six months ended June 30, 2007, the holder of a total of 525,000 warrantsthat were issued in 2002 and 2003 elected to exercise those warrants on a cashless basis as provided in the agreements. The 525,000 rightswere surrendered and cancelled, and the holder was issued a total of 374,085 common shares. During the six months ended June 30, 2007,employees exercised 55,000 options outstanding under the Company’s 2002 Stock Incentive Plan generating $38,500 in cash proceeds andtwo advisors exercised options for 66,666 shares of common stock generating $40,667 in cash.
During the six months ended June 30, 2007, Richard Donnelly, President, was granted 25,000 shares of stock with an estimated fair valueof $2.96 per share, in connection with the renewal of his employment agreement.
Note 8 — Customer Concentration
At June 30, 2008, four customers accounted for approximately 10%, 14%, 17% and 25%, of total accounts receivable. For the six monthsended June 30, 2008, two customers represented more than 10% of the Company’s sales, accounting for approximately 46% and 22%, ofthe sales for the period. At December 31, 2007, one customer accounted for 70% of total accounts receivable. For the six-month periodended June 30, 2007, the Company had three customers, which generated more than 10% of the Company’s revenues and totaledapproximately 27%, 22% and 17%.
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Note 9 — Stock Based Compensation
The Company currently provides stock-based compensation to employees, directors and consultants, under the Company’s Plan that hasbeen approved by the Company’s shareholders. In June 2008 the Company’s shareholders approved an amendment to the Plan to increasethe number of shares reserved under the Plan to 4,600,000 from 4,250,000. Stock options granted under this plan generally vest over one tothree years from the date of grant as specified in the Plan or by the compensation committee of the Company’s board of directors and areexercisable for a period of up to ten years from the date of grant. The Company recognized stock option and other stock-basedcompensation during the six month periods ended June 30, as follows:
Three Months Ended Six Months Ended
2008 2007 2008 2007
Stock options to employees and directors $ 190,298 $ 113,259 $ 396,276 $ 222,007 Stock options to advisory board members 15,173 69,500 76,751 119,707 Stock options to consultants 98,235 34,740 203,775 82,980 Restricted stock awards — — — 74,000
AspenBio Pharma accounts for stock-based compensation under Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective method. SFAS 123R requires the recognition of the cost ofemployee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grantdate fair value of the award. SFAS 123R also requires the stock option compensation expense to be recognized over the period duringwhich an employee is required to provide service in exchange for the award (generally the vesting period). The Company estimated the fairvalue of each stock option at the grant date by using the Black-Scholes option pricing model with the following weighted averageassumptions used for grants in 2008 and 2007:
2008 2007
Expected life 5 years 10 years Volatility 68% to 69% 68% to 71% Risk-free interest rate 2.65% to 3.45% 4.68% to 4.81% Dividend yield 0% 0% Forfeitures estimated 10% 10%
The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based onhistorical exercise trends. Based upon recent trends, commencing in 2008 the expected life was revised to five years. The expectedvolatility is based on the historical price volatility of AspenBio Pharma’s common stock since July 1, 2005, based upon management’sassessment of the appropriate life to determine volatility. The risk-free interest rate represents the U.S. Treasury bill rate for the expectedlife of the related stock options. The dividend yield represents the Company’s anticipated cash dividend over the expected life of the stockoptions. Forfeitures represent the weighted average estimate of future options to be cancelled primarily due to employee terminations.
A summary of stock option activity of options to employees, directors and advisors, for the six months ended June 30, 2008 is presentedbelow:
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SharesUnderOption
WeightedAverageExercise
Price
WeightedAverage
RemainingContractualLife (Years)
AggregateIntrinsic
Value
Outstanding at January 1, 2008 3,347,376 $ 1.29 Granted 386,313 6.63 Exercised (455,433) 1.14 Forfeited (11,667) 3.13
Outstanding at June 30, 2008 3,266,589 $ 1.94 7.0 $14,665,000
Exercisable at June 30, 2008 2,474,878 $ 1.08 6.4 $13,125,000
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between our closing stock price on June30, 2008 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 June 30, 2008.
Included with options granted under the Company’s 2002 Stock Incentive Plan are options to acquire 373,376 shares of common stockcumulatively granted through June 30, 2008, to members of the Company’s advisory board and consultants, exercisable at prices rangingfrom $.70 to $4.43, per share, with various vesting periods up to three years and expiring after ten years.
During the six months ended June 30, 2008, there were 386,313 stock options granted under the Plan with a weighted average fair value atthe grant date of $3.91 per option. Of this amount, 356,313 were granted to officers and directors of the Company exercisable at an averageof $6.54 per share vesting over a three year period annually in arrears; 30,000 were granted to employees at an average $7.79 per sharevesting over a three year period annually in arrears. All of the options granted expire in ten years. Employee options for 11,667 sharesexpired upon the employee’s termination from the Company during the six months ended June 30, 2008.
During the six months ending June 30, 2008, employees exercised 400,433 options outstanding under the Company’s Plan generating$428,136 in cash proceeds and advisors exercised options for 55,000 shares of common stock generating $91,250 in cash. During the 2008period, the 455,433 options exercised by employees and advisors had an intrinsic value when exercised of $3,089,000.
During the six months ended June 30, 2007, 350,000 stock options were granted under the Company’s 2002 Stock Incentive Plan to officersand directors exercisable at the then fair market value of $2.96 per share, vesting over a three-year period annually in arrears and expiringin ten years. An advisor was granted 25,000 stock options at $4.43 per share, vesting over a three-year period annually in advance andexpiring in ten years. During the same six month period, an employee of the Company was granted 15,000 options to purchase commonstock exercisable at $4.25 per share. These options terminated upon his resignation in the same quarter. During the six months ended June30, 2007, employees exercised 55,000 options outstanding under the Company’s 2002 Stock Incentive Plan generating $38,500 in cashproceeds and two advisors exercised options for 66,666 shares of common stock generating $40,667 in cash.
During the six months ended June 30, 2007, employees exercised 55,000 options outstanding under the Company’s 2002 Stock IncentivePlan generating $38,500 in cash proceeds and two advisors exercised options for 66,666 shares of common stock generating $40,667 incash.
Based upon the Company’s experience approximately 90% or approximately 2,940,000 options, are expected to vest in the future, undertheir terms. The total value of stock options granted to employees, directors and advisors that vested during the six months ended June 30,2008 and 2007 was $493,000 and $131,000, respectively.
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A summary of the status of the Company’s non-vested options to acquire common shares granted to employees, officers, directors andconsultants and changes during the period ended June 30, 2008 is presented below.
As of June 30, 2008, based upon employee, advisor and consultant options granted to that point there was approximately $1,800,000additional unrecognized compensation cost related to stock options that will be recorded over a weighted average future period ofapproximately two years.
Subsequent to June 30, 2008, an advisor exercised options to acquire 6,000 shares of common stock outstanding under the Company’s Plangenerating $9,600 in cash proceeds and a former consulting firm surrendered 36,646 options on a cashless basis in exchange for theissuance of 30,000 shares of common stock. Effective July 1, 2008, the board of directors appointed a new Director granting him a total of65,674 options exercisable at $6.38 per share, vesting over three years in arrears and expiring in ten years.
Common stock purchase options:
Through June 30, 2008, in addition to the stock options discussed above, the Company had outstanding 924,800 non-qualified options andwarrants in connection with consulting services for investor relations and placement agent services. Such rights include 525,000 optionswhich were vested upon issuance, of which 75,000 are exercisable at $1.00 per share and expire in 2008, 180,000 are exercisable at $1.80per share and expire in 2009, 90,000 are exercisable at $5.00 per share and expire in 2010, 60,000 are exercisable at $12.00 per share andexpire in 2011, 45,000 are exercisable at $6.01 per share and expire in 2010 and 75,000 are exercisable at $9.15 per share and expire in2010. The remaining 399,800 are exercisable at $1.07 per share and expire in January 2009.
Operating expenses for the six months ended June 30, 2008 and 2007 include $203,775 and $82,980, respectively, for the value of theinvestor relations consulting options. The fair value of the options, recorded as a consulting expense related to investor relations services, atthe 2008 grant dates has been estimated using the Black-Scholes valuation model, with the following assumptions: a) 0% dividend yield, b)expected price volatility 68-69%, c) a risk-free interest rate of 2%-3% and an expected term of three years.
Subsequent to June 30, 2008, an investor relations firm was granted 15,000 options to purchase shares of common stock exercisable at$6.01 per share and 15,000 options during August 2008 to purchase shares of common stock exercisable at $5.57 per share. The optionswere vested upon grant and expire in three years.
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ITEM 2
ASPENBIO PHARMA, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Comparative Results for the Six Months Ended June 30, 2008 and 2007
Sales for the six months ended June 30, 2008, totaled $475,000, which is a $37,000 or 7% decrease from the 2007 period. This decrease insales is primarily attributable to a change in product mix between the two periods combined with the timing of existing customers’ orderplacement, as it is not unusual for the orders from our customers to vary by quarter depending upon the customers’ sales and productionneeds. At June 30, 2008, the Company had outstanding customer open orders totaling approximately $114,000. These orders will berecorded in sales as the products are produced and shipped.
Cost of sales for the six months ended June 30, 2008 totaled $355,000; a $38,000 or 12% increase as compared to the 2007 period. As apercentage of sales, gross margin was 25% in the 2008 period as compared to 38% in the 2007 period. The change in the gross marginpercent resulted from the lower level of sales combined with the change in the product mix during the period. Cost of sales overall was alsonegatively impacted by higher overhead costs.
Selling, general and administrative expenses in the six months ended June 30, 2008, totaled $2,483,000, which is a $1,125,000 or 83%increase as compared to the 2007 period. The increase relates to a $175,000 increase in stock-based compensation granted to employees,advisors and consultants and an increase of $277,000 in higher personnel costs from the hiring of additional personnel and higher wages.Increases of $80,000 in insurance, $143,000 in legal and $340,000 in public company expense also contributed to the increase.
Research and development expenses in the 2008 period totaled $2,361,000, which is a $1,523,000 or 182% increase as compared to the2007 period. The change is due primarily to an increase of $1,413,000 in development costs incurred related primarily to the appendicitisblood test products.
As a result of the improved cash position in 2008, interest income of approximately $456,000 was earned in 2008 as compared to $168,000,in the 2007 comparable period.
No income tax benefit was recorded on the loss for the six months ended June 30, 2008, as management was unable to determine that itwas more likely than not that such benefit would be realized.
Comparative Results for the Three-Month Periods Ended June 30, 2008 and 2007
Sales for the three months ended June 30, 2008 totaled $100,000, which is a $77,000 or 43% decrease from the 2007 period. The decreasein sales is primarily attributable to a change in product mix between the two periods combined with the timing of existing customers’ orderplacement, as it is not unusual for the orders from our customers to vary by quarter depending upon the customers’ sales and productionneeds.
Cost of sales for the three months ended June 30, 2008 totaled $140,000; a $7,000 or 4% decrease as compared to the 2007 period. As apercentage of sales, gross margin decreased to a negative 40% in the 2008 period as compared to a profit of 17% in the 2007 period. Thedecrease is gross profit margin is primarily the result of lower sales levels combined with higher overhead costs.
Selling, general and administrative expenses in the three months ended June 30, 2008, totaled $1,230,000, which is a $598,000 or 95%increase as compared to the 2007 period. The increase relates to $237,000 increase in wages and accrued incentive compensation andapproximately $77,000 increased non-cash stock based equity compensation during the period. Public company expenses increased by$126,000 and legal fees increased by $87,000. In addition, general overhead expenses also increased due to expanded activities.
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Research and development expenses in the 2008 period totaled $1,563,000, which is a $1,019,000 or 187% increase as compared to the2007 period. The change is due primarily to increases in product development, primarily being incurred for outsourced contract consultingand development services on the appendicitis blood test products.
Due to the increase in cash in the 2008 period, interest income of approximately $187,000 was earned in 2008, an increase of approximately$65,000 over the 2007 period.
Liquidity and Capital Resources
We reported a net loss of $4,387,000 during the six months ended June 30, 2008, which included $856,000 in non-cash expenses relating tostock-based compensation totaling $677,000 and depreciation and amortization totaling $179,000. At June 30, 2008, we had workingcapital of $20,840,000. We believe that our current working capital position is sufficient to continue with the technology developmentactivities and support the current level of operations for the near term. Our primary focus currently is to continue the development activitieson the appendicitis and single chain products in order to attempt to continue to secure near-term value from these products from eitheradditional entering licensing agreements for their rights or generating revenues directly from sales of the products.
Capital expenditures, primarily for production, laboratory and facility improvement costs for the balance of the fiscal year endingDecember 31, 2008, are anticipated to total approximately $200,000 to $300,000. We anticipate these capital expenditures to be financedout of working capital.
We anticipate that expenditures for research and development for the fiscal year ending December 31, 2008 will continue to increasesignificantly over the levels incurred for the three months ended June 30, 2008. The primary expenditures will be to continue to fund ourUnited States Food and Drug Administration (“FDA”) 510(k) clearance for our initial appendicitis screening technology, AppyScore™.Additionally, development and testing costs in support of the current pipeline products as well as to file patents and revise and updateprevious filings on our technologies will continue to increase. Our principal development products consist of the appendicitis tests and thesingle-chain animal hormone products. With the commencement of the 800 patient FDA clinical trial in June 2008 for AppyScore, andcontinued advances in development activities for the AppyScreen™ product, we expect that expenditures for development and testingactivities during the balance of 2008 and in to early 2009 will increase substantially over recent levels. As we make progress towardscommercialization of these products including evaluation of strategic alternatives to effectively maximize the value of our technology wewill need to consider possible transaction and partnering opportunities, working capital requirements including possible productmanagement and distribution alternatives and implications of product manufacturing and associated carrying costs. Certain costs such asmanufacturing and license / royalty agreements have different implications depending upon the ultimate strategic path determined. In May2003, we signed the Assignment and Consultation Agreement (“Bealer Agreement”) with Dr. John Bealer, whom we have collaboratedwith on the appendicitis products. In the event that the product is commercialized and we sell it or in the event of a transaction involving asale of all or a portion of the company, the Bealer Agreement provides for a 10% royalty payment to Dr. Bealer of what AspenBio receives.We may also consider acquisitions of development technologies or products, should opportunities arise that we believe fit our businessstrategy and would be appropriate from a capital standpoint.
We have entered and expect to continue to enter into additional agreements with contract manufacturers for the development \ manufactureof initial batches of certain of our products for which we are seeking FDA approval. The ultimate goal of this development process is toestablish current good manufacturing practices (“cGMP”) manufacturing methods required for those products in which we are seekingFDA approval. We are in discussions with other potential manufacturers who meet full cGMP requirements, and are capable of large-scalemanufacturing batches of our medical devices who can economically manufacture them to produce products at an acceptable cost. Thesedevelopment and manufacturing agreements generally contain transfer fees and specified penalty and royalty provisions should we transferour products to another contract manufacturer. We expect to continue to evaluate, negotiate and execute additional development andmanufacturing agreements, some of which may be significant commitments during 2008.
We have a twenty-year permanent mortgage facility on our land and building with a balloon maturity date of July 2013. The loan requiresmonthly payments of approximately $23,700. We also had a 6% note payable to a stockholder under a note for approximately $392,000 atJune 30, 2008, that was repaid under its terms in July 2008.
During the six months ended June 30, 2008, we received cash proceeds of $519,000 from the exercise of 455,433 options.
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In April 2008, the Company entered into a long term exclusive license and commercialization agreement with Novartis Animal Health, Inc.,to develop and launch the Company’s novel recombinant single-chain bovine products, BoviPure LH™ and BoviPure FSH™. The licenseagreement is a collaborative arrangement that provides for a sharing of product development activities, development and registration costsand worldwide product sales. The Company received an upfront cash payment of $2.0 million, of which 50% was non-refundable uponsigning the agreement and the balance is subject to certain conditions, which the Company expects to be substantially achieved in 2008.Ongoing royalties will be payable upon product launch based upon net direct product margins as defined and specified under theagreement. AspenBio has agreed to fund its share of 35% of the product development and registration costs during the development period.Under the terms of the original license agreement that the Company has with the University of Washington (“University”), a portion oflicense fees and royalties AspenBio receives from sublicensing agreements (such as the Novartis Agreement), will be paid to theUniversity. The obligation for such front end fees has been recorded and is included with accrued expenses on the accompanying balancesheet.
For financial reporting purposes the up-front license fees received from this agreement, net of the amounts due to the University have beenrecorded as deferred revenue and will be amortized over the life of the license agreement. As of June 30, 2008, deferred revenue of$913,947 has been classified as a current liability and $830,066 as a long-term liability. The current liability portion includes the net front-end fee amount that is subject to certain conditions. Each such amount also includes $100,000 of deferred revenue associated with theexisting Merial agreement. During the period ended June 30, 2008, $15,987 was recorded as the amortized license fee income for theNovartis agreement.
In April, 2008 our board of directors authorized a stock repurchase plan to purchase shares of our common stock up to a maximum of $5.0million. Purchases are being made in routine, open market transactions, when management determines to effect purchases and anypurchased common shares are thereupon retired. Management may elect to purchase less than $5.0 million. The repurchase program allowsus to repurchase our shares in accordance with the requirements of the Securities and Exchange Commission on the open market, in blocktrades and in privately negotiated transactions, depending upon market conditions and other factors. The repurchase program is beingfunded using our working capital. A total of approximately 232,000 common shares have been purchased through June 30, 2008 at a totalcost of approximately $992,000.
We expect to continue to incur cash losses from operations for the near-term and these losses could be significant as we incur productdevelopment and FDA trial expenses. We believe that our current working capital position will meet our near-term needs. Our investmentsare maintained in relatively short term, high quality investments instruments, to ensure we have access to cash as needed.
Operating Activities
Net cash consumed by operating activities was $14,045,000 during the six months ended June 30, 2008. Of this total, $12,426,000 in cashwas invested in short term securities during the six months ended June 30, 2008. Cash was consumed by the loss of $4,387,000 less non-cash expenses of $677,000 for stock-based compensation issued for services and $179,000 for depreciation and amortization. A net increasein accounts payable and accrued liabilities of $236,000 generated cash arising from the increased level of activities. Deferred revenuesincreased by $1,560,000 from the Novartis license agreement.
Net cash consumed by operating activities was $1,488,000 during the six months ended June 30, 2007. Cash was consumed by the loss of$1,952,000 less non-cash expenses of $632,000, $133,000 for depreciation and amortization, and $499,000 for stock-based compensationissued for services. A decrease in accounts receivable of approximately $316,000 in the six months ended June 30, 2007 provided cash.Increases in inventory of $197,000 to support product sales and anticipated revenue increases consumed cash. A decrease in accountspayable and accrued liabilities of $290,000 also consumed cash, as liabilities were paid.
Investing Activities
Net cash outflows from investing activities consumed $416,000 during the 2008 period. The net outflow was attributable to purchases ofproperty and equipment of $97,000 and payments of $317,000 for patents and trademark application costs.
Net cash outflows from investing activities consumed $451,000 during the 2007 period. The outflow was attributable to purchases ofproperty and equipment of $212,000 and payments of $250,000 for patents and trademark application costs.
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Financing Activities
Net cash outflow from financing activities consumed $641,000 during the 2008 period. Proceeds of $519,000 from the exercise of commonstock options was received, $992,000 was consumed to repurchase and retire the Company’s common stock and $168,000 was consumedfor repayments under existing debt agreements.
Net cash inflows from financing activities generated $9,572,000 during the 2007 period. Proceeds of $9,663,000 from the exercise ofcommon stock options and warrants were received, net of $92,000 for repayments under existing debt agreements.
Recently issued accounting pronouncements:
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”).SFAS 159 allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fairvalue option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair valueoption is elected for an instrument, SFAS 159 specifies that unrealized gains and losses for that instrument be reported in earnings at eachsubsequent reporting date. SFAS 159 was effective for us on January 1, 2008. We did not apply the fair value option to any of ouroutstanding instruments and, therefore, SFAS 159 did not have an impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes aframework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair valuemeasurements. SFAS 157 was effective for us on January 1, 2008 for all financial assets and liabilities. For all nonfinancial assets andliabilities, SFAS 157 is effective for us on January 1, 2009. As it relates to our financial assets and liabilities, the adoption of SFAS 157 didnot have a material impact on our consolidated financial statements. We are still in the process of evaluating the impact that SFAS 157 willhave on our nonfinancial assets and liabilities.
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 themeaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. Thesestatements relate to future events or the Company’s future financial performance and involve known and unknown risks, uncertainties andother factors that may cause the actual results, levels of activity, performance or achievements of the Company or its industry to bematerially different from those expressed or implied by any forward-looking statements. In some cases, forward-looking statements can beidentified 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-LookingStatements” and “Risk Factors” in the Company’s Form 10-KSB for the year ended December 31, 2007 for a discussion of certainimportant factors that relate to forward-looking statements contained in this report. Although the Company believes that the expectationsreflected 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 anyforward-looking statements, whether as a result of new information, future events or otherwise.
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 theeffectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and15d-15(e) as of the last day of the period of the accompanying financial statements Based on that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls and procedures are effective as of June 30, 2008.
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 whichthis report relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financialreporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any legal proceedings, the adverse outcome of which would, in our management’s opinion, have a material adverseeffect on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) The following sets forth the equity securities we sold during the period covered by this report, not previously reported on Forms 10-Qor 8-K, which were not registered under the Securities Act.
During the three months ended June 30, 2008, 45,000 options to acquire common shares exercisable at $6.01 per share were granted to aconsultant in consideration for investor relations services. The options vested upon grant and expire in three years. The Company relied onthe exemption under section 4(2) of the Securities Act of 1933 (the “Act”) for the above issuances. No commission or other remunerationwas paid on these issuances.
(c) The following sets forth all repurchases of the Company’s common stock made in the quarter covered by this report.
AspenBio Pharma, Inc.
Issuer Purchases of Equity Securities
Period
Total Number of
SharesPurchased(1)
AveragePrice Paidper Share
Total Number ofShares Purchased
asPart of Publicly
AnnouncedProgram
ApproximateDollarValue
That May Yet BePurchased Under
the Program
April 25-30, 2008 175,000 $ 4.29 175,000 — May 1- 31, 2008 22,000 4.17 22,000 — June 1-30, 2008 35,000 4.27 35,000 —
Total 232,000 $ 4.28 232,000 (2)
(1) All shares purchased were acquired in open market purchases and acquired under the publically announced buy-back plan.
(2) On April 25, 2008, the company announced an authorized common stock repurchase program of up to $5 million that may be madefrom time to time at prevailing prices as permitted by securities laws and other requirements, and subject to market conditions andother factors. The program is administered by management and may be discontinued at any time. The above amounts represent totalcumulative purchases to date and potentially leave an additional approximate $4,008,000 that was authorized under the program.
Item 4. Submission of Matters to a Vote of Security Holders
On June 9, 2008, the Company held its 2008 Annual Meeting of Shareholders. At the meeting the following directors were elected to serveuntil the next annual meeting or until their successors are elected and qualified:
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Name Shares FOR
WITHHOLD AuthorityTo
Vote
Richard G. Donnelly 23,718,782 244,839 Douglas I. Hepler 23,740,717 222,904 Gregory Pusey 23,752,255 211,366 Gail S. Schoettler 23,128,373 835,248 David Welch 23,238,081 725,540 Mark J. Ratain 23,795,503 168,118
Proposal: Amendment to the Company's 2002 Stock Incentive Plan Increasing the Common Shares Reserved Under the Plan to 4,600,000from 4,250,000.
Shares FOR Shares AGAINST ABSTAIN
13,959,902 722,970 85,160
Item 6. Exhibits
(a) Exhibits
EXHIBIT DESCRIPTION
10.1 Exclusive License Agreement with Novartis Animal Health, Inc., dated as of April 2, 2008.31.1 Rule 13a-14(a)/15d-14(a) - Certification of Chief Executive Officer. Filed herewith.31.2 Rule 13a-14(a)/15d-14(a) - Certification of Chief Financial Officer. Filed herewith.32 Section 1350 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the SARBANES-
OXLEY ACT of 2002. Filed herewith.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this Report to be signed on its behalf bythe undersigned, thereunto duly authorized.
AspenBio Pharma, Inc.(Registrant)
Dated: August 13, 2008 By: /s/ Jeffrey G. McGonegal Jeffrey G. McGonegal, Chief Financial Officer
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Exhibit 10.1
**Note: Confidential Information has been omitted pursuant to a request for confidential treatment and has been filed separately withthe Securities and Exchange Commission
EXCLUSIVE LICENSE AGREEMENT
This AGREEMENT is made effective as of this 2nd day of April, 2008 (the “Effective Date”), by and between Novartis Animal Health Inc,a corporation organized and existing under the laws of Switzerland and having its principal office at Schwarzwaldallee 215, 4058 Basel,Switzerland (hereinafter referred to as “Novartis”) and AspenBio Pharma, Inc, a corporation organized and existing under the laws of theState of Colorado, U.S.A., and having its principal office at 1585 South Perry Street, Castle Rock, Colorado 80104, United States ofAmerica (hereinafter referred to as “Aspen”).
RECITALS
WHEREAS, Aspen owns or has access to certain intellectual property and other assets, including but not limited to patent rights,know-how, and embodiments in connection therewith, relating to recombinant single chain reproductive hormone technology licensed toAspen under the Washington University Agreement (the “Licensed Technology”) for use in non-human mammals in the Field (as definedherein);
WHEREAS, Aspen has rights to grant a license and sublicense, and be a licensor and sublicensor (“Licensor”), under Aspen PatentRights and Aspen Know-How (as defined herein), and desires to grant to Novartis a license and sublicense to these rights under the termsand conditions set forth herein; and
WHEREAS, Novartis desires to obtain a license and sublicense, and thereby become a licensee and sublicensee (“Licensee”), under theAspen Patent Rights and Aspen Know-How in accordance with the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties herein contained, the parties hereto,intending to be legally bound, do hereby agree as follows.
ARTICLE I. Definitions
Unless specifically provided otherwise, the terms in this Agreement with initial letters capitalized, whether used in the singular orplural, shall have the meaning as designated:
1.1 “Affiliate” means, with respect to any Person, any other Person that directly, or indirectly, through one or more intermediaries,controls, is controlled by, or is under common control with, such specified Person. “Control” (including the terms “controlled by” and“under common control with”), with respect to the relationship between or among two or more Persons, means the possession, directly orindirectly, or as trustee or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether throughthe ownership of voting securities, as trustee or executor, by contract or otherwise, including, without limitation, the ownership, directly orindirectly, of securities having the power to elect a majority of directors or similar body governing the affairs of such Person.
1.2 “Regulatory Agency” shall mean any governmental regulatory authority responsible for granting approvals, registrations, importpermits, and other approvals required before the Licensed Technology or Licensed Products may be tested or marketed in any country.
1.3 “Calendar Quarter” shall mean the respective periods of three (3) consecutive calendar months ending on March 31, June 30,September 30 and December 31.
1.4 “Calendar Year” shall mean each successive period of twelve (12) months commencing on January 1 and ending on December31.
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1.5 “Change of Control” means any of the following events: (i) any Person is or becomes the “beneficial owner” (as defined in Rules13d-3 and 13d-5 of the Securities Exchange Act of 1934, as amended, except that a person shall be deemed to have “beneficial ownership”of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time),directly or indirectly, of over 50% of the total voting power of all classes of capital stock then outstanding of Aspen normally entitled tovote in elections of directors; (ii) Aspen consolidates with or merges into another corporation or entity, or any corporation or entityconsolidates with or merges into Aspen, in either event pursuant to a transaction in which over 50% of the total voting power of all classesof capital stock then outstanding of Aspen normally entitled to vote in elections of directors is changed into or exchanged for cash,securities or other property; (iii) Aspen conveys, transfers or leases all or substantially all of its assets relating to this agreement to anyperson; or (iv) (a) during any period of two consecutive years, commencing after the Effective Date, individuals who immediately after theEffective Date constituted the Board of Directors of Aspen (together with any new directors whose election by such Board or whosenomination for election by the shareholders of Aspen was approved by a vote of 66 2/3% of the directors then still in office who wereeither directors at such time or whose election or nomination for election was previously so approved) cease for any reason to constitute amajority of the Board of Directors of Aspen then in office and (b) a new majority of the board is comprised of directors who are officers ofa competitor of Novartis. For avoidance of doubt, “Change of Control” shall not include a public or private offering or a venture ormezzanine financing round for Aspen, or the election of a new majority on Aspen’s Board of Directors except where a venture ormezzanine financing round is funded by a competitor of Novartis, or such new majority is comprised of officers of a competitor in whichcase the venture or mezzanine financing round or new majority shall be considered a Change of Control.
1.6 “Field” shall mean the assistance and facilitation of reproduction in bovine mammals, including, without limitation, cattle,buffalo and bison, using in any way single chain luteinizing hormone or follicle stimulating hormone.
1.7 “First Commercial Sale” shall mean, with respect to a Licensed Product, the first sale for use or consumption by the public ofsuch Licensed Product in a country after all required approvals, including marketing and pricing approvals as mandated in such country,have been granted by applicable Regulatory Agency in such country, provided such term shall not include pre-approval sales, sales pendingapproval or sales under less than full approval irrespective of whether or not such sales are permitted by the applicable Regulatory Agency.
1.8 “First Refusal Technology” shall mean any application of recombinant single-chain reproductive hormone technology, includingthe Licensed Technology, for equine reproduction.
1.9 Gross Margin” shall be an amount equal to the Net Sales of the Licensed Products less the bona fide cost of goods for theLicensed Products. Cost of goods shall consist of variable and fixed production costs directly attributable to the production of the LicensedProducts on a country-by-country basis, including factory overhead, transportation and changes in the value of existing inventory. For theavoidance of doubt, inventory shall be valued at the lower of cost or market on a consistent basis.
1.10 “Licensed Product” shall mean any bovine luteinizing hormone (LH) or bovine follicle stimulating hormone (FSH) product, infinished pharmaceutical form, the manufacture, use, sale, offer for sale, or importing of which would, but for the license(s) grantedhereunder, constitute infringement of a Valid Claim of Aspen Patent Rights; or which incorporates or embodies or was developed withbenefit of Aspen Know-How or Licensed Technology.
1.11 “NADA” shall mean a New Animal Drug Application in the U.S. or the corresponding application for authorization formarketing of Licensed Product in any other country or group of countries, as defined in the applicable laws and regulations and filed withthe Regulatory Agency of a given country or group of countries.
1.12 “Net Sales” shall mean, in accordance with Generally Accepted Accounting Principles, the gross price of Licensed Productwhich is sold, transferred for value or otherwise transferred by Novartis or its Affiliates to independent, third-party customers in connectionwith bona fide, arms-length transactions or exchange, after deducting, to the extent paid by Novartis, if not previously deducted in theamount invoiced or received:
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(i) quantity and/or cash discounts actually allowed or taken;
(ii) freight, postage and shipping insurance (allocated in accordance with Novartis’ standard allocation procedure);
(iii) customs duties and taxes, if any, directly related to the sale;
(iv) amounts repaid or credited by reason of rejections, return of goods, retroactive price reductions specificallyidentifiable as relating to Licensed Product;
(v) amounts incurred resulting from governmental (or a Regulatory Agency thereof) mandated rebate programs;
(vi) third party rebates and chargebacks related to the sale of Licensed Product to the extent actually allowed; and
(vii) as mutually agreed by the parties in writing, any other specifically identifiable amounts included in LicensedProduct’s gross sales that were or ultimately will be credited and that are substantially similar to those listed herein above.
“Net Sales” shall not include disposition of Licensed Product by Novartis or its Affiliates as samples (promotion or otherwise) ordisposition as donations to, for example, non-profit institutions or government Regulatory Agencies for a non-commercial orhumanitarian purpose to the extent that such disposition shall not exceed in any Calendar Year a total of 5% of the equivalent of eitherthe number of units or revenues from commercial sales, unless such disposition is approved in advance by Licensor. For purposes ofreporting by Licensee to Licensor, whether or not any disposition (e.g., as samples or donations) of Licensed Product is subject toroyalty herein, Licensee shall provide an accounting of such disposition.
1.13 “Novartis Technical Information and Patent Rights” shall mean all technical information, improvements, inventions, discoveriesand other technology, whether or not patentable, made or developed by Novartis in the course of its development work pursuant to thisAgreement, including the Development Agreement (as defined in section 4.1), which relate specifically to Licensed Technology orLicensed Products, or the development, manufacture or use of the same, and any patent, patent applications, or other intellectual propertyrights obtained as a result of the foregoing.
1.14 “Person” means any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, aswell as any syndicate or group that would be deemed to be a person in the United States under Section 13(d)(3) of the Securities ExchangeAct of 1934, as amended, and the equivalent thereof as would be understood in a foreign jurisdiction.
1.15 “Proprietary Information” shall mean and include, without limitation, information and data of one party provided to the other inconnection with this Agreement, including Aspen Know-How, Novartis Technical Information and Patent Rights and all other scientific,clinical, regulatory, marketing, financial, and commercial information or data, whether communicated in writing or orally or by othermeans.
1.16 “Aspen Know-How” shall mean all information and data, technical information, trade secrets, specifications, instructions,processes, formulae, expertise and information necessary to generate, develop, improve upon, or practice the Licensed Technology orLicensed Products, and their manufacture or use in the Field, known to Aspen or an Affiliate thereof as of the Effective Date or during theterm of this Agreement and in respect of which Aspen has the right to grant Novartis a license or sublicense. Aspen Know-How shallinclude, without limitation: (i) all biological, chemical, pharmacological, biochemical, toxicological, pharmaceutical, physical andanalytical, safety, quality, manufacturing, preclinical and clinical data, instructions, processes, formulae, expertise and information, relevantto the manufacture, use or sale of and/or which may be useful in studying, testing, development, production, formulation or use of LicensedTechnology, or intermediates for the synthesis thereof, or Licensed Products; and (ii) copies of registration documents and amendments orsupplements thereto filed with the FDA, or other similar Regulatory Agency, by Aspen and all correspondence to and from such RegulatoryAgency relevant to Licensed Technology or Licensed Products.
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1.17 “Aspen Patent Rights” shall mean all patent rights owned, or licensed (with the right to grant sub-licenses) by Aspen or anAffiliate thereof, as of the Effective Date or during the term of this Agreement, which relate to Licensed Technology or Licensed Products,and their development, manufacture, or use in the Field. Aspen Patent Rights existing as of the Effective Date are set forth in Exhibit A andAspen Patent Rights obtained or acquired by, or licensed to Aspen or an Affiliate thereof during the term of this Agreement shall beconsidered added to said Exhibit. Aspen Patent Rights shall include all patents and patent applications, and all divisionals, continuations,continuations-in-part, re-examinations, reissues, extensions, registrations, and supplementary or complementary certificates and the like.Aspen Patent Rights shall also include Aspen’s, or an Affiliate’s, share of any patent rights jointly owned by Aspen or that Affiliate thereof,in the event that Aspen or that Affiliate has not acquired the right to license all joint owners’ shares under such patent rights. For avoidanceof doubt, the Parties acknowledge that Aspen is engaged in activities outside of the Field which may involve elements of the LicensedTechnology, and the Aspen Patent Rights shall not include a license to such activities or rights to the extent not applicable to the Field.
1.18 “Territory” shall mean the world.
1.19 “Third Party Competition” shall have the meaning set forth in Section 3.4
1.20 “Valid Claim” shall mean a claim of a Published Claim or issued patent or equivalent right in a foreign jurisdiction which hasnot been abandoned or rejected, revoked or held invalid or unenforceable by a decision of a court or other government agency of competentjurisdiction, and is not amenable to further prosecution in good faith, reinstatement or revival and is unappealable or unappealed within thetime allowed for appeal.
1.21 Published Claim” shall mean a claim in a pending patent application which has been published by the United States Patent andTrademark Office, World Intellectual Property Organization or foreign equivalent, which claim has not been the subject of an unfavorablepatentability opinion generated in good faith by outside counsel who shall be reasonably acceptable to both Parties.
1.22 “Washington University Agreement” shall mean the license agreement between Aspen and The Washington University datedMay 10, 2004 pursuant to which Aspen has licensed in the Licensed Technology.
ARTICLE II. Scope of License.
2.1 Grant of License. Subject to the terms of this Agreement, and in particular for consideration hereunder, Aspen hereby grants toNovartis and its Affiliates an exclusive fee and running royalty-bearing license in the Territory, under and to the Aspen Patent Rights andAspen Know-How, to import, make, or have made, to develop or have developed, for use, sale, distribution and offer for sale in the Field,and to use, sell, distribute, and offer to sell, in the Field, Licensed Products (hereinafter the “License”).
2.2 Restrictions on Aspen. During the term of this Agreement Aspen will not sell, directly or indirectly either independently or incooperation with a third party, any products which may compete with the Licensed Products in the Field. Also during the term of thisAgreement, Aspen will grant no licenses nor make assignments to a third party in or to any patents, patent applications, or know-howowned or controlled by Aspen or an Affiliate thereof (including but not limited to the Aspen Patent Rights and Aspen Know-How) relatingto the Licensed Products in the Field, wherein such licenses or assignments are in conflict with or would limit Novartis rights under thisAgreement.
2.3 Right of First Option and First Refusal. For consideration paid hereunder, Aspen also grants to Novartis a right of first option andfirst refusal to develop, commercialize and/or otherwise exploit the First Refusal Technology. Aspen shall provide prompt written notice toNovartis of its desire to develop, commercialize and/or exploit the First Refusal Technology.
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(a) First Option: Within one hundred and twenty (120) calendar days after receipt of such notice (the “Option Period”).Novartis shall notify Aspen in writing of its decision on whether to exercise its right of first option to negotiate in good faith a license underAspen’s Patent Rights and Know How for the development and commercialization of the First Refusal Technology. If Novartis elects toexercise its right of first option, the parties shall enter into a new agreement, regarding the development and commercialization of the FirstRefusal Technology, which agreement shall be negotiated and the key material terms agreed upon in writing within six (6) months ofNovartis notice during which Aspen shall negotiate exclusively with Novartis and refrain from directly or indirectly making the FirstRefusal Technology available to a third-party until the conclusion of such negotiations. The Parties may, upon mutual agreement, extend orreduce the six (6) month term set forth herein.
(b) First Refusal: If the Parties fail to reach agreement during this period, Aspen shall be free to make the First RefusalTechnology available to third-parties, provided that, Aspen shall not execute an agreement with or otherwise bind itself to a third party withrespect to such First Refusal Technology without giving notice of such third party binding offer to Novartis and providing Novartis with athirty (30) day period (the “First Refusal Period”) within which to enter into a binding offer with Aspen on material financial terms andconditions no less favorable to Aspen than those contained in the third party offer (the “First Refusal Right”). Aspen shall provide Novartiswith information of sufficient particularity for Novartis to understand such material financial terms and conditions. If Novartis fails toexecute such Agreement within such First Refusal Period, then Aspen shall be free to enter into an agreement with such third party withrespect to the First Refusal Technology. If upon expiration of the Option Period, Novartis fails to provide the required notification toAspen, Aspen shall be free of any restriction regarding the First Refusal Technology.
(c) Grace Period. The Parties agree that Aspen’s notice provided under section 2.3 shall be provided no earlier than thesix (6) month anniversary of the Effective Date. Notice provided prior to this date shall be void and ineffective to begin the 120 day periodset forth therein.
2.4 Right of First Option on other Species: Aspen hereby grants to Novartis and its Affiliates a first option to negotiate in good faith alicense under Aspen’s Patent Rights and Know-How for the use of the Licensed Technology in other species of non-human mammals. Suchoption shall be exercisable by Novartis within one hundred twenty (120) days following Aspen’s written notice of its intent to develop suchother products. Upon exercise, the procedure set forth in 2.3(a) shall apply. If upon expiration of the one hundred twenty day period,Novartis fails to provide the required notification to Aspen, Aspen shall be free of any restriction with respect to said products. Foravoidance of doubt, Novartis the right of first refusal under 2.3(b) shall not apply to this section 2.4.
ARTICLE III. Consideration.
The compensation structure and terms, including such for fees and royalties, has been contemplated, determined, and set forth for themutual benefit and convenience of the Parties; the Parties acknowledge that the compensation herein in part reflects the bundling of certainrights, wherein such rights include access to patent and non-patent rights.
3.1 Collaboration Fee. In partial consideration of the present availability and willingness of Aspen to engage in future collaboration,and execution of the Development Agreement, Novartis shall pay Aspen upon execution of this Agreement a non-creditable and non-refundable amount of One Million Dollars ($1,000,000 USD) (the “Collaboration Fee”).
3.2 Milestone Payments. In addition to the Collaboration Fee, as further consideration for the rights and licenses granted by Aspenunder this Agreement, Novartis shall pay to Aspen the following payments which, subject to the provisions of this agreement, shall be non-creditable and non-refundable upon the occurrence of the milestone event noted beside such payment (“Milestone Payments”):
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MILESTONE PAYMENTS
Milestone Event Payment $USD
1. Conclusion of Pilot Study Establishing Efficacy of Bovine LH and Execution of DevelopmentAgreement
$ 900,000
2. Notice by Aspen of Right of First Option and First Refusal under Section 2.3 $ 50,000 3. First Notice by Aspen of Right of First Option for additional species under Section 2.4. $ 50,000
(a) Novartis shall pay an amount equal to the sum of all the Collaboration Fee and all Milestone Payments set forth aboveupon execution of the Agreement, which amount shall consist of the Collaboration Fee, and advance payments of the Milestone Paymentswhich amounts shall be refunded to Novartis by Aspen upon the non-occurrence of the corresponding Milestone Event and as set forth in3.2(c).
(b) Except in the event of breach as set forth in section 12.5, Milestone Payments hereunder and as set forth herein, shallbe non-refundable following achievement of applicable event, provided that any advance payments may, until such achievement, berefunded in the event that the corresponding Milestone Event is not achieved.
(c) Allocation and Return of Milestone Payments; Results of Bovine LH Pilot Study: The Parties have agreed thatNovartis and Aspen shall conduct a pilot study designed to establish the efficacy of Bovine LH, set forth in the Development Agreement,which study design shall be reasonably satisfactory to Novartis and Aspen (The “LH Pilot Study”) and at the sole expense of Novartis,which expense shall be non-refundable. For avoidance of doubt, retention of the Milestone Payments is contingent upon the LH Pilot Studyestablishing efficacy and safety, the results within parameters reasonably acceptable to and agreed by both Parties, which amount paid shallbe refunded to Novartis in the event that such results are not achieved.
(d) The Parties expressly agree that the payments and refunds set forth in this section do not represent liquidated damagesin the event of breach by either Party and shall in no way be deemed remedies thereto.
3.3 Royalty Payments.
(a) Novartis shall pay to Aspen royalties at the royalty rates set forth below on Gross Margin from sales of LicensedProduct by Novartis or its Affiliates on a country-by-country and Calendar Quarter basis in the Territory as follows:
(i) Patent Royalty. A “patent royalty” on Gross Margin shall be due as provided in Table III until the expiry of the last toexpire of Aspen Patent Rights granted in such country where a Valid Claim exists that covers the Licensed Products which could beinfringed by the sale of said Licensed Product in that country but for the license granted hereunder, and for such additional period (if any)for which the effective period of patent protection for such product is extended by any patent term extension, prolongation or equivalentmeasure (such as a Supplemental Protection Certificate) in that country; provided that upon the non-issuance, invalidity or expiration of allpatents and patent applications covering Licensed Products the applicable Know-How Royalty shall apply.
Table III.
Running Royalties
Licensed Product Royalty Type
RoyaltyRate(% ofGross
Margin)
Covered by one or more Valid Patent Royalty ***% Claims of a Aspen Patent Right in the applicable country.
Not Covered by one or more Valid Claims and Know-How Royalty ***% no Third Party Competition in applicable country
Not Covered by one or more Valid Claims and Competitive Know-How ***% Third Party Competition for sale in applicable country Royalty
*** [Confidential treatment requested — the omitted information has been filed separately with the Securities and Exchange Commission]
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(ii) In non-patent countries, where there is no Valid Claim such that the manufacture, sale or offer for sale of saidLicensed Product does not infringe an Aspen Patent Right or Valid Claim, and no Third Party Competition, a “know-how royalty” of[Confidential treatment requested — the omitted information has been filed separately with the Securities and ExchangeCommission]***% (or less subject to 3.4 below) of Gross Margin shall be due Aspen until ten (10) years after the First Commercial Sale ofthe Licensed Product in any form in such country, or for the maximum shorter period as applicable law permits for an exclusive know-howlicense. In the event a non-patent country becomes a patent country under 3.3(i), through the issuance or presence of a Valid Claim, thePatent Royalty shall apply from the beginning of the next quarterly reporting period following such conversion. Both Parties represent thatapart from information already provided to one another,, neither, to the best of its knowledge and belief, is aware of any jurisdiction where aKnow-How Royalty would not be available under law for less than a period of ten years or is otherwise unlawful.
(iii) Unless otherwise agreed or prohibited, for each country, upon complete expiration of Novartis’ obligation to payroyalties pursuant to this Section 3.2, Novartis shall have a fully paid-up, royalty-free license, with the right to sub-license, in the applicablecountry, under and to the Aspen Patent Rights and Aspen Know-How, to import, make or have made, to develop or have developed, foruse, sale, distribution and offer of sale in the Field, and to use, sell, distribute and offer to sell in the Field, Licensed Technology andLicensed Products, in said country.
(iv) Royalty Obligations of Aspen: Aspen shall be solely responsible for timely payment of all royalties due by Aspen toother intellectual property rights holders (including but not limited to royalties to be paid by Aspen under the Washington UniversityAgreement and manufacturing agreements related to the Licensed Technology and any other possible royalties due other intellectualproperty right holders as referenced in Section 3.5) which are necessary for the performance of this Agreement and the commercializationof the Licensed Products hereunder.
3.4 Third Party Competition — Competitive Know-How Royalty. In the event that substantial competition in the sale of a LicensedProduct arises in a country in which no patent royalty is due, pursuant to Section 3.3(a)(i), as a result of a third-party market introduction ofa product containing Licensed Technology or which would constitute a Licensed Product under this Agreement, then any know-how royaltyotherwise payable for said country pursuant to Section 3.3(a)(ii) shall be a “competitive know-how royalty” of [Confidential treatmentrequested — the omitted information has been filed separately with the Securities and Exchange Commission]***% (or less subject to 3.5below) of Gross Margin; and such reduction shall commence with the first full Calendar Quarter following Novartis’ written notification toAspen of the existence of said substantial competition. Substantial competition as used in this Section 3.4 means the unit sales of the thirdparty product which total at least twenty percent (20%) of the total market Licensed Product unit sales of Licensed Product in said countryover any three (3) month period. Such substantial competition shall be measured by comparing Novartis’ unit sales and those of the thirdparty, as reported by an independent market research firm acceptable to both parties. The Parties agree that a country subject to this section3.4 may revert to being subject to a Know-how or Patent royalty upon the occurrence of an event which eliminates the substantialcompetition and establishes an enforceable barrier to future substantial competition. Moreover, for avoidance of doubt, the existence ofsubstantial competition in violation of applicable criminal or trade law shall not result in reduced royalty hereunder.
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3.5 Third Party Obligation — Reduction in Royalties. In the event Novartis is required to obtain a license from any unaffiliated thirdparty under any patent or other intellectual property right reasonably necessary to practice the Licensed Technology or commercialize theLicensed Product, apart from any trademark right or copyright, and is obligated to pay a royalty to such unaffiliated third party or parties inany country in respect of Licensed Product, for which royalties are due under this Agreement, then Novartis shall have the right to deductthe amount of such royalties which Novartis pays for such product, in such country in a Calendar Quarter, from the royalties otherwise to bepaid to Aspen under this Agreement for such product in such country provided that, for any given third-party royalty, to the extent theamount deducted results in an effective royalty rate reduction to Aspen of fifty percent (50%) of the otherwise applicable royalty rate absenta third party obligation, and such third party obligation remains unsatisfied, any further deduction shall be jointly shared by both Parties ona pro rata scale in proportion to the otherwise applicable royalty rate. Aspen shall remain responsible for any royalty obligations due tothird parties under Aspen Patent Rights which have been licensed to Aspen and are sub-licensed to Novartis hereunder.
3.6 Reports: Payment of Royalty.
(a) All payments made by Novartis to Aspen under this Agreement shall be made in United States dollars.
(b) Royalty Obligations. Unless otherwise agreed by the Parties, during the term of the Agreement following the FirstCommercial Sale of a Licensed Product, Novartis shall furnish to Aspen once each quarter a written report for the Calendar Quartershowing the sales of all Licensed Product(s) subject to royalty payments in each country during the reporting period and the royaltiespayable under this Agreement. Reports and Royalty Payments shall be due within sixty (60) days following the close of each CalendarQuarter. Novartis shall keep complete and accurate records in sufficient detail to enable the royalties payable hereunder to be determined.
(c) Payment Dates: For any calendar year hereunder, unless otherwise agreed, the payments shall be made on theschedule set forth on Exhibit C, which may be updated from time to time upon the mutual agreement of the Parties.
3.7 Audits.
(a) Upon the written request of Aspen and not more than once in each Calendar Year, Novartis shall permit anindependent certified public accounting firm of recognized standing selected by Aspen and reasonably acceptable to Novartis, at Aspen’sexpense, to have access during normal business hours to such records of Novartis as may be reasonably necessary to verify the accuracy ofthe royalty reports hereunder for any Calendar Year ending not more than thirty six (36) months prior to the date of such request. Theauditing party’s representative or agent will be required to execute a reasonable confidentiality agreement prior to commencing any suchinspection. Such auditor shall report only on the accuracy of the information provided by Novartis and whether additional royalties areowed.
(b) If such accounting firm concludes that additional royalties were owed during such period, Novartis shall pay theadditional royalties within thirty (30) days of delivery to Novartis of such accounting firm’s written report so concluding. Novartis shallreimburse Aspen for accounting costs in the event the underpayment of royalties is determined to exceed 10% of the total royalty paymentotherwise due.
(c) All information subject to review under this Section 3.7 is subject to the confidentiality provisions of this Agreement.
ARTICLE IV. Research and Development; Collaboration
4.1 Novartis and Aspen shall enter into a Development Agreement (the “Development Agreement”), no later than sixty (60) daysfollowing the Effective Date hereunder, the terms of which shall be negotiated in good faith and subject to and incorporated into thisAgreement, for the development and commercialization of Licensed Product(s) and future product(s) consistent with the terms set forth inthe term sheet which is attached hereto as Exhibit B. For avoidance of doubt, the Parties agree that the Development Agreement shallreflect the Parties’ commitment to share in decisions and costs associated with research and development of Licensed Product(s) in theField.
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4.2 Both Parties represent and affirm that it is their mutual intent to enter into the Development Agreement, and both Partiesacknowledge that the Development Agreement represents a substantial portion of the mutually beneficial purpose of this Agreement.Accordingly, the Parties agree that the failure or refusal of either Party to, in good faith, negotiate and enter into the DevelopmentAgreement shall constitute breach of this Agreement, as set forth in 12.3, provided that any remedy for such breach shall be withoutprejudice to the rights of the non-breaching Party.
(a) Notwithstanding anything to the contrary in this Agreement, in the event of an uncured breach by Aspen under thissection, and provided that Novartis is not otherwise in material breach of this Agreement, this Agreement shall continue for so long asNovartis complies with its royalty obligations hereunder and does not otherwise materially breach the terms of this Agreement and Novartismay elect, at its sole option, in addition to the remedy set forth in 12.5(c), to exercise the remedies set forth under Section 13 (Change ofControl) with respect to Aspen.
(b) Notwithstanding anything to the contrary in this Agreement, in the event of an uncured breach by Novartis under thissection, and provided that Aspen is not otherwise in material breach of this Agreement, Aspen shall be entitled to retain all milestonepayments, whether vested or unvested, and all licenses granted hereunder to Novartis shall immediately terminate and revert to Aspen, asset forth herein.
4.3 Unless expressly stated to the contrary in the Development Agreement, any conflict between the Development Agreement andthis Agreement shall be resolved in favor of this Agreement.
4.4 Notwithstanding anything to the contrary in this Agreement, and as further set forth in the Development Agreement, Novartisshall use all reasonable efforts to develop and commercialize the Licensed Products hereunder. Novartis will ensure that Products are givencomparable marketing and promotional priority relative to other products for the Field in the Territory and relative to other comparableproducts sold by or on behalf of Novartis in the Territory.
4.5 Non-Performance. In the event Novartis substantially fails to perform its obligations under Section 4.4, and such failure is in noway attributable to Force Majeure (as defined in section 15.5) then Novartis shall be deemed in material breach of this Agreement pursuantto 12.3.
ARTICLE V. Ownership of Inventions.
Except as specifically stated herein or as to be set forth in the Development Agreement, nothing herein is intended to transferownership of rights from one Party to the other. Novartis shall own the entire right, title and interest in and to all Novartis TechnicalInformation and Novartis Patent Rights, and Aspen shall own the entire right, title and interest in and to all Aspen Know How and AspenPatent Rights. Inventorship of all patentable subject matter including Know-How developed, conceived or reduced to practice in the courseof performing activities under this Agreement shall be determined in accordance with United States patent laws.
ARTICLE VI. Confidentiality.
6.1 Duty of Confidence. All Proprietary Information will be maintained in confidence and otherwise safeguarded by the recipientparty, will be used only for the purposes of this Agreement and pursuant to the rights granted to the recipient under this Agreement, and willnot be disclosed to third parties and will be made available only to the employees or agents (including attorneys) of the receiving party orits Affiliates who need to know for purposes permitted under this Agreement. Each party shall hold as confidential such ProprietaryInformation in the same manner and with the same protection as such party maintains for its own confidential information, but with no lessthan a reasonable degree of care. A party may disclose Proprietary Information of the other party to a third party solely to the extentnecessary for furthering the purposes of this Agreement, provided that: (a) the receiving party gives prompt written notice to the disclosingparty of the proposed disclosure to the third party, and the disclosing party is provided a period of thirty (30) days to reasonably object toall or any portion of the disclosure; and (b) after receiving the consent of the disclosing party (or after the response period expires withoutobjection by the disclosing party), the third party thereafter agrees in writing to maintain the confidentiality of the Proprietary Informationin a manner consistent with the confidentiality provisions of this Agreement. In contemplating whether disclosure is made to a third party,the receiving party shall take into reasonable consideration the comments and objections raised by the disclosing party.
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6.2 The mutual obligations of confidentiality under this Section shall not apply to any information to the extent that such information:
(a) is or hereafter becomes part of the public domain rightfully and through no action of the recipient or itsAffiliates which constitutes a breach or default under this Agreement;
(b) was already known to the recipient or its Affiliates as evidenced by prior written documents in its possessionwhich were not furnished by the disclosing party or its Affiliates;
(c) is disclosed by Aspen or Novartis to The Washington University pursuant to the requirements of theWashington University Agreement.
(d) is disclosed to the recipient or its Affiliates by a third party who is not in breach or default of any confidentialityobligation to the disclosing party or an Affiliate of the disclosing party; or
(e) is independently discovered or developed by the receiving party or its Affiliates without reference or access toProprietary Information provided by the disclosing party.
6.3 Disclosures Required By Law or For Purposes of Commercialization and/or Development. In the event the receiving party isrequired by law to disclose Proprietary Information of the disclosing party to a government health Regulatory Agency to obtain regulatoryapproval for Licensed Technology or Licensed Products, or is required to disclose Proprietary Information in connection with thecommercialization and sale of the Licensed Products or bona fide legal process, the receiving party may do so only if it limits disclosure tothat purpose, and after giving the disclosing party prompt written notice of any instance of such a requirement in reasonable time for thedisclosing party to take steps to object to or to limit such disclosure. In the event of disclosures required by law, the receiving party shallcooperate with the disclosing party as reasonably requested thereby.
ARTICLE VII. Trademarks.
7.1 Novartis shall have the right to sell Licensed Technology or Licensed Product under its own trademark or, at Novartis’ election,Aspen’s trademarks. In the latter case, Aspen and Novartis shall enter into a separate trademark License agreement to facilitate same.
ARTICLE VIII. Indemnification.
8.1 Indemnification.
(a) Each Party (the “Indemnifying Party”) shall defend, indemnify and hold the other Party and its Affiliates (the“Indemnified Party”) and their respective officers, directors, employees, independent contractors, agents, and assigns, harmless from andagainst any and all liability, damage, loss, cost or expense, including reasonable attorneys’ fees, resulting from any claims made or suitsbrought against the Indemnified Party or any of the foregoing Persons, which arise or result from:
(i) Any negligence or willful misconduct of the Indemnifying Party in the storage or handling of LicensedTechnology or Licensed Products;
(ii) Negligence or willful misconduct by the Indemnifying Party in its performance pursuant to this Agreement;
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(iii) Material breach by the Indemnifying Party of any of the covenants, warranties and representations made underthis Agreement;
(iv) Violation by the Indemnifying Party of any applicable law or regulation; or
(v) With respect to Aspen as Indemnifying Party, any award arising from a judicial determination, or settlementamounts arising from bona fide allegations or claims, that Novartis has infringed or is infringing the intellectual property or otherrights of another, apart from any trademarks or copyrights, through the exercise of the license granted herein.
(b) Each Party shall only be obligated to so indemnify and hold the other harmless to the extent that such liability,damage, loss, cost or expense does not arise from the negligence or willful misconduct of the indemnified Party.
(c) The Parties shall promptly notify one another of any such claim or suit as to which this indemnification applies. Anindemnified Party shall not agree to any settlement terms with respect to such claim or suit without the prior written consent of the otherParty, such consent not to be unreasonably withheld. The indemnified Party may, at its expense, retain its own counsel in connection withsuch claim or suit.
(d) The indemnification provisions hereunder shall be effective only when the aggregate amount of losses for whichindemnification is sought exceeds $500,000, in which case the indemnified Party shall be entitled to full indemnification thereof.
(e) Limitation of Infringement Indemnification Liability: Aspen’s indemnification obligation under 8.1(a)(v) shall in noevent exceed the cumulative amounts received by Aspen under this Agreement provided that such limitation shall not apply to the extentthat Aspen was aware of such infringement at the time of execution of this Agreement and did not disclose to Novartis or to any successorto Aspen in the event of a Change of Control.
8.2 Mitigation of Infringement. Without prejudice to any other remedies available to Novartis, in the event that any of the LicensedTechnology or Licensed Products (or uses thereof) are alleged to infringe a third party’s intellectual property rights, apart from trademarksand copyrights, and independent outside counsel for Novartis reasonably concludes that there is a significant possibility that such allegationmay be upheld in a litigation, in addition to any indemnity obligations which may arise, Aspen shall use reasonable efforts, with respect tosuch infringement, to promptly:
(a) procure for Novartis and its end users and customers the right to continue using the Licensed Products free of anyliability for infringement; or
(b) provide Novartis with a functionally equivalent, non-infringing replacement, or a design- around strategy to developthe generation thereof, for the Licensed Products otherwise complying with all of the requirements of this Agreement.
8.3 Insurance. During the Term, both Parties will, for each for their respective liability, secure and maintain a comprehensive generalliability insurance policy providing sufficient coverage for personal injury (including as a result of product liability) and property damage,at the level as is usual and customary in the veterinary pharmaceutical industry to procure. A certificate with regard to said policies will bedelivered to the other Party upon such Party’s request.
ARTICLE IX. Patent Infringement.
9.1 Notification. Each party hereto shall promptly inform the other party of any infringement of the Aspen Patent Rights of which ithas knowledge.
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9.2 Right to bring action. Novartis shall have the right to initiate legal action in respect of any infringement of the Aspen PatentRights in the Field in the Territory; provided, however, that if, within six (6) months of receiving written notice of an infringement and arequest by Aspen that it take action with respect thereto, or if within twenty-one (21) days after Novartis and/or Aspen have receivednotification of patent certification as set forth under Section 11.3 below, Novartis fails to terminate such infringement or to commence suitto such end, then thereafter Aspen shall have the right, but not the obligation, to bring suit against such an infringement.
In any suit against an infringer brought in accordance with this Article, the prosecuting party shall have the right to control such suitand to join as a party to such suit the other party to the Agreement, and such other party shall cooperate in any such suit. To the extent thateither Party is a party to a suit involving rights hereunder with a third-party, the other Party to this Agreement hereby consents to beingjoined in said litigation.
9.3 Costs and Expenses: Recovery. The costs and expenses (including attorneys’ fees) of any suit against an infringement brought inaccordance with this Article shall be borne by the party controlling the prosecution of such suit. Any monetary recovery in connection withsuch infringement action shall first be applied to reimburse the prosecuting party for their out-of-pocket expenses (including reasonableattorneys’ fees) in prosecuting such infringement action. Once the parties have been reimbursed for their out-of-pocket expenses, theremainder will be apportioned in proportion to damages incurred by the parties.
9.4 Notification of Potentially Infringing Third Parties and Marking.
(a) Notification of Third Parties. The parties agree to consult each other in advance regarding the issue of whether andhow to provide notice to a suspected infringer, regardless of whether the activities of the third party relate to Aspen or Novartis rights,where such notice is independent of marking.
(b) Marking. Novartis shall comply with applicable requirements for patent marking in each given jurisdiction, including,e.g., 35 U.S.C. 287 and 35 U.S.C. 292 and foreign equivalents thereof, and engage in proper marking practice
ARTICLE X. Intellectual Property and Obligations and Warranty with Respect to Patents
10.1 Aspen shall promptly advise Novartis of any additions to, or deletions from the list of Aspen Patent Rights set forth in Exhibit B,including the issuance of patents upon any patent applications included therein.
10.2 Aspen and Novartis shall cooperate in good faith for pursuing patent prosecution and filing strategies with respect to theLicensed Technology and Licensed Products as to be set forth in the Development Agreement. Except as set forth therein, Aspen shalldiligently take all steps reasonably necessary to procure and to maintain the Aspen Patent Rights in full force and effect, including but notlimited to a duty to diligently file and pursue patent applications as applicable to the Licensed Technology and Licensed Products in thefield. If Aspen shall elect not to procure or to maintain any of such Patent Rights, it shall promptly notify Novartis of that election andshall, at Novartis’ request, assign to Novartis or its designee all right, title and interest in and to such Aspen Patent Right involved, in whichcase, if such Aspen Patent Right is the only Aspen Patent Right covering the Licensed Product in a country, then the payment of a patentroyalty hereunder shall cease with respect to sales of Licensed Product in the country involved, provided that such sales may be subject to aKnow-How Royalty as provided hereunder.
10.3 Except as set forth in the Development Agreement, ownership of any process, method, composition of matter, article ofmanufacture, discovery or finding that is conceived, discovered, developed and/or constructively or actually reduced to practice during theTerm in the conduct of activities pursuant to this Agreement (“Invention”) shall be determined as follows:
(a) Inventions and the intellectual property rights therein, invented and/or developed solely by employees of a Partyand/or persons obligated to assign inventions to that Party shall be owned by that Party.
(b) Inventions and the intellectual property rights therein, invented and/or developed jointly, shall be jointly owned byAspen and Novartis.
(c) The inventorship of any Invention made during the course of the Collaboration shall be determined in accordance withU.S. patent laws.
(d) To the extent that, subject to the Development Agreement, this Agreement is a “joint research agreement,” the Partiesagree to cooperate consistent with the provisions of section 35 U.S.C. 103(c) as amended.
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ARTICLE XI. Drug Price Competition and Patent Term Restoration
11.1 To the extent applicable, the parties agree to cooperate in an effort to avoid loss of any rights which may otherwise be availableto the parties hereto under the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984 including, indetermining, if applicable, which of Aspen’s Patent Rights shall be extended, although Novartis shall have the final decision in this regard.
11.2 Aspen agrees that applications for patent term extension are to be made by Novartis in the sixty (60) days period followingNADA approval or in the 60 day period following issuance of a patent with an issue date subsequent to the date of NADA approval,whichever is later; consequently, the parties agree that preparation for such application shall begin upon FDA’s issuance of an “ApprovableLetter”; the parties agree that the responsibility for such application shall be borne by Novartis and that Aspen will cooperate to the extentreasonably necessary in connection therewith.
11.3 Notice to a party of any “patent certification” filed by a third party applicant under a FDA application which references a U.S.patent licensed hereunder shall be promptly provided to the other party for possible action. Aspen agrees that Novartis, on Aspen’s behalf,may initiate the necessary action to prevent such applicant from obtaining FDA approval to market Licensed Product.
11.4 No actions or agreements which interfere with the activities set forth in this Article XI shall be undertaken or entered into afterthe Effective Date of the Agreement.
11.5 Aspen agrees that applications for patent term restoration or supplemental protection certificates in any country are to be madeby Novartis. The parties shall cooperate with each other in obtaining patent term restoration or supplemental protection certificates or theirequivalents in any country worldwide where applicable to the Aspen Patent Rights, at Novartis’ cost. Aspen shall provide all reasonableassistance to Novartis, including proceeding with applications for such in the name of Aspen and facilitating the cooperation of Aspen’slicensor(s), but at the cost of Novartis if so required.
ARTICLE XII. Term and Termination of the Agreement
12.1 Termination by Novartis. Novartis may terminate the Agreement in its sole discretion at any time during the term hereof:
(a) on one-hundred eighty (180) days prior written notice to Aspen;
(b) immediately, upon notice to Aspen, in the event that Aspen sells, transfers or otherwise disposes of all or a substantialportion of Aspen’s assets necessary for performance under this Agreement, where such assets are so determined necessary by a mutuallyacceptable independent source;
(c) immediately, upon notice to Aspen, in the event of a Change of Control of Aspen in which the successor entity fails toaccommodate in good faith Novartis’ rights under Article 13 (Change of Control)
(d) on thirty (30) days prior written notice to Aspen, in whole or on a country by country basis, in the event of a significant andcontinuing regulatory, medical, efficacy, safety, publicity or legal issue resulting in an inability to market Licensed Technology or LicensedProducts in a commercially reasonable manner; or
(e) At Novartis discretion in the event that the LH Pilot Study is unsuccessful.
12.2 Termination by Aspen. Aspen may terminate the Agreement in its sole discretion at any time during the term hereof:
(a) immediately, upon notice to Novartis, in the event that Novartis sells, transfers or otherwise disposes of all or asubstantial portion of Novartis assets necessary for performance under this Agreement, where such assets are so determined necessary by amutually acceptable independent source; or
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(b) immediately, upon notice to Novartis, in the event that Novartis challenges the validity or enforceability of anyestablished Aspen Patent Right or Aspen Know-How in a proceeding before a tribunal, court or administrative authority.
12.3 Termination for Breach. In the event either party shall be in breach of any material obligation hereunder, the non breachingparty may give written notice to the other party specifying the claimed particulars of such breach, and in the event such material breach isnot cured, or effective steps to cure such material breach have not been initiated or are not thereafter diligently pursued, within sixty (60)days following the date of such written notification, the non breaching party shall have the right thereafter to terminate the Agreement bygiving thirty (30) days prior written notice to the other party to such effect. For avoidance of doubt, failure to in good faith negotiate andenter a Development Agreement hereunder shall be a material breach.
12.4 Termination on Insolvency. Either party may terminate the Agreement without notice if the other party becomes insolvent,makes an assignment for the benefit of creditors where such assignment, is the subject of proceedings in voluntary or involuntarybankruptcy instituted on behalf of or against such party (except for involuntary bankruptcies which are dismissed within ninety (90) days),or has a receiver or trustee appointed for substantially all of its property.
Without limitation, Novartis’ rights under this Agreement shall include those rights afforded by 11 U.S.C. § 365(n) of the UnitedStates Bankruptcy Code (the “USBC”) and any successor thereto. If the bankruptcy trustee of Aspen as a debtor or debtor-in-possessionrejects this Agreement under 11 U.S.C. § 365(o) of the USBC, Novartis may elect to retain its rights licensed from Aspen hereunder (andany other supplementary agreements hereto) for the duration of this Agreement and avail itself of all rights and remedies to the full extentcontemplated by this Agreement and 11 U.S.C. § 365(n) of the USBC, and any other relevant laws.
12.5 Effect of Termination; Remedies
(a) Upon termination of this Agreement under this Article XII (except in the case of (a) termination by Novartis underSections 12.1(b) or 12.1(c), (b) termination by Novartis pursuant to Section 12.3, or (c) termination by Novartis for the insolvency,bankruptcy or other similar event of Aspen under Section 12.4), the license of rights to Novartis under this Agreement shall terminate andall such rights shall revert to Aspen and Novartis shall return to Aspen all Aspen Proprietary Information, except that a single copy of suchProprietary Information may be retained by Novartis in its legal department for archival purpose.
(b) In the case of Novartis’ right to terminate accruing under 12.1(b), 12.1(c), 12.3, or 12.4, and provided that Novartis isnot in material breach under section 12.3, Novartis shall be entitled, at its sole discretion, to elect the following in lieu of termination:
(i) If Novartis’ right to terminate occurs prior to the first commercial sale of a Licensed Product hereunder, Novartis may electthat this Agreement shall continue (with Aspen or Aspen’s successor) for so long as Novartis complies with its royaltyobligations hereunder and does not otherwise materially breach the terms of this Agreement and Novartis shall be entitled toany remedy set forth under Section 13 (Change of Control) with respect to Aspen.
(ii) If such right accrues after the first commercial sale of a Licensed Product, Novartis may elect to continue this Agreementprovided that Novartis complies with the royalty obligations hereunder and does not otherwise materially breach theAgreement.
For avoidance of doubt, unless separately negotiated pursuant to Section 13, the survival of Novartis’ license in this Section 12.5(b) is notintended to grant Novartis a fully paid-up license to the rights granted hereunder and, any failure by Novartis to meet its royalty obligationshall constitute a material breach of the surviving provisions.
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Any election by Novartis under this section 12.5 shall be made in writing in lieu of the termination notice requirement under the applicablesection. All reasonable costs associated with such election shall be borne by Novartis.
(c) In the case of (a) termination by Novartis under 12.3 for Aspen’s refusal to, or failure to in good faith, enter into theDevelopment Agreement or (b) termination by Novartis under 12.1(b) or 12.1(c) prior to the Parties’ execution of a DevelopmentAgreement, Novartis shall be entitled to a refund of all Milestone Payments other than the Collaboration Fee paid hereunder.
(d) Upon termination of this Agreement by Aspen pursuant to Sections 12.2, 12.3 or 12.4 hereof based on Novartis’material breach, bankruptcy, insolvency or other similar event (but not for Aspen’s material breach, bankruptcy, insolvency or other similarevent), then within one hundred-twenty (120) days following termination of this Agreement, Novartis, in consideration of a reasonableroyalty on subsequent commercialization of the Licensed Products hereunder, shall provide to Aspen, in written form, such of the NovartisTechnical Information and Patent Rights as is based on Aspen Know-How provided to Novartis hereunder under an obligation ofconfidence and to the extent relating to Licensed Technology or to a Licensed Product (but only to the extent said Licensed Product iscovered by Aspen Patent Rights or was developed with the benefit of Aspen Know-How); and in such event, Aspen shall be granted aroyalty-free non-exclusive license without the right to sub-license to use such Novartis Technical Information and Patent Rights in itsresearch.
(e) In the case of (a) termination by Aspen under 12.3 for Novartis’ refusal to, or failure to in good faith, enter into theDevelopment Agreement or (b) termination by Aspen under 12.4, Aspen shall be entitled to retain all Milestone Payments.
12.6 Sell-Off Rights. In the event of termination by either party, or expiration hereunder, both parties shall be permitted twelve (12)months from the date of termination to sell any inventory of Licensed Products in production at the time of termination which sales shall besubject to the applicable royalty as if this Agreement were in force.
12.7 Unless sooner terminated pursuant to Article XIV hereof, the Agreement shall continue in full force and effect until Novartis isno longer obligated to pay royalties hereunder.
12.8 Expiration or termination of this Agreement, in whole or in part, for any reason shall not: (a) release any Party hereto from anyliability which, at the time of such expiration or termination, has already accrued to the other Party or which is attributable to a period oftime prior to such expiration or termination, nor (b) preclude either Party from pursuing any rights and remedies it may have hereunder or atlaw or in equity with respect to any breach of this Agreement. It is understood and agreed that any remedies set forth herein shall notconstitute liquidated damages, that monetary damages may not be a sufficient remedy for any breach of this Agreement and that the non-breaching Party may be entitled to injunctive relief as a remedy for any such breach.
Without limiting the foregoing, the obligations pursuant to Article X, VI, VII, VIII, XII and Sections 3.7 shall survive termination of theAgreement. The provisions of Article XII shall survive the termination of the Agreement for a period of ten (10) years after termination.
ARTICLE XIII. Change of Control
13.1 Change of Control. In the event of a Change of Control, as defined herein, of Aspen, Aspen shall notify Novartis in writingwithin forty-five (45) days following the occurrence of such event and Novartis shall have the option, in its sole discretion, to (i) assume allof the obligations of Aspen or any successor entity to Aspen under the Development Agreement and offset the Patent Royalties and/orMilestone Payments by an amount directly in proportion to Aspen’s pro rata share Development Costs incurred by Novartis after theEffective Date of such Change of Control; (ii) assume all of the obligations of Aspen or any successor entity to Aspen under theDevelopment Agreement and deduct Aspen’s pro rate share of Development Costs incurred by Novartis after the Effective Date of suchChange of Control from any Patent Royalties and/or Lump Sum Payments, when due to Aspen or any successor entity to Aspen; (iii)negotiate in good faith a fully-paid up license to the Aspen Know-How, Aspen Patent Rights and any Licensed Products for use in theField, including, at Novartis’ option, the First Refusal Technology and/or (i) or (ii) above; (iv) negotiate in good faith a fully-paid uplicense to the Aspen Know-How, Aspen Patent Rights and any Licensed Products for use in the Field, including, at Novartis’ option, theFirst Refusal Technology and a termination fee, reasonably acceptable to Aspen or the successor entity to Aspen (as advised by anindependent, nationally recognized accounting firm) to terminate the Development Agreement such that all rights, title and interest in andto the Licensed Products, including, but not limited to the right to continue development, resides with Novartis; or (v) discuss with Aspen orits successor entity the impact of the Change of Control on the Development Agreement and mutually agree on any revisions to theDevelopment Agreement. For avoidance of doubt, this agreement shall continue in force following a Change of Control.
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Novartis may exercise its option at any time by written notice to the successor entity to Aspen within such ninety (90) days of receiptfrom Aspen of notice of the Change of Control event, or, in the event that Aspen fails to provide such notice, within 90 days of Novartis’becoming aware of such event as confirmed in writing by Novartis to Aspen. Within sixty (60) days of receipt by the successor entity toAspen of Novartis’ option notice, the Parties shall meet to discuss, in good faith, any amendments to the Exclusive License Agreementand/or the Development Agreement (collectively “the Agreements”) necessitated thereby. The Parties shall execute any amendment to theAgreements no later than one hundred twenty days (120) days after the Effective Date of such Change of Control transaction. For theavoidance of doubt, the Parties agree that during this one hundred twenty (120) day time period, each Party shall continue to perform all ofits obligations under the Agreements as such Party has qualified personnel to perform.
ARTICLE XIV. Representations and Warranties
14.1 Each Party represents, warrants and covenants to the other that, to the best of its knowledge and belief:
(a) it is duly organized and validly existing under the laws of its jurisdiction of incorporation, and has full corporatepower and authority to enter into this Agreement and to carry out the provisions hereof;
(b) it is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder and that it has theright to grant to the other Party the licenses and sublicenses granted pursuant to this Agreement, and the person or persons executing thisAgreement on its behalf has been duly authorized to do so by all requisite corporate action;
(c) this Agreement is legally binding upon it and enforceable in accordance with its terms. The execution, delivery andperformance of this Agreement by it does not conflict with any agreement, instrument or understanding, oral or written, to which it is aparty or by which it may be bound, nor violate any material law or regulation of any Government Authority having jurisdiction over it;
(d) it has not granted, and shall not grant during this Agreement, any right to any third party which would conflict withthe rights granted to the other Party hereunder; and
(e) it is not aware of any action, suit or inquiry or investigation instituted by any person or governmental agency whichquestions or threatens the validity of this Agreement.
14.2 Aspen warrants and represents that, to the best of its knowledge and belief, and apart from any information which has alreadyprovided to Novartis, it has no information as of the Effective Date of the Agreement to indicate that Novartis may not be able to import,make, or have made, to develop or have developed, for use, sale, distribution and offer for sale in the Field, and to use, sell, distribute, andoffer to sell, in the Field, Licensed Technology and Licensed Products, without infringing any third-party patent, contractual or other rightor any similar right of any Affiliate or parent company of Aspen and that Novartis shall incur no license fee or obligation to a third partyother than as may be discovered under 3.5 and as set forth herein.
14.3 Aspen represents, warrants and covenants to Novartis that, to the best of its knowledge and belief, the Washington UniversityLicense Agreement is in full force and effect and no party is in material breach of any of its obligations thereunder. Aspen will maintain theWashington University License Agreement in effect during the Term as applicable and will not amend such agreement in a manner thatwould negatively affect the rights and obligations of Novartis under this Agreement without Novartis’ prior consent.
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14.4 Aspen warrants and represents that as of the Effective Date, to the best of its knowledge and belief, it owns or possesses allright, title and interest in and to the Aspen Patent Rights and the Aspen Know-How, in the sense of being able to convey to Novartis, inaccordance with this Agreement, an exclusive license hereunder in the Field in the Territory and that, except as set forth in section 3.5,Novartis shall not incur a license fee or other obligation to a third Party as a result.
14.5 Novartis warrants and represents that, to the best of its knowledge and belief, a copy of The Washington University Agreement,between Aspen and Washington University dated May 10, 2004, has been provided to Novartis, and to the extent such agreement requires asublicensee to fulfill any obligation thereunder, Novartis agrees to undertake and fulfill such obligation and to be subject to the terms andconditions of the license granted to Aspen.
14.6 EXCEPT AS MAY OTHERWISE BE EXPRESSLY SET FORTH IN THIS AGREEMENT, ASPEN MAKES NOREPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, CONCERNING THE LICENSEDTECHNOLOGY AND LICENSED PRODUCTS, INVESTIGATIONAL MATERIALS, AND OTHER MATERIALS; INCLUDING,WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND THEABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE. IN NO EVENT SHALL EITHER PARTY,ITS DIRECTORS, OFFICERS, EMPLOYEES, AFFILIATES AND DISTRIBUTORS BE LIABLE FOR INCIDENTAL, INDIRECT,PUNITIVE, SPECIAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND, , REGARDLESS OF WHETHER SUCH PARTY ISADVISED, SHALL HAVE OTHER REASON TO KNOW, OR IN FACT SHALL KNOW OF THE POSSIBILITY OF THEFOREGOING. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR LIABILITIES BEYOND THE TOTAL AMOUNTACTUALLY RECEIVED UNDER THIS AGREEMENT. THE PARTIES ACKNOWLEDGE THAT THE SUBJECT MATTER OF THISAGREEMENT IN PART RELATES TO EXPERIMENTAL MEDICAL PRODUCTS. As of the Effective Date, no products are approvedfor any clinical purpose by domestic authority, e.g., the U.S. Food and Drug Administration (FDA), U.S. Department of Agriculture(USDA), or equivalent foreign authority. The experimental nature is relevant both in the context of any development and clinical study use,and in the context of developing and securing intellectual property and commercialization activity, and the parties recognize that there is anintent to preserve intellectual property options and rights in that information and inventions not be disclosed, or publicly known or used,unless affirmatively made so as mutually desired.
ARTICLE XV. Miscellaneous
15.1 Assignment: This Agreement may not be assigned or otherwise transferred, nor may any right or obligation hereunder beassigned or transferred, by either Party without the consent of the other Party; except that each Party may, without consent of the otherParty, assign this Agreement and its rights and obligations hereunder in whole or in part to an Affiliate or to a successor entity in connectionwith a Change of Control of that Party. Any attempted assignment not in accordance with this Section 15.1 shall be void. Any permittedassignee shall assume all assigned obligations of its assignor under this Agreement.
15.2 Affiliates Extension: Either party shall have the right to extend the rights and immunities granted in the Agreement to any of itsAffiliates, provided that such party shall not then be in default with respect to any of its obligations under this Agreement. All the terms andprovisions of the Agreement, except this right to extend, shall apply to such Affiliate to which this license has been extended to the sameextent as they apply to either of Novartis or Aspen, as the case may be.
15.3 Severability and No Waiver: Should one or more of the provisions of the Agreement become void or unenforceable as a matterof law, then the Agreement shall be construed as if such provision were not contained therein and the remainder of such Agreement shall bein full force and effect, and the parties will use their best efforts to substitute for the invalid or unenforceable provision a valid andenforceable provision which conforms as nearly as possible with the original intent of the parties. The failure of either party to assert a righthereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse asimilar subsequent failure to perform any such term or condition by the other party.
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15.4 Governing Law: The validity and interpretation of this Agreement and the legal relations of the parties to it shall be governed bythe substantive laws of the State of Delaware, without reference to any rules of conflict of laws.
15.5 Force Majeure: Neither party shall be responsible to the other for any failure or delay in performing any of its obligations underthis Agreement or for other nonperformance hereof if such delay or nonperformance is caused by strike, stoppage of labor, lockout or otherlabor trouble, fire, flood, accident, act of God or of the Government of any country or of any State or local Government, or of the publicenemy of either, or by cause unavoidable or beyond the control of any party hereto. In such event, the party affected will use reasonablecommercial efforts to resume performance of its obligations.
15.6 No provision of the Agreement may be amended or modified other than by a written document signed by authorizedrepresentatives of both parties.
15.7 Other Agreements. This Agreement, together with the Exhibits hereto, and the expected Development Agreement shallsupersede all other agreements between the parties as to the subject matter hereof.
15.8 Publicity. Each party agrees not to issue any press release or other public statement, whether oral or written, disclosing theexistence of this Agreement or any information relating to this Agreement without the prior written consent of the other party, whichconsent shall not be unreasonably withheld, provided however, that neither party will be prevented from complying with any duty ofdisclosure it may have pursuant to law or governmental regulation.
15.9 Relationship of the Parties. Both parties shall act solely as independent contractors, and nothing in this Agreement shall beconstrued to give either party the power or authority to act for, bind, or commit the other party.
15.10 Entire Agreement. This Agreement, together with the Exhibits hereto and the expected Development Agreement, sets forth theentire agreement and understanding of the parties as to the subject matter hereof and supersedes all proposals, oral or written, and all othercommunications between the parties with respect to such subject matter.
15.11 Headings. The headings of Articles and Sections of this Agreement are for convenience of reference only and shall not affectthe meaning or interpretation of this Agreement in any way.
15.12 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and theirrespective successors and assigns.
15.13 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but allof which together shall constitute one and the same instrument.
15.14 Irreparable Harm. Novartis and Aspen each hereby acknowledge and agree that a material breach of this Agreement or otheractivity (or inactivity) giving rise to a right of termination under Article XII shall constitute irreparable harm to the other party, for whichmonetary damages may be insufficient to make the other party whole. Accordingly, Novartis and Aspen each hereby consent to, and waiveany right, to object to the pursuit and entry of preliminary or permanent injunctive relief, including specific performance, in connection withsuch party’s material breach of this Agreement or activity (or inactivity) giving rise to a right of termination.
15.15 Invoice Requirement. Where applicable, all payments to Aspen under this Agreement shall be payable by Novartis only whenan invoice substantially of the form of Exhibit D hereto is provided by Aspen to Novartis (and further subject to any other limitations onpayments provided in this Agreement).
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15.16 Further Assurances. Novartis and Aspen hereby covenant and agree for consideration hereunder and without the necessity ofany further consideration, to execute, acknowledge and deliver any and all such other documents and take any such other action as may bereasonably necessary to carry out the intent and purpose of this Agreement.
15.17 Dispute Resolution. In the event of any dispute under this Agreement, the parties expressly agree to attempt to resolve thedispute between the appropriate officers of each party. If such attempt is unsuccessful, the parties agree to submit the dispute to nonbindingmediation. In the event that the dispute is not resolved within thirty (30) days after submission to a mediator, either party may then seekjudicial relief.
ARTICLE XVI. Reporting
16.1 Adverse Reaction Reporting. During the term of this Agreement, and as further established in the Development Agreement, forthe purpose of product development and approval of veterinary medical therapeutic products, each party shall promptly report to the otherparty as soon as practicable (i) any findings associated with the veterinary medical and therapeutic use of the Licensed Technology orLicensed Products that may suggest significant hazards, significant contraindications, significant or unexpected side effects or significantprecautions pertinent to the safety of Licensed Technology or Licensed Products; (ii) any information concerning any serious or unexpectedside effect, injury, toxicity or sensitivity reaction or any unexpected incidents, and the severity thereof, associated with the clinical uses,studies, investigations, tests and marketing of Licensed Technology or Licensed Products, whether or not determined to be attributablethereto; and (iii) all adverse reaction information of which such party becomes aware to enable the other to satisfy all requirements forreporting such adverse reactions in the Territory. Upon receipt of any such findings or information by either party hereto, both parties shallpromptly consult each other and use good faith efforts to arrive at a mutually acceptable procedure for taking the appropriate actions underthe circumstances; provided, however, that nothing contained herein shall restrict the right of either party to make submissions toRegulatory Agencies or to take other actions it deems appropriate or necessary. With respect to all other adverse experiences (non-serious),each party shall furnish to the other copies of all such reports promptly after such report is prepared.
ARTICLE XVII
17.1 Notices. All notices given pursuant to this Agreement shall be in writing and shall be deemed received upon the earlier of (i)when received at least one of the address set forth below for each Party (including telefax or personal delivery), or (ii) three (3) businessdays after being sent by telefax and confirmed by being mailed by certified, registered, or overnight courier mail in the United States orSwiss mails, postage prepaid and properly addressed, with return receipt requested.
Notices shall be delivered to the respective parties as indicated or to such other address as the party to whom notice is to be given mayhave furnished to the other party in writing in accordance herewith.
If to Aspen:
AspenBio Pharma, Inc. 1585 South Perry Street Castle Rock, CO 80104 U.S.A. Fax: (303) 798-8332 Attention: Richard Donnelly, CEO
with a copy to:
Steve J Penner Greenlee Winner and Sullivan, PC 4875 Pearl East Circle, Suite 200 Boulder, CO 80301 Fax: (303) 499-8089
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If to Novartis:
Novartis Animal Health Inc. Attn: General CounselSchwarzwaldallee 215 4058 BaselSwitzerland Fax: +41 61 6975747
with a copy to:
Novartis Animal Health US, Inc. Attn: Clinton Vranian 3200 Northline Ave, Suite 300 Greensboro, NC 27408 Fax: (336) 387-1279
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties intending to be bound have caused this Agreement to be executed by their duly authorizedrepresentatives, effective as of the Effective Date.
ASPENBIO PHARMA, INC.
By: /s/
Name: Jeffrey G. McGonegal
Title: Chief Financial Officer
NOVARTIS ANIMAL HEALTH INC.
By: /s/
Name: George Gunn
Title: AH1
By: /s/
Name: Conna A. Weiner
Title: General Counsel
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EXHIBIT 31.1
CERTIFICATION
I, Richard Donnelly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AspenBio Pharma, Inc.,;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect tothe period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisreport.
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined inExchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant: and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report basedon such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.
Date: August 13, 2008 /s/ Richard Donnelly Richard DonnellyPresident and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Jeffrey G. McGonegal, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AspenBio Pharma, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect tothe period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant: and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report basedon such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportingwhich are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.
Date: August 13, 2008 /s/ Jeffrey G. McGonegal Jeffrey G. McGonegalChief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANTTO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q (the “Report”) of AspenBio Pharma, Inc., (the “Company”) for thequarter ended June 30, 2008, each of the undersigned Richard Donnelly and Jeffrey G. McGonegal, hereby certifies pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the undersigned’s knowledge andbelief:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operationsof the Company.
Dated: August 13, 2008
Dated: August 13, 2008
\s\ Richard DonnellyRichard Donnelly, President and ChiefExecutive Officer
\s\ Jeffrey G. McGonegalJeffrey G. McGonegal,Chief Financial Officer
