UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2016~~

2017

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from __________________to __________________

001-34236

(Commission file number)

BIOSPECIFICS TECHNOLOGIES CORP.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		11-3054851
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)

35 Wilbur Street Lynbrook, NY 11563

(Address of Principal Executive Offices) (Zip Code)

516.593.7000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of the ~~issuer's~~issuer’s classes of common stock, as of the latest practicable date:

Class of Stock	Outstanding ~~November 8, 2016~~August 9, 2017
Common Stock ($.001 par value)	~~7,147,159~~7,164,233

BIOSPECIFICS TECHNOLOGIES CORP.

TABLE OF CONTENTS

		Page
	PART I – FINANCIAL INFORMATION
ITEM 1.	Financial Statements Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Income Statements	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	2526
ITEM 4.	Controls and Procedures	2526

	PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings	2627
ITEM 1A.	Risk Factors	2627
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2627
ITEM 6.	Exhibits	2628
	Signatures	2729

Table of Contents

Introductory Comments – Terminology

Throughout this Quarterly Report on Form 10-Q, the terms “BioSpecifics,” “Company,” “we,” “our,” and “us” refer to BioSpecifics Technologies Corp. and its subsidiary, Advance Biofactures Corp.

Throughout this Quarterly Report on Form 10-Q, Endo Global Ventures, a Bermuda unlimited liability company, an affiliate of Endo International plc, and Endo International plc are referred to collectively as “Endo”.

Introductory Comments – Forward-Looking Statements

This Report includes “forward-looking statements” within the meaning of, and made pursuant to the safe harbor provisions of, the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, expected revenue growth, and the assumptions underlying or relating to such statements, are “forward-looking statements.” The forward-looking statements in this Report include statements concerning, among other things, the continued ~~successful~~ commercialization of XIAFLEX to treat Dupuytren’s contracture and Peyronie’s disease; the continued ~~successful~~ marketing and commercialization of XIAFLEX to treat Dupuytren’s contracture and Peyronie’s disease in Europe, Eurasia, Japan, Canada and Australia; Endo’s ability to obtain required regulatory approvals; Endo’s ability to manufacture XIAFLEX at an acceptable cost, in a timely manner and with appropriate quality; successful development of ~~CCH~~XIAFLEX for additional indications; the ability to successfully develop, market and commercialize our drug candidates; the funding of research and development at medical institutions under agreements that are generally cancellable; the future receipt of payments from Endo, including milestone and royalty payments, in connection with the License Agreement; the recognition of the $8.25 million payment from Endo in connection with the First Amendment; the plans for the repurchase of stock and reacquired stock; the suspension or discontinuation of the stock repurchase plan; the risk of doubtful accounts and how we provide for estimates of uncollectable accounts; the adoption of new accounting pronouncements and their impact; which accounting policies we consider to be critical to the estimates and judgments used to prepare the unaudited condensed consolidated financial statements; the effect of changes in interest rates on the Company’s results of operations, financial position and cash flow; changes in internal controls; the ability of internal controls and procedures to achieve desired control objectives; the existence of significant uncertain tax positions and provision for income taxes; the sufficiency of the Company’s available funds and cash flow from operations to meet our operational cash needs; whether the carrying amounts of the Company’s financial instruments approximate fair value due to the nature of the instruments; the changes in the Company’s exposure to market risk; the fair value of the Company’s stock option awards; whether the Company’s bank account balances will exceed insured limits; whether the Company is exposed to any significant credit risk on our cash; our milestone achievements and payments; whether we will continue to make payments to buy down our future royalty obligations; whether we will experience uneven payment flows due to the variance in financial terms in contracts with third parties to perform clinical trial activities and ongoing development of potential drugs; estimates concerning our development period; our interpretation of the definition of milestone; whether the Company will choose to cancel the lease prior to the expiration of the term; whether and when we will hear from Endo the results of their ~~analysis~~ongoing commercial review regarding the ~~CCH pipeline:~~XIAFLEX pipeline; the timing of Endo’s determination of clinical trial timelines for additional indications; and the nature of our accounts receivable balance. In some cases, these statements can be identified by forward-looking words such as “believe,” “expect,” “anticipate,” “estimate,” “likely,” “may,” “will,” “can,” and “could,” the negative or plural of these words, and other similar expressions. These forward-looking statements are predictions based on our current expectations and our projections about future events and various assumptions. There can be no assurance that we will realize our expectations or that our beliefs will prove correct. There are a number of important factors that could cause BioSpecifics’ actual results to differ materially from those indicated by such forward-looking statements, including the timing of regulatory filings and action; the ability of Endo and its partners, Asahi Kasei Pharma Corporation, Actelion Ltd. and Swedish Orphan Biovitrum AB, to achieve their objectives for XIAFLEX in their applicable territories; the market for XIAFLEX in, and timing, initiation and outcome of clinical trials for, additional indications ~~including frozen shoulder, cellulite, human lipoma, canine lipoma, uterine fibroids, plantar fibromatosis and lateral hip fat all of which~~that will determine the amount of milestone, royalty, mark-up on cost of goods sold, license and sublicense income BioSpecifics may receive; the potential of ~~CCH~~XIAFLEX to be used in additional indications; Endo modifying its objectives or allocating resources other than to XIAFLEX; and other risk factors identified in BioSpecifics’ Quarterly ~~Reports~~Report on Form 10Q for the ~~periods~~period ended March 31, ~~2016~~2017 and ~~June 30, 2016 and its~~ Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 and its Current Reports on Form 8-K filed with the Securities and Exchange Commission. All forward-looking statements included in this Report are made as of the date hereof, are expressly qualified in their entirety by the cautionary statements included in this Report and, except as may be required by law, we assume no obligation to update these forward-looking statements.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1:

Condensed Consolidated Financial Statements

BioSpecifics Technologies Corp.

Condensed Consolidated Balance Sheets

	September 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
	(unaudited)			(audited)			(unaudited)			(audited)
Assets
Current assets:
Cash and cash equivalents	$	4,747,745		$	5,137,875		$	6,029,964		$	4,763,364
Short term investments		45,075,570			28,347,542			45,115,391			44,254,862
Accounts receivable		3,846,752			2,547,920			4,663,282			3,810,792
Income tax receivable		-			916,843			290,205			494,711
Deferred royalty buy-down		1,215,620			1,017,981			1,535,274			1,451,893
Prepaid expenses and other current assets		554,401			383,810			800,547			624,345
Total current assets		55,440,088			38,351,971			58,434,663			55,399,967

Long-term investments		1,443,099			3,596,541			7,396,902			3,771,380
Deferred royalty buy-down – long term, net		1,913,697			2,851,423			1,156,242			1,976,456
Deferred tax assets, net		3,370,836			622,972			3,072,116			3,290,122
Patent costs, net		268,928			275,206			238,030			258,355

Total assets	$	62,436,648		$	45,698,113		$	70,297,953		$	64,696,280

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses		991,867			611,009		$	1,162,497		$	738,649
Income taxes payable		279,333			-
Deferred revenue		1,223,479			149,378			1,298,912			1,179,848
Accrued liabilities of discontinued operations		78,138			78,138			78,138			78,138
Total current liabilities		2,572,817			838,525			2,539,547			1,996,635

Long-term deferred revenue		6,642,441			49,379			5,661,179			6,417,702

Stockholders’ equity:
Series A Preferred stock, $.50 par value, 700,000 shares authorized; none outstanding		-			-			-			-
Common stock, $.001 par value; 10,000,000 shares authorized; 7,545,167 and 7,290,167 shares issued, 7,149,559 and 6,918,579 shares outstanding as of September 30, 2016 and December 31, 2015, respectively		7,545			7,290
Common stock, $.001 par value; 10,000,000 shares authorized; 7,575,167 and 7,555,167 shares issued, 7,166,998 and 7,156,281 shares outstanding as of June 30, 2017 and December 31, 2016, respectively								7,575			7,555
Additional paid-in capital		32,650,938			31,797,418			33,270,422			32,945,240
Retained earnings		27,694,041			19,238,610			36,579,693			30,610,849
Treasury stock, 395,608 and 371,588 shares at cost as of September 30, 2016 and December 31, 2015, respectively		(7,131,134	)		(6,233,109	)
Treasury stock, 408,169 and 398,886 shares at cost as of June 30, 2017 and December 31, 2016, respectively								(7,760,463	)		(7,281,701	)
Total stockholders’ equity		53,221,390			44,810,209			62,097,227			56,281,943

Total liabilities and stockholders’ equity	$	62,436,648		$	45,698,113		$	70,297,953		$	64,696,280

See accompanying notes to condensed consolidated financial statements.

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BioSpecifics Technologies Corp.

Condensed Consolidated Income Statements

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Revenues:
Royalties	$	6,119,815		$	5,277,494		$	18,843,273		$	15,574,234		$	6,531,107		$	6,167,811		$	14,217,317		$	12,723,458
Licensing revenues		762,345			1,012,345			787,034			1,037,034			4,409			12,345			8,818			24,689
Total Revenues		6,882,160			6,289,839			19,630,307			16,611,268			6,535,516			6,180,156			14,226,135			12,748,147

Costs and expenses:
Research and development		312,907			258,837			1,005,884			755,038			337,731			444,477			592,512			692,977
General and administrative		1,843,368			1,709,044			5,909,785			5,307,431			2,315,283			1,902,083			4,741,000			4,066,416
Total Cost and Expenses		2,156,275			1,967,881			6,915,669			6,062,469			2,653,014			2,346,560			5,333,512			4,759,393

Operating income		4,725,885			4,321,958			12,714,638			10,548,799			3,882,502			3,833,596			8,892,623			7,988,754

Other income:
Interest income		80,674			26,744			200,704			58,946			140,995			67,327			242,748			120,030
Other income		6,254			1,477			37,448			6,110			23,423			9,836			25,985			31,194
		86,928			28,221			238,152			65,056			164,418			77,163			268,733			151,224

Income before income tax expense		4,812,813			4,350,179			12,952,790			10,613,855			4,046,920			3,910,759			9,161,356			8,139,978
Provision for income tax expense		(1,759,220	)		(1,479,200	)		(4,497,359	)		(3,654,772	)		(1,422,829	)		(1,338,044	)		(3,192,512	)		(2,738,139	)

Net income	$	3,053,593		$	2,870,979		$	8,455,431		$	6,959,083		$	2,624,091		$	2,572,715		$	5,968,844		$	5,401,839


Basic net income per share	$	0.43		$	0.42		$	1.20		$	1.02		$	0.37		$	0.37		$	0.83		$	0.77
Diluted net income per share	$	0.42		$	0.39		$	1.16		$	0.96		$	0.36		$	0.35		$	0.81		$	0.74

Shares used in computation of basic net income per share		7,062,543			6,892,637			7,031,068			6,797,506			7,170,223			7,018,652			7,167,251			7,015,158
Shares used in computation of diluted net income per share		7,280,375			7,316,287			7,277,780			7,259,338			7,329,118			7,268,527			7,330,875			7,272,328

See accompanying notes to condensed consolidated financial statements.

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BioSpecifics Technologies Corp.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended September 30,						Six Months Ended June 30,
Cash flows from operating activities:	2016			2015			2017			2016
Net income	$	8,455,431		$	6,959,083		$	5,968,844		$	5,401,839
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization		1,215,814			647,071			1,084,614			816,113
Stock-based compensation expense		100,428			72,305			66,952			66,952
Deferred tax expense		(2,747,864	)		441,211			218,006			(2,735,645	)
Changes in operating assets and liabilities:
Accounts receivable		(1,298,832	)		(1,273,079	)		(852,490	)		(1,731,520	)
Income tax receivable		916,843			(521,121	)		204,506			32,404
Prepaid expenses and other current assets		(170,591	)		(136,152	)		(176,202	)		(346,946	)
Patent costs		(23,341	)		(24,204	)		-			(11,215	)
Accounts payable and accrued expenses		380,858			107,372			423,848			(23,568	)
Income taxes payable		279,333			-
Deferred revenue		7,667,163			(37,034	)		(637,459	)		7,953,439
Net cash provided by operating activities		14,775,242			6,235,452			6,300,619			9,421,853

Cash flows from investing activities:
Maturity of marketable investments		32,548,040			11,043,544			32,855,741			21,703,040
Purchases of marketable investments		(47,568,734	)		(24,422,334	)		(37,669,248	)		(28,934,178	)
Net cash used in investing activities		(15,020,694	)		(13,378,790	)		(4,813,507	)		(7,231,138	)

Cash flows from financing activities:
Proceeds from stock option exercises		529,300			2,813,984			258,250			177,250
Payments for repurchase of common stock		(898,025	)		(1,182,068	)		(478,762	)		(692,818	)
Excess tax benefits from share-based payment arrangements		224,047			3,188,682			-			151,380
Net cash (used in) provided by financing activities		(144,678	)		4,820,598
Net cash used in financing activities								(220,512	)		(364,188	)

Decrease in cash and cash equivalents		(390,130	)		(2,322,740	)
Increase in cash and cash equivalents								1,266,600			1,826,527
Cash and cash equivalents at beginning of year		5,137,875			9,810,816			4,763,364			5,137,875
Cash and cash equivalents at end of period	$	4,747,745		$	7,488,076		$	6,029,964		$	6,964,402

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		-			-			-			-
Taxes	$	5,825,000		$	546,000		$	2,770,000		$	5,290,000

See accompanying notes to condensed consolidated financial statements.

Table of Contents

BIOSPECIFICS TECHNOLOGIES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2016~~2017

(Unaudited)

1.	1. ORGANIZATION AND DESCRIPTION OF BUSINESS

We are a biopharmaceutical company involved in the development of an injectable collagenase clostridium histolyticum ~~or CCH,~~ for multiple indications. We currently have a development and license agreement with Endo Global Ventures, ~~International plc (together with~~ a Bermuda unlimited liability company (“Endo ~~International plc,~~Global Ventures”), an affiliate of Endo ~~Global Ventures, “Endo”~~International plc (“Endo”), for injectable collagenase for marketed indications and indications in development. Endo assumed this agreement when Endo acquired Auxilium Pharmaceuticals, Inc. ~~(“Auxilium”~~(“Auxilium”) on January 29, 2015 (the ~~“Acquisition”~~“Acquisition”). ~~CCH~~Injectable collagenase clostridium histolyticum is marketed as ~~XIAFLEX®~~XIAFLEX® (or ~~XIAPEX®~~Xiapex® in Europe).

On August 31, 2011, we entered into the Second Amended and Restated Development and License Agreement (the “License Agreement”) with Auxilium for XIAFLEX. The License Agreement was filed with the Securities and Exchange Commission (the “SEC”) on September 1, 2011 as Exhibit 10.1 to a Current Report on Form 8-K. Auxilium subsequently assigned the License Agreement to Auxilium Bermuda ULC. As a result of the Acquisition and resulting internal restructuring, the counterparty to the agreement is now Endo Global Ventures.

On February 5,1, 2016, we ~~announced that we had~~ entered into with Endo the First Amendment (the “First Amendment”) to the Second Amended and Restated Development and Licensing Agreement (the “Auxilium Agreement”), by and between us and Auxilium, now a wholly-owned subsidiary of Endo, to amend certain provisions of the Auxilium Agreement (as amended by the First Amendment, the “License Agreement”). The First Amendment was filed with the SEC on February 5, 2016 as Exhibit 10.1 to a Current Report on Form 8-K. The effective date of the First Amendment was January 1, 2016. Pursuant to the First Amendment, we and Endo mutually agreed that in exchange for a $8.25 million lump sum payment, we will not receive future additional mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S.; provided, however, that Endo will still be required to pay a mark-up on cost of goods sold for sales made in the ~~"Endo~~“Endo Territory,"” which includes sales made in the U.S. and sales made in any other country where Endo sells the product directly or through affiliated sublicensees. We received this $8.25 million lump sum payment in February 2016 and began recognizing this income over time based on sales by non-affiliated sublicensees of Endo outside of the U.S. according to our revenue recognition policy in the second quarter of 2016.

Additionally, we agreed that Endo may opt-in early to indications, prior to our submission of a clinical trial report, with our consent, such consent not to be unreasonably withheld. For early opt-ins, Endo will be required to make an opt-in payment of $0.5 million on a per indication basis. For regular opt-ins, following our submission of a clinical trial report, Endo will be required to make an opt-in payment of $0.75 million on a per indication basis.

The two marketed indications involving our injectable collagenase are ~~Dupuytren’s~~Dupuytren’s contracture and ~~Peyronie’s~~Peyronie’s disease. Prior to the Acquisition, Auxilium had, and after the Acquisition, Endo has, opted-in to the following indications: frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis and human lipoma. Endo exercised, with our consent, an early opt-in for lateral hip fat and plantar fibromatosis in November 2015. Endo opted-in for human lipoma in July 2016. We manage the development of ~~CCH~~XIAFLEX for uterine fibroids and initiate the development of ~~CCH~~XIAFLEX in new potential indications, not licensed by Endo.

On November 8, 2016, following a change in Endo management, Endo announced that a commercial review is ongoing of the XIAFLEX exercised but non-marketed indications, including frozen shoulder, cellulite, lateral hip fat, plantar fibromatosis and human lipoma, so that Endo can best prioritize its R&D efforts and determine clinical trial timelines moving forward. We are awaiting an update on Endo’s ongoing commercial review.

Endo is currently selling XIAFLEX in the U.S. for the treatment of ~~Dupuytren’s~~Dupuytren’s contracture and ~~Peyronie’s~~Peyronie’s disease and has an agreement with Swedish Orphan Biovitrum AB ~~(“Sobi”~~(“Sobi”), pursuant to which Sobi has marketing rights for ~~XIAPEX~~Xiapex for ~~Dupuytren’s~~Dupuytren’s contracture and ~~Peyronie’s~~Peyronie’s disease in Europe and certain Eurasian countries. Sobi is currently selling ~~XIAPEX~~Xiapex in Europe and certain Eurasian countries for the treatment of ~~Dupuytren’s~~Dupuytren’s contracture and ~~Peyronie’s~~Peyronie’s disease. In addition, Endo has an agreement with Asahi Kasei Pharma Corporation ~~(“Asahi”~~(“Asahi”) pursuant to which Asahi has the right to commercialize XIAFLEX for the treatment of ~~Dupuytren’s~~Dupuytren’s contracture and ~~Peyronie’s~~Peyronie’s disease in Japan. Asahi ~~has received regulatory approval and~~ is ~~currently~~ selling XIAFLEX for the treatment of ~~Dupuytren’s~~Dupuytren’s contracture in Japan. Endo also had an agreement with Actelion Pharmaceuticals Ltd. (“Actelion”), pursuant to which Actelion had the right to commercialize XIAFLEX for the treatment of Dupuytren’s contracture and Peyronie’s disease in Canada and Australia. Actelion received regulatory approval in Canada and Australia for XIAFLEX for the treatment of Dupuytren’s contracture and was selling XIAFLEX in Canada and Australia. Endo terminated its agreement with Actelion as of July 4, 2016 and a transitional services agreement was put in place to cover both Canada and Australia. Endo is currently distributing XIAFLEX in Canada through Paladin Labs Inc, an operating company of Endo. In December 2016, Endo entered into a new out-licensing agreement with Actelion, pursuant to which Actelion obtained marketing and commercial rights for XIAFLEX in Australia and New Zealand.

2.	7 Table of Contents 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited, but include all adjustments (consisting only of normal, recurring adjustments) which we consider necessary for a fair presentation of our financial position at such dates and the operating results and cash flows for those periods. Although we believe that the disclosures in our financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reporting.

~~Table of Contents~~

The information included in this Report should be read in conjunction with the risk factors discussed in “Part I, Item 1A. Risk Factors” in our Quarterly ~~Reports~~Report on Form 10Q for the ~~periods~~period ended March 31, ~~2016 and June 30, 2016~~2017 filed with the SEC on May 10, ~~2016 and August 9, 2016, respectively~~2017 and our Annual Report on Form 10-K for the ~~period~~year ended December 31, ~~2015~~2016 filed with the SEC on March ~~14, 2016.~~16, 2017.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiary, Advance Biofactures Corp. ~~(“ABC-NY”).~~ All intercompany balances and transactions have been eliminated.

Critical Accounting Policies, Estimates and Assumptions

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the use of management’s estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company makes certain assumptions and estimates for its deferred tax assets and deferred royalty buy-down. For further details see notes “Provision for Income Taxes” and “Third-Party Royalties and Royalty Buy-Down.” Actual results may differ from those estimates.

Cash, Cash Equivalents and Investments

Cash equivalents include only securities having a maturity of three months or less at the time of purchase. Investments are stated on an amortized cost basis. The Company limits its credit risk associated with cash, cash equivalents and investments by placing its investments with banks it believes are highly creditworthy and with highly rated money market funds, certificates of deposit and municipal bonds. All investments are classified as held to maturity. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the aggregate fair value of these cash, cash equivalents and investments was ~~$46.5~~$58.5 million and ~~$31.9~~$52.8 million, respectively.

Fair Value Measurements

Management believes that the carrying amounts of the Company’s financial instruments, including cash, cash equivalents, held to maturity investments, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of those instruments. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, there were no recorded unrealized gains or losses on our investments as they are held to maturity. As of ~~September~~June 30, ~~2016,~~2017, amortized cost basis of the investments ~~approximate~~approximated their fair value. At ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the amortized premium included in interest income was ~~$446,000~~$327,000 and ~~$316,000,~~$610,000, respectively.

~~The following table presents the Company’s schedule of maturities at September 30, 2016 and December 31, 2015:~~

Maturities as of
September 30, 2016

Maturities as of
December 31, 2015

1 Year or Less
Greater than
1 Year

1 Year or
Less

Greater than 1
Year

Municipal bonds $ 6,917,696 $ - $ 6,461,216 $ 155,826

Corporate Bonds 31,218,996 1,194,049 9,882,285 1,597,715

Certificates of deposit 6,938,878 249,050 12,004,041 1,843,000
Total $ 45,075,570 $ 1,443,099 $ 28,347,542 $ 3,596,541

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The following table presents the Company’s schedule of maturities at June 30, 2017 and December 31, 2016:

	Maturities as of June 30, 2017				Maturities as of December 31, 2016
	1 Year or Less		Greater than 1 Year		1 Year or Less		Greater than 1 Year
Municipal bonds	$	5,091,468	$	-	$	6,967,954	$	586,074
Corporate Bonds		35,851,579		7,396,902		30,418,120		2,936,287
Certificates of deposit		4,172,344		-		6,868,788		249,019
Total	$	45,115,391	$	7,396,902	$	44,254,862	$	3,771,380

The authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.

As of ~~September~~June 30, ~~2016,~~2017, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tables present the Company’s fair value hierarchy for these financial assets as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015:~~2016:

September 30, 2016	Type of Instrument	Fair Value		Level 1		Level 2		Level 3
June 30, 2017										Type of Instrument	Fair Value		Level 1		Level 2		Level 3

Cash equivalents	Institutional Money Market	$	1,894,904	$	1,894,904		-		-	Institutional Money Market	$	2,973,534	$	2,973,534	$	-	$	-

Investments	Municipal Bonds		6,917,696		-	$	6,917,696		-	Municipal Bonds		5,091,468		-		5,091,468		-

Investments	Corporate Bonds		32,413,045		-		32,413,045		-	Corporate Bonds		43,248,481		-		43,248,481		-

Investments	Certificates of Deposit		7,187,928		7,187,928		-		-	Certificates of Deposit		4,172,344		4,172,344		-		-

December 31, 2015	Type of Instrument	Fair Value		Level 1		Level 2		Level 3

Cash equivalents	Institutional Money Market	$	715,784	$	715,784		-		-

Investments	Municipal Bonds		6,617,042		-	$	6,617,042		-

Investments	Corporate Bonds		11,480,000		-		11,480,000		-

Investments	Certificates of Deposit		13,847,041		13,847,041		-		-

December 31, 2016	Type of Instrument	Fair Value		Level 1		Level 2		Level 3

Cash equivalents	Institutional Money Market	$	2,290,331	$	2,290,331	$	-	$	-
Investments	Municipal Bonds		7,554,028		-		7,554,028		-
Investments	Corporate Bonds		33,354,407		-		33,354,407		-
Investments	Certificates of Deposit		7,117,807		7,117,807		-		-

Concentration of Credit Risk and Major Customers

The Company maintains ~~its investment~~investments in FDIC insured certificates of deposits, ~~with several banks, pre-refunded municipal bonds,~~ municipal bonds and corporate bonds.

The Company is currently dependent on one customer, Endo, who generates almost all its revenues. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately ~~$6.9~~$6.5 million and ~~$19.6~~$14.2 million, respectively, and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015,~~2016, the licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately ~~$6.3~~$6.2 million and ~~$16.6~~$12.7 million, respectively.

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At June 30, 2017 and December 31, 2016, our accounts receivable balances from Endo were $4.7 million and $3.8 million, respectively.

~~At September 30, 2016 and December 31, 2015, our accounts receivable balances were $3.8 million and $2.5 million, respectively.~~

Revenue Recognition

We currently recognize revenues resulting from the licensing and sublicensing of the use of our technology and from services we sometimes perform in connection with the licensed technology under the guidance of Accounting Standards Codification 605, Revenue Recognition (“ASC 605”).

If we determine that separate elements exist in a revenue arrangement under ASC 605, we recognize revenue for delivered elements only when the fair values of undelivered elements are known, when the associated earnings process is complete, when payment is reasonably assured and, to the extent the milestone amount relates to our performance obligation, when our customer confirms that we have met the requirements under the terms of the agreement.

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Revenues, and their respective treatment for financial reporting purposes, are as follows:

Royalty / Mark-Up on Cost of Goods Sold

For those arrangements for which royalty and mark-up on cost of goods sold information becomes available and collectability is reasonably assured, we recognize revenue during the applicable period in which it is earned. For interim quarterly and year-end reporting purposes, when collectability is reasonably assured, but a reasonable estimate of royalty and mark-up on cost of goods sold cannot be made, the royalty and mark-up on cost of goods sold are generally recognized in the quarter that the applicable licensee provides the written report and related information to us.

Under the License Agreement, we do not participate in the selling, marketing or manufacturing of products for which we receive royalties and a mark-up on the cost of goods sold. The royalty and mark-up on cost of goods sold will generally be recognized in the quarter that Endo provides the written reports and related information to us; that is, royalty and mark-up on cost of goods sold are generally recognized one quarter following the quarter in which the underlying sales by Endo occurred. The royalties payable by Endo to us are subject to set-off for certain patent costs.

Pursuant to the First Amendment with Endo, in exchange for a $8.25 million lump sum payment, we will not receive future additional mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S.; provided, however, that Endo will still be required to pay a mark-up on cost of goods sold for sales made in the “Endo Territory,” which includes sales made in the U.S. and sales made in any other country where Endo sells the product directly or through affiliated sublicensees. We received this $8.25 million lump sum payment in February 2016. We classified this payment as deferred revenue in our balance sheet and began recognizing this income over time in the second quarter of 2016 based on sales by non-affiliated sublicensees of Endo outside of the U.S. according to our revenue recognition policy. We recognized approximately ~~$274,000~~$373,000 and ~~$546,000~~$629,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, and zero in~~2017, respectively. We recognized approximately $272,000 for each of the ~~2015 corresponding periods.~~three and six months ended June 30, 2016.

Licensing Revenue

We include revenue recognized from upfront licensing, sublicensing and milestone payments in “License Revenues” in our condensed consolidated statements of income in this Quarterly Report on Form 10-Q.

Upfront License and Sublicensing Fees

We generally recognize revenue from upfront licensing and sublicensing fees when the license or sublicense agreement is signed, we have completed the earnings process and we have no ongoing performance obligation with respect to the arrangement. ~~We recognized licensing fees related to the exercise of an opt-in right by Endo~~ ~~for the human lipoma indication~~ ~~of $750,000 for the three and nine months ended September 30, 2016 as compared to zero in each of the 2015 periods.~~ Nonrefundable upfront technology license fees for product candidates for which we are providing continuing services related to product development are deferred and recognized as revenue over the development period. We recognized deferred revenue of ~~$12,345~~$4,409 and ~~$37,034~~$8,818 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, respectively, and $12,345 and ~~$37,034~~$24,689 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015,~~2016, respectively.

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Milestones

Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specific event identified in the license or sublicense agreement, such as completion of specified development activities and/or regulatory submissions and/or approvals. We believe that a milestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on our part. We recognize such milestones as revenue when they become due and collection is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, we recognize revenue in a manner similar to that of an upfront license fee.

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The timing and amount of revenue that we recognize from licenses of technology, either from upfront fees or milestones where we are providing continuing services related to product development, are primarily dependent upon our estimates of the development period. We define the development period as the point from which research activities commence up to regulatory approval of either our or our partners’ submission, assuming no further research is necessary. As product candidates move through the development process, it is necessary to revise these estimates to consider changes to the product development cycle, such as changes in the clinical development plan, regulatory requirements, or various other factors, many of which may be outside of our control. Should the U.S. Food and Drug Administration ~~(“FDA”)~~ or other regulatory agencies require additional data or information, we would adjust our development period estimates accordingly. The impact on revenue of changes in our estimates and the timing thereof is recognized prospectively over the remaining estimated product development period. We did not recognize any milestone revenue in the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2016. Milestone revenue recognized for the three~~2017 and ~~nine months ended September 30, 2015 was $1.0 million in each period. The $1.0 million~~ ~~milestone revenue recognized in the 2015 periods related to the~~ ~~first commercial sale of XIAFLEX by Asahi for the treatment of Dupuytren's contracture in Japan.~~2016.

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, we repurchased ~~24,020~~9,283 shares at an average price of ~~$37.39~~$51.57 as compared to the repurchase of ~~27,433~~18,730 shares at an average price of ~~$43.07~~$36.99 in the corresponding ~~2015~~2016 period.

Receivables and Doubtful Accounts

Trade accounts receivable are stated at the amount the Company expects to collect. We may maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Our accounts receivable balance is typically due from Endo, our one large specialty pharmaceutical customer. Endo has historically paid timely and has been a financially stable organization. Due to the nature of the accounts receivable balance, we believe the risk of doubtful accounts is minimal. If the financial condition of our customer were to deteriorate, adversely affecting its ability to make payments, additional allowances would be required. We may provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 our accounts receivable balance from Endo was ~~$3.8~~$4.7 million and ~~$2.5~~$3.8 million, respectively, and was from one customer, Endo.

Deferred Revenue

Deferred revenue consists of the remaining ~~$7.7~~$6.8 million related to the First Amendment with Endo of mark-up on cost of goods sold revenue for sales by non-affiliated sublicensees, approximately ~~$62,000~~$48,000 related to nonrefundable upfront product license fees for product candidates for which we are providing continuing services related to product development and $100,000 related to a milestone payment withheld by Endo due to a foreign tax withholding which remains uncollected. Currently, the Company expects to recover the full amount. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, deferred revenue was ~~$7.9~~$7.0 million and ~~$0.2~~$7.6 million, respectively.

Reimbursable Third-Party ~~Development~~Patent Costs

We ~~accrued~~accrue patent ~~expenses for~~costs that are reimbursable to Endo by us under the License Agreement. We capitalize certain patent costs related to ~~estimated third-party development costs that are reimbursable under the License Agreement.~~patent prosecution and maintenance and expense others. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, our net reimbursable third party patent expense ~~accrual~~ was approximately ~~$25,000~~$188,000 and ~~$20,000,~~$25,000, respectively.

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Third-Party Royalties

We have entered into licensing and royalty agreements with third parties and agreed to pay certain royalties on net sales of products for specific indications. The royalty rates differ from agreement to agreement and, in certain cases, have been redacted with the permission of the SEC. No assumptions should be made that any disclosed royalty rate payable to a particular third party is the same or similar with respect to any royalty rate payable to any other third parties. We accrue third-party royalty expenses on net sales reported to us by Endo. Third-party royalty costs are generally expensed under general and administrative in the quarter that Endo provides the written reports and related information to us; that is, generally one quarter following the quarter in which the underlying sales by Endo occurred. For the three and ~~nine~~six month periods ended ~~September~~June 30, 2017, third-party royalty expenses were $0.4 million and $0.9 million, respectively. For the three and six month periods ended June 30, 2016, third-party royalty expenses were $0.4 million and ~~$1.2 million , respectively, and for the three and nine month periods ended September 30, 2015, third-party royalty expenses were $0.3 million and $1.0 million,~~$0.8, respectively. Our third-party royalty expense under general and administrative expenses may increase if net sales by Endo and its partners for XIAFLEX and ~~XIAPEX~~Xiapex increase and potential new indications for ~~CCH~~XIAFLEX and Xiapex are ~~approved.~~approved, marketed and sold.

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Royalty Buy-Down

On March 31, 2012, we entered into an amendment to our existing agreement with Dr. Martin K. Gelbard, dated August 27, 2008, related to our future royalty obligations in connection with Peyronie’s disease. The amendment enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment of $1.5 million and five additional cash payments of $600,000, ~~three~~four of which have been paid as of ~~September~~June 30, ~~2016.~~2017. We are currently making the payments to buy down the future royalty obligations, which royalty obligations terminate five years after first commercial sale. The Company amortizes long-term contracts with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. Dr. Gelbard’s agreement is amortized based on an income forecast method by estimating sales of XIAFLEX and Xiapex for Peyronie’s disease on an annual basis as measured by the proportion of the total estimated sales over the five year period. ~~Related~~For the three and six months ended June 30, 2017, we amortized approximately $374,000 and $737,000 related to this agreement, ~~we amortized approximately $247,000~~respectively, and ~~$740,000~~$219,000 and $493,000 for the three and ~~nine~~six months ended ~~September~~June 30, 2016, ~~respectively,~~respectively. As of June 30, 2017 and ~~$221,000 and $420,000 for~~December 31, 2016, the ~~three and nine months ended September 30, 2015, respectively. The~~ remaining capitalized ~~balance as of September 30, 2016 was $3.1 million.~~balances were approximately $2.7 million and $3.4 million, respectively. We perform an evaluation of the recoverability of the carrying value to determine if facts and circumstances indicate that the carrying value of the assets may be impaired and if any adjustment is warranted. ~~Based on our evaluation as~~As of ~~September~~June 30, ~~2016,~~2017, there was no indicator that an impairment ~~existed and no adjustment was warranted.~~existed.

~~R&D~~Research and Development Expenses

R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab ~~expenses,~~expense, facility costs and overhead. R&D expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials, consulting fees and costs associated with clinical study arrangements. We may fund R&D at medical research institutions under agreements that are generally cancelable. All of these costs are charged to R&D as incurred, which may be measured by percentage of completion, contract milestones, patient enrollment, or the passage of time.

Clinical Trial Expenses

Our cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with various clinical trial centers and clinical research organizations. In the normal course of business we contract with third parties to perform various clinical trial activities in the ongoing development of potential drugs. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, the completion of portions of the clinical trial, ~~and other~~or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual cost of services received and efforts expended. As such, expenses related to each patient enrolled in a clinical trial are recognized ratably beginning upon entry into the trial and over the course of the patient’s continued participation in the trial. In the event of early termination of a clinical trial, we accrue an amount based on our estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trial. Our estimates and assumptions could differ significantly from the amounts that may actually be incurred.

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Stock-Based Compensation

The Company has one stock-based compensation plan in effect. Accounting Standards Codification 718, Compensation - Stock Compensation (“ASC 718”), requires the recognition of compensation expense, using a fair-value based method, for costs related to all stock options including stock options and common stock issued to our employees and directors under our stock plans. ASC 718 requires companies to estimate the fair value of stock option awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our condensed consolidated statements of operations.

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Under ASC 718, we estimate the fair value of our employee stock option awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of an award. When establishing an estimate of the expected term of an option award, we consider the vesting period for the award, our recent historical experience of employee stock option exercises (including forfeitures) and the expected volatility of our common stock. As required under the accounting rules, we review our estimates at each grant date and, as a result, the valuation assumptions that we use to value employee stock-based awards granted in future periods may change. No stock options were granted during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015.~~2016.

Further, ASC 718 requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line are estimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period.

Stock-based compensation expense recognized in general and administrative expenses was approximately $33,000 and ~~$100,000~~$67,000 for each three and six month periods ended June 30, 2017 and approximately $34,000 and $67,000 for the three and ~~nine~~six months ended ~~September~~June 30, 2016, ~~respectively, and $33,000 and $72,000 for the three and nine months ended September 30, 2015,~~ respectively.

Stock Option Activity

A summary of our stock option activity during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2016		562,000		$	11.91		2.51	$	17,456,220
Outstanding at December 31, 2016											297,000		$	20.14		3.10	$	10,561,380
Grants		-			-		-		-		-			-		-		-
Exercised		(255,000	)		2.08		-		-		(20,000	)		12.91		-		-
Forfeitures or expirations		-			-		-		-		-			-		-		-
Outstanding at September 30, 2016		307,000		$	20.08		3.33	$	7,857,070
Exercisable at September 30, 2016		260,750		$	17.89		2.83	$	7,243,095
Outstanding at June 30, 2017											277,000		$	20.66		2.74	$	7,991,000
Exercisable at June 30, 2017											238,250		$	18.92		2.39	$	7,288,450

During the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, the Company received ~~$0.5 million~~$258,250 and ~~$2.8 million,~~$177,250, respectively, from stock options exercised by option holders.

Aggregate intrinsic value represents the total pre-tax intrinsic value based on the closing price of our common stock of ~~$45.67~~$49.51 on ~~September~~June 30, ~~2016,~~2017, which would have been received by the option holders had all option holders exercised their options as of that date. We have approximately ~~$301,000~~$201,000 in unrecognized compensation cost related to stock options outstanding as of ~~September~~June 30, ~~2016,~~2017, which we expect to recognize over the next ~~2.40~~1.8 years.

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Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Machinery and equipment, furniture and fixtures, and autos are depreciated on a straight-line basis over their estimated useful lives of five to ten years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining life of the lease. AsAt each of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015, respectively,~~2016, property and equipment were fully depreciated.

Comprehensive Income

For each of the three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2016~~2017 and ~~2015, respectively,~~2016, we had no components of other comprehensive income other than net income itself.

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Provision for Income Taxes

Deferred tax assets and liabilities are recognized based on the expected future tax consequences, using current tax rates, of temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We use the asset and liability method of accounting for income taxes, as set forth in Accounting Standards ~~Codification.~~Codification 740-10-25-2. Under this method, deferred income taxes, when required, are provided on the basis of the difference between the financial reporting and income tax basis of assets and liabilities at the statutory rates enacted for future periods. WeIn accordance with Accounting Standards Codification 740-10-45-25, Income Statement Classification of Interest and Penalties, we classify interest associated with income taxes under interest expense and tax penalties under ~~other expense.~~other.

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax ~~benefit~~benefits recognized in the consolidated financial statements from such position isare measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate settlement. As of ~~September~~June 30, ~~2016~~2017 and ~~2015, respectively,~~December 31, 2016, the Company has not recorded any unrecognized tax benefits.

Commitments and Contingencies

On November 1, 2016, the Company entered into an agreement with the Landlord to extend the term of the lease to the Headquarters for an additional one year period (the “Extended Lease Agreement”). The one year extension will end on November 30, 2017. Pursuant to the Extended Lease Agreement, the base rent is $10,757 per month and the Company may cancel the lease with three months’ prior written notice to the Landlord at any time during the term. The Extended Lease Agreement was filed with the SEC as Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q on November 9, 2016.

Adopted Accounting Standard

In March 2016, the FASB issued ASU 2016-09, which amends the existing accounting standards for share-based payments, including the accounting for income taxes and forfeitures, as well as the classifications on the statements of cash flows. We adopted this guidance effective January 1, 2017. Beginning January 1, 2017, stock-based compensation excess tax benefits or tax deficiencies are reflected in the consolidated statements of operations as a component of the provision for taxes, whereas they previously were recognized as additional paid in capital in the stockholders’ deficit in the consolidated balance sheets. We have elected to continue to estimate forfeitures expected to occur to determine stock-based compensation expense. Additionally, beginning with the three months ended March 31, 2017, and on a prospective basis, the consolidated statements of cash flows now requires excess tax benefits be presented as an operating activity rather than as a financing activity, while the payment of withholding taxes on the settlement of stock-based compensation awards continues to be presented as a financing activity. The implementation of this guidance did not have a material impact on the consolidated financial statements for the three and six months ended June 30, 2017.

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New Accounting Pronouncements

The Financial Accounting Standards Board, or FASB, issued in May 2014, in August 2015, March 2016, ~~and~~ April 2016, and May 2016 respectively, Accounting Standards Updates No. 2014-09, No. 2015-14, No. 2016-08, and No. 2016-10, No. 2016-12 (the “ASUs”). These ASUs were issued in connection with revenue from contracts with customers. The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition. In August 2015, the FASB deferred the effective date of the guidance to reporting periods, including interim periods, beginning after December 15, 2017, and will be applied retrospectively. Early adoption is not permitted. We plan to adopt this guidance effective January 1, 2018, as required. We understand that the adoption of these updates have the potential to materially impact our revenue recognition process and related expenses. We are ~~currently evaluating~~in the ~~timing, method~~process of ~~adoption and~~completing the ~~expected~~analysis of the standards’ impact ~~that the standard could have~~ on our ~~consolidated financial statements~~royalty and ~~related disclosures.~~licensing revenue. While we have not completed our analysis of the impact of the provisions of these standards on the licensing revenue, at this time we have not identified any provisions that we would expect to have a significant impact on how we recognize this revenue. When the assessment of the licensing revenue is complete, we will analyze our remaining revenue streams. We ~~are currently evaluating~~expect to complete our assessments prior to adoption of the ~~expected impact that the standard could have on our consolidated financial statements and related disclosures.~~guidance.

In January 2016, the FASB issued new guidance on recognition and measurement of financial assets and financial liabilities. The new guidance will impact the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for under the equity method of accounting) will generally be measured at fair value with changes in fair value recognized through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income (loss) for equity securities with readily determinable fair values. In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt securities. In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings. This guidance will be effective for us on January 1, 2018. We are currently evaluating the expected impact that the standard could have on our consolidated financial statements and related ~~disclosures.~~disclosure. We expect to complete our evaluation during the second half of 2017.

In February 2016, FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the expected impact that the standard could have on our consolidated financial statements and related disclosures.

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In March 2016, FASB issued ASU No. 2016-09 related to stock-based compensation. The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update is effective in fiscal years, including interim periods, beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating this guidance and the impact it will have on the consolidated financial statements and related disclosures.

In May 2016, FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. We are currently evaluating the expected impact that the standard could have on our consolidated financial statements and related disclosures.

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.

3.	3. NET INCOME PER SHARE

In accordance with Accounting Standards Codification 260, Earnings Per Share, basic net income per share amount is computed using the weighted-average number of shares of common stock outstanding during the periods presented, while diluted net income per share is computed using the sum of the weighted-average number of common and common equivalent shares outstanding. Common equivalent shares used in the computation of diluted earnings per share result from the assumed exercise of stock options using the treasury stock method.

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The following table summarizes the number of common equivalent shares that were excluded for the calculation of diluted net income per share reported in the condensed consolidated statement of operations.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
Stock options 20,000 20,000 20,000 20,000

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Stock options		20,000		50,000		20,000		50,000

~~At September~~For the three and six months ended June 30, ~~2016,~~2017, the Company had 20,000 options, which have an exercise price of $29.21, and will vest upon the achievement of certain performance criteria, which have not yet been met. These options expire on December 2, 2019. For the three and six months ended June 30, 2016, the Company had 50,000 options excluded from the calculation of diluted earnings per share, of which 30,000 options had an exercise price of $37.64, which was higher than the average market price for the second quarter of 2016. These options expire on April 21, 2025.

4.	4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Trade accounts payable and accrued expenses	$	728,425	$	372,367
Trade accounts payable					$	663,964	$	505,098
Accrued legal and other professional fees		66,775		74,138		164,554		51,000
Accrued payroll and related costs		196,667		164,504		262,475		182,551
Other accruals						71,504		-
Total	$	991,867	$	611,009	$	1,162,497	$	738,649

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5.	5. PATENT COSTS

We amortize intangible assets with definite lives on a straight-line basis over their remaining estimated useful lives, ranging from ~~one~~two to ~~twelve~~ten years, and review for impairment on a quarterly basis and when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We analyze our intangible assets, specifically, capitalized patent costs, on an annual basis for any indicator that an impairment exist.

~~We capitalized legal patent costs related to patent prosecution and maintenance.~~ For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, we ~~increased~~did not increase our capitalized patent costs ~~by approximately $23,300,~~ based on reports provided to us by Endo. ~~These patent~~Patent costs ~~are~~may be creditable against future royalty revenues. For each period presented below, net patent costs consisted of:

September 30,
2016

December 31,
2015

Patents $ 720,600 $ 697,260
Accumulated amortization (451,672 ) (422,054 )
$ 268,928 $ 275,206

	June 30, 2017			December 31, 2016
Patents	$	720,601		$	720,601
Accumulated amortization		(482,571	)		(462,246	)
	$	238,030		$	258,355

The amortization expense for patents for the three and ~~nine~~six months ended ~~September~~June 30, 2017 was approximately $10,100 and $20,300, respectively and for the three and six months ended June 30, 2016 was approximately ~~$10,300~~$9,700 and ~~$29,600, respectively, and the amortization expense for patents for the three and nine months ended September 30, 2015 was approximately $11,000 and $34,000,~~$19,300, respectively. The estimated aggregate amortization expense for the remaining ~~three~~six months of ~~2016~~2017 and each of the years below is approximately as follows:

October 1, 2016 to December 31, 2016	$	10,600
2017		38,700
July 1, 2017-December 31, 2017			$	20,400
2018		38,700		40,600
2019		38,700		40,600
2020		27,400		28,600
2021				16,600
Thereafter	$	114,800		91,200

6.	16 Table of Contents 6. PROVISION FOR INCOME TAXES

In determining our provision for income taxes, we consider all available information, including operating results, ongoing tax planning, and forecasts of future taxable income. The significant components of the Company’s deferred tax assets consist of stock-based compensation and deferred revenues. For the three and ~~nine~~six months ended ~~September~~June 30, 2017, the provision for income taxes was $1.4 million and $3.2 million, respectively. As of June 30, 2017 and December 31, 2016, our remaining deferred tax assets were approximately $3.1 million and $3.3 million, respectively.

For the three and six months ended June 30, 2016, the provision for income taxes was ~~$1.8~~$1.3 million and ~~$4.5 million, respectively. As of September 30, 2016 and December 31, 2015, our remaining deferred tax assets were approximately $3.4 million and $0.6 million, respectively.~~

~~For the three and nine month periods ended September 30, 2015, the provision for income taxes was $1.5 million and $3.7~~$2.7 million, respectively.

As of ~~September~~June 30, ~~2016,~~2017, the Company believes that there are no significant uncertain tax positions and no amounts have been recorded for interest and penalties.

7.	~~SUBSEQUENT EVENTS~~

On November 8, 2016, following the change in Endo management, Endo announced as part of its earnings call that an analysis is ongoing of the XIAFLEX exercised but non-marketed indications, including frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis and human lipoma, so that Endo can best prioritize its R & D efforts and determine clinical trial timelines moving forward.

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Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Report and is qualified by reference to them.

Overview

We are a biopharmaceutical company involved in the development of an injectable collagenase clostridium histolyticum ~~or CCH,~~ for multiple indications. We currently have a development and license agreement with Endo Global Ventures, a Bermuda unlimited liability company (“Endo Global Ventures”), an affiliate of Endo International plc (“Endo”), for injectable collagenase for marketed indications and indications in development. Endo assumed this agreement when Endo acquired Auxilium Pharmaceuticals, Inc. (“Auxilium”) on January 29, 2015 (the “Acquisition”). ~~CCH~~Injectable collagenase clostridium histolyticum is marketed as ~~XIAFLEX®~~XIAFLEX® (or ~~XIAPEX®~~Xiapex® in Europe).

On February 1, 2016, we entered into with Endo the First Amendment (the “First Amendment”) to the Second Amended and Restated Development and Licensing Agreement (the “Auxilium Agreement”), by and between us and Auxilium, now a wholly-owned subsidiary of Endo, to amend certain provisions of the Auxilium Agreement (as amended by the First Amendment, the “License Agreement”). The First Amendment was filed with the SEC on February 5, 2016 as Exhibit 10.1 to a Current Report on Form 8-K. The effective date of the First Amendment was January 1, 2016. Pursuant to the First Amendment, we and Endo mutually agreed that in exchange for a $8.25 million lump sum payment, we will not receive future additional mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S.; provided, however, that Endo will still be required to pay a mark-up on cost of goods sold for sales made in the “Endo Territory,” which includes sales made in the U.S. and sales made in any other country where Endo sells the product directly or through affiliated sublicensees. We received this $8.25 million lump sum payment in February 2016 and began recognizing this income over time based on sales by non-affiliated sublicensees of Endo outside of the U.S. according to our revenue recognition policy in the second quarter of 2016.

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Endo is currently selling XIAFLEX in the U.S. for the treatment of ~~Dupuytren’s~~Dupuytren’s contracture and ~~Peyronie’s~~Peyronie’s disease and has an agreement with Swedish Orphan Biovitrum AB (“Sobi”), pursuant to which Sobi has marketing rights for ~~XIAPEX~~Xiapex for ~~Dupuytren’s~~Dupuytren’s contracture and ~~Peyronie’s~~Peyronie’s disease in Europe and certain Eurasian countries. Sobi is currently selling ~~XIAPEX~~Xiapex in Europe and certain Eurasian countries for the treatment of ~~Dupuytren’s~~Dupuytren’s contracture and ~~Peyronie’s~~Peyronie’s disease. In addition, Endo has an agreement with Asahi Kasei Pharma Corporation (“Asahi”) pursuant to which Asahi has the right to commercialize XIAFLEX for the treatment of ~~Dupuytren’s~~Dupuytren’s contracture and ~~Peyronie’s~~Peyronie’s disease in Japan. Asahi ~~has received regulatory approval and~~ is ~~currently~~ selling XIAFLEX for the treatment of ~~Dupuytren’s~~Dupuytren’s contracture in Japan. Endo also had an agreement with Actelion Pharmaceuticals Ltd. (“Actelion”), pursuant to which Actelion had the right to commercialize XIAFLEX for the treatment of Dupuytren’s contracture and Peyronie’s disease in Canada and Australia. Actelion received regulatory approval in Canada and Australia for XIAFLEX for the treatment of Dupuytren’s contracture and was selling XIAFLEX in Canada and Australia. Endo terminated its agreement with Actelion as of July 4, 2016 and a transitional services agreement was put in place to cover both Canada and Australia. Endo is currently distributing XIAFLEX in Canada through Paladin Labs Inc. an operating company of Endo. In December 2016, Endo entered into a new out-licensing agreement with Actelion, pursuant to which Actelion obtained marketing and commercial rights for XIAFLEX in Australia and New Zealand.

Operational Highlights

On ~~July 29, 2016, Endo notified us~~April 18, 2017, we announced that ~~it was exercising its right to opt-in~~we initiated an open-label, dose escalation Phase 1 clinical trial of XIAFLEX for the ~~human lipoma indication, bringing their total number~~treatment of ~~licensed indications~~uterine fibroids. The Phase 1 open-label dose escalation study is being conducted at the Department of Gynecology & Obstetrics at Johns Hopkins University and will enroll 15 female subjects treated prior to ~~eight. As~~hysterectomy. Three subjects have been injected with saline only to evaluate the safety and effectiveness of the injection method and the remaining 12 subjects will now be injected with increasing doses of XIAFLEX. The primary endpoint will assess the safety and tolerability of a ~~result~~single injection of ~~Endo's opt-in for this indication,~~XIAFLEX directly into the uterine fibroids at three doses under transvaginal ultrasound guidance. The secondary endpoints will assess symptoms of pain and bleeding, quality of life throughout the study, shrinkage of XIAFLEX treated fibroids in ~~addition to an opt-in payment~~size, increased rates of ~~$750,000 received~~apoptosis in treated fibroids and a decrease in the ~~third quarter~~collagen content of ~~2016, they are now responsible for all costs for future clinical development and will owe potential future milestone, royalty and mark-up on cost of goods payments to us.~~treated fibroids.

Outlook

We generated revenue from primarily one source, the License Agreement. Under the License Agreement, we receive license, sublicense income, royalties, milestones and mark-up on cost of goods sold payments related to the sale, regulatory submissions and approval of XIAFLEX as described above.

Significant Risks

We are dependent to a significant extent on third parties, and our principal licensee, Endo, may not be able to continue successfully commercializing XIAFLEX for Dupuytren’s contracture and Peyronie’s disease, successfully develop ~~CCH~~XIAFLEX for additional indications, obtain required regulatory approvals, manufacture XIAFLEX at an acceptable cost, in a timely manner and with appropriate quality, or successfully market products or maintain desired margins for products sold, and, as a result, we may not achieve sustained profitable operations.

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The Company maintains bank account balances, which, at times, may exceed insured limits. The Company has not experienced any losses with these accounts and believes that it is not exposed to any significant credit risk on cash. The Company maintains its investment in FDIC insured certificates of deposits with several banks, municipal bonds and corporate bonds.

For more information regarding the risks facing the Company, please see the risk factors discussed under the heading “Risk Factors” under Item 1A of Part 2 ~~within this report and~~of our Quarterly ~~Reports~~Report on Form 10Q for the ~~periods~~quarter ended March 31, ~~2016 and June 30, 2016~~2017 filed with the SEC on May 10, ~~2016 and August 9, 2016, respectively,~~2017 and under item 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 filed with the SEC on March ~~14, 2016.~~16, 2017.

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Critical Accounting Policies, Estimates and Assumptions

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The financial information at ~~September~~June 30, ~~2016~~2017 and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth herein. The December 31, ~~2015~~2016 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, ~~2015~~2016 audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, ~~2015~~2016 included in the Company’s Annual Report on Form 10-K and with the unaudited condensed consolidated financial statements included in our Quarterly ~~Reports~~Report on Form 10-Q for the first ~~and second~~ quarter of ~~2016~~2017 filed with the SEC. While our significant accounting policies are described in more detail in the notes to our unaudited condensed consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. Actual results have differed in the past, and may differ in the future, from our estimates and could impact our earnings in any period during which an adjustment is made.

Revenue Recognition

We currently recognize revenues resulting from the licensing, sublicensing and use of our technology and from services we sometimes perform in connection with the licensed technology.

We enter into product development licenses and collaboration agreements that may contain multiple elements, such as upfront license and sublicense fees, milestones related to the achievement of particular stages in product development and royalties. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple-element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if deliverables should be treated as separate units, how the aggregate contract value should be allocated among the deliverable elements and when to recognize revenue for each element.

We recognize revenue for delivered elements only when the fair values of undelivered elements are known, when the associated earnings process is complete and, to the extent the milestone amount relates to our performance obligation, when our licensee confirms that we have met the requirements under the terms of the agreement, and when payment is reasonably assured. Changes in the allocation of the contract value between various deliverable elements might impact the timing of revenue recognition, but in any event, would not change the total revenue recognized on the contract. For example, nonrefundable upfront product license fees for product candidates for which we are providing continuing services related to product development are deferred and recognized as revenue over the development period.

Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specific event identified in a contract, such as completion of specified clinical development activities and/or regulatory submissions and/or approvals. We believe that a milestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on our part. We recognize such milestones as revenue when they become due and payment is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, we recognize revenue in a manner similar to that of an upfront product license fee.

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We recognize revenues from product sales in other income when there is persuasive evidence that an arrangement exists, title passes, the price is fixed and determinable, and payment is reasonably assured.

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Royalty / Mark-up on Cost of Goods Sold

For those arrangements for which royalty and mark-up on cost of goods sold information becomes available and collectability is reasonably assured, we recognize revenue during the applicable period earned. For interim quarterly reporting purposes, when collectability is reasonably assured, but a reasonable estimate of royalty and mark-up on cost of goods sold cannot be made, the royalty and mark-up on cost of goods sold are generally recognized in the quarter that the applicable licensee provides the written report and related information to us.

Pursuant to the First Amendment with Endo, in exchange for a $8.25 million lump sum payment, we will not receive future additional mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S.; provided, however, that Endo will still be required to pay a mark-up on cost of goods sold for sales made in the “Endo Territory,” which includes sales made in the U.S. and sales made in any other country where Endo sells the product directly or through affiliated sublicensees. We received this $8.25 million lump sum payment in February 2016. We classified this payment as deferred revenue in our balance sheet and began recognizing this income over time beginning in the second quarter of 2016 based on sales by non-affiliated sublicensees of Endo outside of the U.S. according to our revenue recognition policy. We recognized approximately ~~$274,000~~$373,000 and ~~$546,000~~$629,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, respectively, and zero in~~2017. We recognized approximately $272,000 for each of the ~~2015 corresponding periods.~~

three and six months ended June 30, 2016.

Reimbursable Third-Party ~~Development~~Patent Costs

We accrue patent ~~expenses for~~costs that are reimbursable to Endo by us under the License Agreement. We capitalize certain patent costs related to ~~estimated third-party development costs that are reimbursable under the License Agreement.~~patent prosecution and maintenance and expense others. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, our ~~estimated~~ net reimbursable third party patent ~~costs accrual were~~expense was approximately ~~$25,000~~$188,000 and ~~$20,000,~~$25,000, respectively.

Receivables

At ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 our accounts receivable balance which consists of royalties, mark-up on costs of goods sold and a portion of a milestone payment from Endo due to a foreign tax withholding, was ~~$3.8~~$4.7 million and ~~$2.5~~$3.8 million, respectively, and was from one customer, Endo.

Deferred Revenue

Deferred revenue consists of the mark-up on cost of goods sold for sales by non-affiliated sublicensees and ~~will be~~is being recognized as income over time based on sales by non-affiliated sublicensees of Endo outside of the U.S in accordance with our revenue recognition policy beginning in the second quarter of 2016. In addition, deferred revenue consists of licensing fees related to the cash payments received under the License Agreement in prior years and amortized over the expected development period of certain indications for XIAFLEX and a portion of a milestone payment withheld by Endo due to a foreign tax withholding which remains uncollected. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, deferred revenue was approximately ~~$7.9~~$7.0 million and ~~$0.2~~$7.6 million, respectively.

Third-Party Royalties

We have entered into licensing and royalty agreements with third parties and have agreed to pay certain royalties on net sales of products for specific indications. The royalty rates differ from agreement to agreement and, in certain cases, have been redacted with the permission of the SEC. No assumptions should be made that any disclosed royalty rate payable to any particular third party are the same or similar with respect to any royalty rate payable to any other third parties. We accrue third-party royalty expenses on net sales reported to us by Endo. Third-party royalty costs are generally expensed in the quarter that Endo provides the written reports and related information to us; that is, generally one quarter following the quarter in which the underlying sales by Endo occurred. For the three and ~~nine~~six month periods ended ~~September~~June 30, 2017, third-party royalty expenses were $0.4 million and $0.9 million, respectively. For the three and six month periods ended June 30, 2016, third-party royalty expenses were $0.4 million and ~~$1.2 million, respectively, and for the three and nine month periods ended September 30, 2015, third-party royalty expenses were $0.3 million and $1.0 million,~~$0.8, respectively. Our third-party royalty expense under general and administrative expenses may increase if net sales by Endo and its partners for XIAFLEX and ~~XIAPEX~~Xiapex increase and potential new indications for ~~CCH~~XIAFLEX and Xiapex are ~~approved.~~approved, marketed and sold.

1920

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Royalty Buy-Down

On March 31, 2012, we entered into an amendment to our existing agreement with Dr. Martin K. Gelbard, dated August 27, 2008, related to our future royalty obligations in connection with Peyronie’s disease. The amendment enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment of $1.5 million and five additional cash payments of $600,000, ~~three~~four of which have been paid as of ~~September~~June 30, ~~2016.~~2017. We are currently making the payments to buy down the future royalty obligations, which royalty obligations terminate five years after first commercial sale. The Company amortizes long-term contracts with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. Dr. Gelbard’s agreement is amortized based on an income forecast method by estimating sales of XIAFLEX for Peyronie’s disease on an annual basis as measured by the proportion of the total estimated sales over the five year period. Related to this agreement, ~~we amortized approximately $247,000 and $740,000~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, we amortized approximately $374,000 and $737,000 related to this agreement, respectively, and ~~$221,000~~$219,000 and ~~$420,000~~$493,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015,~~2016, respectively. The remaining capitalized balance as of ~~September~~June 30, ~~2016~~2017 was ~~$3.1~~$2.7 million. We perform an evaluation of the recoverability of the carrying value to determine if facts and circumstances indicate that the carrying value of the assets may be impaired and if any adjustment is warranted. Based on our evaluation as of ~~September~~June 30, ~~2016,~~2017, no impairment existed and no adjustment was warranted.

Stock Based Compensation

Under ASC 718, we estimate the fair value of our employee stock option awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of an option award. Expected volatility is based on the historical volatility of our common stock. When establishing an estimate of the expected term of an option award, we consider the vesting period for the award, our historical experience of employee stock option exercises (including forfeitures) and the expected volatility of our common stock. We review our estimates at each grant date and, as a result, we are likely to change our valuation assumptions used to value future employee stock-based awards granted, to the extent any such awards are granted.

Further, ASC 718 requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line is estimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and are revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period.

RESULTS OF OPERATIONS

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2016~~2017 COMPARED TO THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2015~~2016

Revenues

Royalties

Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the three month period ended ~~September~~June 30, ~~2016~~2017 were ~~$6.1~~$6.5 million as compared to ~~$5.3~~$6.2 million in the corresponding ~~2015~~2016 period, an increase of ~~$0.8~~$0.3 million or ~~15%~~5%. This increase in royalties and the mark-up on cost of goods sold was primarily due to the increase in sales of XIAFLEX for the treatment of Peyronie’s disease and Dupuytren’s contracture ~~and Peyronie’s disease.~~partially offset by lower mark-up on cost of goods sold revenue.

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Licensing Revenue

Licensing revenue consists of licensing fees, sublicensing fees and milestones. We ~~recognized licensing fees related to the exercise of an opt-in right by Endo~~ ~~for the human lipoma indication~~ ~~of $750,000 for the three months ended September 30, 2016 as compared to zero in the corresponding 2015 period. In addition, we~~ recognized certain licensing fees related to the cash payments received under the Auxilium Agreement in prior years and amortized them over the expected development period. For ~~each of~~ the three month periods ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, we recognized licensing revenue related to the development of injectable collagenase of ~~approximately $12,000.~~$4,409 and $12,344, respectively.

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Milestone revenue recognized for the three months ended ~~September~~June 30, 2017 and 2016 was zero ~~as compared to $1.0 million for the corresponding 2015~~in each period. ~~The $1.0 million~~ ~~milestone revenue recognized in the corresponding 2015 period related to the~~ ~~first commercial sale of XIAFLEX by Asahi for the treatment of Dupuytren's contracture in Japan.~~

Research and Development Activities and Expenses

R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expenses, facility costs and overhead. R&D expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. For ~~each of~~ the three ~~months~~month periods ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, R&D expenses were ~~$0.3 million~~approximately $338,000 and $444,000, respectively and in each case, are primarily related to the development work associated with our clinical programs, preclinical and other R&D programs.

We manage the development of ~~CCH~~XIAFLEX for uterine fibroids and initiate the development of ~~CCH~~XIAFLEX in new potential indications, not licensed by Endo. On April 18, 2017, we initiated an open-label, dose escalation Phase 1 clinical trial of XIAFLEX for the treatment of uterine fibroids.

We have finished the development work on human lipomas. On July 29, 2016, Endo exercised its opt-in right under the license agreement with respect to the human lipoma indication.

The following table summarizes our R&D expenses related to our development programs:

	Three Months Ended September 30, 2016		Three Months Ended September 30, 2015		Three Months Ended June 30, 2017		Three Months Ended June 30, 2016
Program
Human Lipoma	$	100,973	$	68,606	$	-	$	215,131
Uterine Fibroids		18,762		19,915		107,746		76,683
Pre-clinical/other research projects		193,172		170,316		229,985		152,663

The successful development of drugs is inherently difficult and uncertain. Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if the Company is able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX and ~~CCH,~~Xiapex, to continue to ~~successfully~~ commercialize these drug candidates.

There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:

the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects;

the anticipated completion dates for our drug candidate projects;

the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drug candidate projects;

the scope, rate of progress of our preclinical studies and other R&D activities related to our drug candidate projects;

~~the~~ clinical trial results for our drug candidate projects;

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidate projects;

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the terms and timing of any strategic alliance, ~~partnership, joint venture,~~ licensing and other arrangements that we have or may establish in the future relating to our drug candidate projects;

the cost and timing of regulatory approvals with respect to our drug candidate projects; and

the cost of establishing clinical supplies for our drug candidate projects.

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We believe that our current resources and liquidity are sufficient to advance our ~~significant~~ current clinical and R&D projects.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs for personnel, third-party royalty fees, amortization of deferred royalty buy-down, consultant costs, legal fees, investor relations, professional fees and overhead costs. General and administrative expenses for the three months ended ~~September~~June 30, 2017 and 2016 ~~and 2015~~ were ~~$1.8~~$2.3 million and ~~$1.7~~$1.9 million, respectively. The increase in general and administrative expenses was mainly due to the increased third party patent fees, amortization of the deferred royalty buy-down, third party royalty partially offset by lower investor relations and ~~consulting~~legal fees.

Other Income

Other income for the three months ended ~~September~~June 30, ~~2016~~2017 was approximately ~~$87,000~~$164,000 compared to ~~$28,000~~$77,000 in the corresponding ~~2015~~2016 period. Other income consists of interest earned on our investments and product sales of collagenase for laboratory use.

Provision for Income Taxes

Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business, R&D activities, vesting of nonqualified options, deferred revenues and other items. The provision for income taxes is based on an estimated effective tax rate derived from an estimate of condensed consolidated earnings before taxes, adjusted for nondeductible expenses and other permanent differences for the fiscal year. For the three month period ended June 30, 2017, our provision for income taxes was $1.4 million. Our deferred tax assets as of June 30, 2017 were $3.1 million. For the three month period ended June 30, 2016, the provision for income taxes was $1.3 million.

Net Income

For the three months ended June 30, 2017, we recorded net income of $2.6 million, or $0.37 per basic common share and $0.36 per diluted common share, compared to a net income of $2.6 million, or $0.37 per basic common share and $0.35 per diluted common share, for the same period in 2016.

SIX MONTHS ENDED JUNE 30, 2017 COMPARED TO SIX MONTHS ENDED JUNE 30, 2016

Revenues

Royalties

Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the six month period ended June 30, 2017 were $14.2 million as compared to $12.7 million in the corresponding 2016 period, an increase of $1.5 million or 12%. This increase in royalties and the mark-up on cost of goods sold was primarily due to the increase in sales of XIAFLEX for the treatment of Peyronie’s disease and Dupuytren’s contracture.

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Licensing Revenue

Licensing revenue consists of licensing fees, sublicensing fees and milestones. We recognized certain licensing fees related to the cash payments received under the Auxilium Agreement in prior years and amortized them over the expected development period. For the six month periods ended June 30, 2017 and 2016, we recognized licensing revenue related to the development of injectable collagenase of $8,818 and $24,689, respectively.

Milestone revenue recognized for the six months ended June 30, 2017 and 2016 was zero in each period.

Research and Development Activities and Expenses

R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expenses, facility costs and overhead. R&D expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. For the six month periods ended June 30, 2017 and 2016, R&D expenses were approximately $0.6 million and $0.7 million, respectively and in each case, are primarily related to the development work associated with our clinical programs, preclinical and other R&D programs.

We manage the development of XIAFLEX for uterine fibroids and initiate the development of XIAFLEX in new potential indications, not licensed by Endo. On April 18, 2017, we initiated an open-label, dose escalation Phase 1 clinical trial of XIAFLEX for the treatment of uterine fibroids.

We have finished the development work on human lipomas.On July 29, 2016, Endo exercised its opt-in right under the license agreement with respect to the human lipoma indication.

The following table summarizes our R&D expenses related to our development programs:

	Six Months Ended June 30, 2017		Six Months Ended June 30, 2016
Program
Human Lipoma	$	-	$	251,100
Uterine Fibroids		228,132		93,020
Pre-clinical/other research projects		364,380		348,857

The successful development of drugs is inherently difficult and uncertain. Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if the Company is able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX and Xiapex, to continue to commercialize these drug candidates.

There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:

the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects;

the anticipated completion dates for our drug candidate projects;

the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drug candidate projects;

the scope, rate of progress of our preclinical studies and other R&D activities related to our drug candidate projects;

clinical trial results for our drug candidate projects;

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidate projects;

the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drug candidate projects;

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the cost and timing of regulatory approvals with respect to our drug candidate projects; and

the cost of establishing clinical supplies for our drug candidate projects.

We believe that our current resources and liquidity are sufficient to advance our current clinical and R&D projects.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs for personnel, third-party royalty fees, amortization of deferred royalty buy-down, consultant costs, legal fees, investor relations, professional fees and overhead costs. General and administrative expenses for the six months ended June 30, 2017 and 2016 were $4.7 million and $4.1 million, respectively. The increase in general and administrative expenses was mainly due to the increased third party patent fees, amortization of the deferred royalty buy-down, third party royalty partially offset by lower investor relations and legal fees.

Other Income

Other income for the six months ended June 30, 2017 was approximately $269,000 compared to $151,800 in the corresponding 2016 period. Other income consists of interest earned on our investments and product sales of collagenase for laboratory use.

Provision for Income Taxes

For the ~~three~~six month period ended ~~September~~June 30, ~~2016,~~2017, our provision for income taxes was ~~$1.8~~$3.2 million. Our taxes payable as of ~~September~~June 30, ~~2016~~2017 were reduced by ~~$0.2 million~~$28,000 due to the windfall associated with the disqualified sale of incentive stock options and the exercise of nonqualified options. Our deferred tax assets ~~remained unchanged~~ as of ~~September~~June 30, ~~2016.~~

2017 were $3.1 million

For the ~~three~~six month period ended ~~September~~June 30, ~~2015,~~2016, the provision for income taxes was ~~$1.5~~$2.7 million.

Net Income

For the ~~three~~six months ended ~~September~~June 30, ~~2016,~~2017, we recorded net income of ~~$3.1~~$6.0 million, or ~~$0.43~~$0.83 per basic common share and ~~$0.42~~$0.81 per diluted common share, compared to a net income of ~~$2.9~~$5.4 million, or ~~$0.42~~$0.77 per basic common share and ~~$0.39~~$0.74 per diluted common share, for the same period in ~~2015.~~2016.

~~NINE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2015~~

~~Revenues~~

~~Royalties~~

Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the nine month period ended September 30, 2016 were $18.8 million as compared to $15.6 million in the corresponding 2015 period, an increase of $3.2 million or 21%. This increase in royalties and the mark-up on cost of goods sold was primarily due to the increase in sales of XIAFLEX for the treatment of Dupuytren’s contracture and Peyronie’s disease.

~~Licensing Revenue~~

~~Licensing revenue consists of licensing fees, sublicensing fees and milestones. We recognized licensing fees related to the exercise of an opt-in right by Endo~~ ~~for the human lipoma indication~~ of $750,000 for the nine months ended September 30, 2016 as compared to zero in the corresponding 2015 period. In addition, we recognized certain licensing fees related to the cash payments received under the Auxilium Agreement in prior years and amortized them over the expected development period. For each of the nine month periods ended September 30, 2016 and 2015, we recognized licensing revenue related to the development of injectable collagenase of approximately $37,000.

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~~Milestone revenue recognized for the nine months ended September 30, 2016 was zero as compared to $1.0 million for the~~ ~~corresponding~~ ~~2015 period. The $1.0 million~~ ~~milestone revenue recognized in the corresponding 2015 period related to the~~ ~~first commercial sale of XIAFLEX by Asahi for the treatment of Dupuytren's contracture in Japan.~~

~~Research and Development Activities and Expenses~~

R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expenses, facility costs and overhead. R&D expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials, consulting fees and costs associated with clinical study arrangements. For the nine months ended September 30, 2016 and 2015, R&D expenses were $1.0 million and $0.8 million, respectively. This increase is primarily related to the development work associated with our clinical programs, preclinical and other R&D programs.

~~We manage the development of CCH for uterine fibroids and initiate the development of CCH in new potential indications, not licensed by Endo. We have finished the development work on human lipomas.On July 29, 2016, Endo exercised its opt-in right under the license agreement with respect to the human lipoma indication.~~

~~The following table summarizes our R&D expenses related to our development programs:~~

Nine Months Ended
September 30, 2016

Nine Months Ended
September 30, 2015

Program

Human Lipoma $ 352,073 $ 193,704
Uterine Fibroids 111,782 26,858
Pre-clinical/other research projects 542,029 534,476

The successful development of drugs is inherently difficult and uncertain. Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if the Company is able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX and CCH, to continue to successfully commercialize these drug candidates.

~~There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:~~

~~the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects;~~

~~the anticipated completion dates for our drug candidate projects;~~

~~the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drug candidate projects;~~

~~the scope, rate of progress of our preclinical studies and other R&D activities related to our drug candidate projects;~~

~~the clinical trial results for our drug candidate projects;~~

~~the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidate projects;~~

~~the terms and timing of any strategic alliance, partnership, joint venture, licensing and other arrangements that we have or may establish in the future relating to our drug candidate projects;~~

~~the cost and timing of regulatory approvals with respect to our drug candidate projects; and~~

~~the cost of establishing clinical supplies for our drug candidate projects.~~

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~~We believe that our current resources and liquidity are sufficient to advance our significant current clinical and R&D projects.~~

~~General and Administrative Expenses~~

General and administrative expenses consist primarily of salaries and other related costs for personnel, third-party royalty fees, amortization of deferred royalty buy-down, consultant costs, legal fees, investor relations, professional fees and overhead costs. General and administrative expenses for the nine months ended September 30, 2016 and 2015 were $5.9 million and $5.3 million, respectively. The increase in general and administrative expenses was mainly due to the increased amortization of the deferred royalty buy-down, third party royalty, patent fees, director fees and stock-based compensation partially offset by lower legal and consulting fees.

~~Other Income~~

Other income for the nine months ended September 30, 2016 was approximately $238,000 compared to $65,000 in the corresponding 2015 period. Other income consists of interest earned on our investments and product sales of collagenase for laboratory use.

~~Provision for Income Taxes~~

For the nine month period ended September 30, 2016, our provision for income taxes was $4.5 million. Our taxes payable as of September 30, 2016 were reduced by $0.2 million due to the windfall associated with the disqualified sale of incentive stock options and the exercise of nonqualified options. Our deferred tax assets increased by $2.7 million due to ~~the deferred revenue associated with the receipt of $8.25 million under the First Amendment with Endo on sales by non-affiliated sublicensees of Endo outside of the U.S.~~ ~~As of September 30, 2016, our remaining deferred tax assets were approximately $3.4 million.~~

~~For the nine month period ended September 30, 2015, the provision for income taxes was $3.7 million.~~

~~Net Income~~

For the nine months ended September 30, 2016, we recorded net income of $8.5 million, or $1.20 per basic common share and $1.16 per diluted common share, compared to a net income of $7.0 million, or $1.02 per basic common share and $0.96 per diluted common share, for the same period in 2015.

Liquidity and Capital Resources

To date, we have financed our operations primarily through product sales, licensing revenues and royalties under agreements with third parties and sales of our common stock. At ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, we had cash and cash equivalents and investments in the aggregate of approximately ~~$51.3~~$58.5 million and ~~$37.1~~$52.8 million, respectively. We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for at least the next 12 months.

Net cash provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, 2017 and 2016 ~~and 2015~~ was ~~$14.8~~$6.3 million and ~~$6.2~~$9.4 million, respectively. Net cash provided by operating activities in the 2017 period was primarily attributable to our net income of $6.0 million, an increase in operating assets and liabilities of $1.0 million of which $0.9 million was related to an increase in accounts receivable due to sales of XIAFLEX. Non-cash items included amortization, stock-based compensation expense, and deferred taxes which was reduced by adjustments to reconcile net income to net cash provided by operating activities of $1.4 million. Net cash provided by operating activities in the 2016 period was primarily attributable to our net income of ~~$8.5~~$5.4 million, an increase in operating assets and liabilities of ~~$7.8~~$5.9 million of which ~~$7.7~~deferred revenue of $8.0 million was related to the First Amendment with Endo for mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S. Non-cash items included amortization, stock-based compensation expense, and deferred taxes which was reduced by adjustments to reconcile net income to net cash provided by operating activities of ~~$1.4~~$1.8 million. Net cash provided by operating activities in the 2015 period was primarily attributable to our net income of $7.0 million, adjustments to reconcile net income to net cash provided by operating activities of $1.2 million and changes in operating assets and liabilities of $1.9 million. Non-cash items included amortization, stock-based compensation expense, deferred taxes and deferred revenue.

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Net cash used inby investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was ~~$15.0~~$4.8 million as compared ~~to $13.4~~$7.2 million for the corresponding ~~2015~~2016 period. The net cash used in investing activities in the 2017 period reflects the maturing of $32.9 million and investment of $37.7 million in marketable securities. The net cash used in investing activities in the 2016 period reflects the maturing of ~~$32.5~~$21.7 million and investment of ~~$47.6 million in marketable securities. The net cash used in investing activities in the 2015 period reflects the maturing of $11.0 million and investment of $24.4~~$28.9 million in marketable securities.

Net cash used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was ~~$0.1 million~~approximately $221,000 as compared to ~~net cash provided by financing activities of $4.8 million~~approximately $364,000 in the corresponding ~~2015~~2016 period. In the 2017 period, net cash used in financing activities was mainly due to the repurchase of approximately $479,000 of our common stock under our stock repurchase program partially offset the proceeds received from stock option exercises of approximately $258,000. In the 2016 period, net cash used in financing activities was mainly due to the repurchase of ~~$0.9 million~~$693,000 of our common stock under our stock repurchase program partially offset by proceeds received from stock option exercises of approximately $177,000 and the excess tax benefits related to share-based payments of $0.2 million and the proceeds received from stock option exercises of approximately $0.5 million. In the 2015 period, net cash provided by financing activities was mainly due to the excess tax benefits related to share-based payments of $3.2 million and the proceeds received from stock option exercises of approximately $2.8 million partially offset by the repurchase of $1.2 million of our common stock under our stock repurchase program.$151,000.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

We do not use derivative financial instruments or derivative commodity instruments for trading purposes. Our financial instruments consist of cash, cash equivalents, investments, trade accounts receivable, accounts payable and long-term obligations. We consider investments that, when purchased, have a remaining maturity of three months or less to be cash equivalents.

Our investment portfolio is subject to interest rate risk, although limited given the short term nature of the investments, and will fall in value in the event market interest rates increase. All of our cash and cash equivalents and investments at ~~September~~June 30, ~~2016,~~2017, amounting to approximately ~~$51.3~~$58.5 million, were maintained in bank demand accounts, money market accounts, certificates of deposit, corporate bonds and municipal bonds. We do not hedge our interest rate risks, as we believe reasonably possible near-term changes in interest rates would not materially affect our results of operations, financial position or cash flows.

We are subject to market risks in the normal course of our business, including changes in interest rates. There have been no significant changes in our exposure to market risks since ~~December 31, 2015.~~June 30, 2017.

Item 4:

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of Thomas L. Wegman, the Company’s President, Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, Thomas L. Wegman, in his capacity as the sole named executive officer of the Company, the Company’s Principal Executive Officer and the Company’s Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by it in reports the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such material information is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, the Company’s controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of such control, and misstatements due to error or fraud may occur and not be detected on a timely basis.

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Changes in Internal Controls

There were no changes in our internal controls over financial reporting during the quarter ended ~~September~~June 30, ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

~~The outcome and effects of Endo’s ongoing analysis of the XIAFLEX exercised but non-marketed indications is uncertain.~~

Following the change in Endo management, Endo has announced an analysis of the XIAFLEX exercised but non-marketed indications, including frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis and human lipoma, so that Endo can best prioritize its R & D efforts and determine clinical trial timelines moving forward. At the present time, it is unclear how long this analysis will take to complete and the effect that it will have on Endo’s willingness to develop further such exercised but non-marketed indications. It is also unclear what effect, if any, the analysis will have on the willingness of Endo to exercise its rights to opt in for any additional indications, including uterine fibroid, currently under development by the Company.

In addition to the other information contained elsewhere in this Report, you should carefully consider the risk factors discussed in “Part I, Item 1A. Risk Factors” in our Quarterly Report on Form ~~10-Q~~10Q for the ~~periods~~period ended March 31, ~~2016 and June 30, 2016~~2017 filed with the SEC on May 10, ~~2016 and August 9, 2016, respectively,~~2017 and our Annual Report on Form 10-K for the ~~period~~year ended December 31, ~~2015~~2016 filed with the SEC on March ~~4, 2016,~~16, 2017, which could materially affect our business, financial condition or future results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the ~~nine~~six month period ended ~~September~~June 30, ~~2016,~~2017, we did not issue any unregistered equity securities.

Issuer Purchases of Equity Securities

The following table presents a summary of share repurchases made by us during the quarter ended ~~September~~June 30, ~~2016.~~2017.

Period

Total Number of
Shares
Purchased ⁽²⁾

Average
Price Paid
Per Share ⁽³⁾

Total Number of
Shares
Purchased as
Part of Publicly
Announced Plan

Maximum
Number (or
Dollar Value) of
Shares that may
yet be Purchased
under the Plan

$ 927,193
⁽¹⁾
July 1, 2016 – July 31, 2016 1,655 $ 40.62 256,053 859,969
August 1, 2016 – August 31, 2016 2,235 38.66 258,288 773,563
September 1, 2016 – September 30, 2016 1,400 36.84 259,688 721,986

Period	Total Number of Shares Purchased ⁽²⁾		Average Price Paid Per Share ⁽³⁾		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number (or Dollar Value) of Shares that may yet be Purchased under the Plan
							$	401,268,000	⁽¹⁾
April 1, 2017 – April 30, 2017		773	$	53.48		267,999		359,929
May 1, 2017 – May 31, 2017		1,195		53.36		269,194		296,162
June 1, 2017 – June 30, 2017		3,055		49.70		272,249		144,328

(1)

On August 17, 2015, we announced that our Board of Directors had authorized the repurchase of up to $2.5 million of our common stock under the stock repurchase program.

(2)

The purchases were made in open-market transactions in compliance with rule 10b-18 or under the company’s 10b-18 plan.

(3)

Includes commissions paid, if any, related to the stock repurchase transactions.

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Item 6.

Exhibits

	10.1*	~~Amended Agreement of Lease, dated as of November 1, 2016, among the Company, ABC-NY and 35 Wilbur Street Associates.~~
	31*	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule13a-14(a)/15d-14(a).
	32**	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
	101*	The following materials from BioSpecifics Technologies Corp.’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2016, (ii)~~2017, (i) the Condensed Consolidated Statements of Operations, ~~(iii)~~(ii) the Condensed Consolidated Statements of Cash Flows, and ~~(iv)~~(iii) the Notes to the Condensed Consolidated Financial Statements.

*	filed herewith

**	furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	BIOSPECIFICS TECHNOLOGIES CORP.
	(Registrant)

Date: ~~November~~August 9, ~~2016~~2017	/s/ Thomas L. Wegman
	Thomas L. Wegman
	President, Principal Executive Officer and Principal Financial Officer

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	Maturities as of September 30, 2016				Maturities as of December 31, 2015

	1 Year or Less		Greater than 1 Year		1 Year or Less		Greater than 1 Year

Municipal bonds	$	6,917,696	$	-	$	6,461,216	$	155,826

Corporate Bonds		31,218,996		1,194,049		9,882,285		1,597,715

Certificates of deposit		6,938,878		249,050		12,004,041		1,843,000
Total	$	45,075,570	$	1,443,099	$	28,347,542	$	3,596,541

	Nine Months Ended September 30, 2016		Nine Months Ended September 30, 2015
Program
Human Lipoma	$	352,073	$	193,704
Uterine Fibroids		111,782		26,858
Pre-clinical/other research projects		542,029		534,476