Washington, D.C. 20549
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 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Class
Title of Stockeach class | Outstanding November 8, 2017 Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, ($.001$0.001 par value)value per share | 7,189,233BSTC | The Nasdaq Capital Market |
As of May 9, 2019, there were 7,286,902 shares of Common Stock, par value $0.001 per share, outstanding.
BIOSPECIFICS TECHNOLOGIES CORP.
| Page |
| PART I – FINANCIAL INFORMATION | |
ITEM 1. | Financial Statements | |
| | 4 |
| | 5 |
| | 6 |
| | 7 |
| | 78 |
ITEM 2. | | 1718 |
ITEM 3. | | 2524 |
ITEM 4. | | 2624 |
| PART II – OTHER INFORMATION | |
ITEM 1. | | 2625 |
ITEM 1A.
| | 2625 |
ITEM 2. | | 2625 |
ITEM 6. | | 2826 |
| | 2927 |
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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q include statements concerning, among other things, (i) the continued commercializationopportunity for minimally invasive non-surgical treatment XIAFLEX® in several potential pipeline indications; (ii) whether and when the Company will hear from Endo International plc (“Endo”) the results of XIAFLEXtheir full commercial assessment and analysis regarding the XIAFLEX® research and development (“R&D”) pipeline; (iii) the Company’s ability to treatachieve its future growth initiatives with regard to Dupuytren’s contractureContracture and Peyronie’s disease; (iv) the continued marketingexpansion of the market for XIAFLEX® through future growth initiatives; (v) whether treating uterine fibroids with XIAFLEX® will achieve the advantages over major surgery identified by the Company; (vi) Endo’s interest in currently unlicensed indications, including capsular contracture of the breast, Dercum’s disease, knee arthrofibrosis, urethral strictures, hypertrophic scars and commercialization of XIAFLEX to treat Dupuytren’s contracturekeloids; (vii) whether XIAFLEX® will be the only U.S. Food 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 XIAFLEXDrug Administration (“FDA”) approved nonsurgical therapy for additional indications;frozen shoulder (adhesive capsulitis); (viii) 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 futureprojected receipt of payments from Endo including milestone and royaltysublicense income payments in connection withbased on Endo’s partnerships; and (ix) and 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 sufficiencystrength 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 ongoing commercial review regarding the XIAFLEX pipeline; the timing of Endo’s determination of clinical trial timelines for additional indications; and the nature of our accounts receivable balance. IP portfolio.
In some cases, these statements can be identified by forward-looking words such as “believe,“expect,” “expect,“plan,” “anticipate,” “potential,” “estimate,” “likely,” “may,“can,” “will,” “can,” and “could,“continue,” 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 XIAFLEXXIAFLEX® in their applicable territories; the market for XIAFLEXXIAFLEX® in, and timing, initiation and outcome of clinical trials for, additional indications, thatwhich will determine the amount of milestone, royalty, mark-up on cost of goods sold, license and sublicense income that BioSpecifics may receive; the potential of XIAFLEXXIAFLEX® to be used in additional indications; Endo modifying its objectives or allocating resources other than to XIAFLEXXIAFLEX®; and other risk factors identified in BioSpecifics’ Quarterly Reports on Form 10Q for the periods ended March 31, 2017 and June 30, 2017 and ourCompany’s Annual Report on Form 10-K for the year ended December 31, 2016 2018 (the “2018 Annual Report”), specifically in Part I, Item IA of the 2018 Annual Report under the heading “Risk Factors” and its Current Reports on Form 8-K filed withunder the Securitiessection “Management’s Discussion and Exchange Commission. Analysis.” All forward-looking statements included in this Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2019 are made as of the date hereof, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and, except as may be required by law, we assume no obligation to update these forward-looking statements.
PART I – FINANCIAL INFORMATION
Item 1: | Condensed Consolidated Financial Statements |
BioSpecifics Technologies Corp.
Condensed Consolidated Balance Sheets
| | March 31, 2019 | | | December 31, 2018 | |
| | (unaudited) | | | (audited) | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 17,597,430 | | | $ | 13,176,452 | |
Short term investments | | | 66,899,660 | | | | 67,707,143 | |
Accounts receivable | | | 16,476,790 | | | | 16,518,687 | |
Deferred royalty buy-down | | | - | | | | 184,931 | |
Prepaid expenses and other current assets | | | 604,392 | | | | 646,749 | |
Total current assets | | | 101,578,272 | | | | 98,233,962 | |
| | | | | | | | |
Long-term investments | | | 3,635,115 | | | | 1,099,834 | |
Deferred tax assets, net | | | 313,768 | | | | 313,768 | |
Patent costs, net | | | 425,678 | | | | 444,478 | |
| | | | | | | | |
Total assets | | $ | 105,952,833 | | | $ | 100,092,042 | |
| | | | | | | | |
Liabilities and stockholders’ equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 1,944,663 | | | | 1,798,588 | |
Income tax payable | | | 1,802,847 | | | | 704,934 | |
Total current liabilities | | | 3,747,510 | | | | 2,503,522 | |
| | | | | | | | |
Commitments and Contingencies | | | | | | | | |
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; 7,740,167 and 7,738,167 shares issued, 7,277,902 and 7,275,902 shares outstanding as of March 31, 2019 and December 31, 2018, respectively | | | 7,740 | | | | 7,738 | |
Additional paid-in capital | | | 36,502,652 | | | | 36,302,446 | |
Retained earnings | | | 76,593,314 | | | | 72,176,719 | |
Treasury stock, 462,265 shares at cost as of March 31, 2019 and December 31, 2018 | | | (10,898,383 | ) | | | (10,898,383 | ) |
Total stockholders’ equity | | | 102,205,323 | | | | 97,588,520 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 105,952,833 | | | $ | 100,092,042 | |
See accompanying notes to condensed consolidated financial statements.
| | September 30, 2017 | | | December 31, 2016 | |
| | (unaudited) | | | (audited) | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 6,422,358 | | | $ | 4,763,364 | |
Short term investments | | | 48,166,583 | | | | 44,254,862 | |
Accounts receivable | | | 4,681,885 | | | | 3,810,792 | |
Income tax receivable | | | 56,930 | | | | 494,711 | |
Deferred royalty buy-down | | | 1,566,078 | | | | 1,451,893 | |
Prepaid expenses and other current assets | | | 673,064 | | | | 624,345 | |
Total current assets | | | 61,566,898 | | | | 55,399,967 | |
| | | | | | | | |
Long-term investments | | | 6,717,196 | | | | 3,771,380 | |
Deferred royalty buy-down – long term, net | | | 757,021 | | | | 1,976,456 | |
Deferred tax assets, net | | | 2,992,001 | | | | 3,290,122 | |
Patent costs, net | | | 227,868 | | | | 258,355 | |
| | | | | | | | |
Total assets | | $ | 72,260,984 | | | $ | 64,696,280 | |
| | | | | | | | |
Liabilities and stockholders’ equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 785,275 | | | $ | 738,649 | |
Deferred revenue | | | 1,134,031 | | | | 1,179,848 | |
Accrued liabilities of discontinued operations | | | 78,138 | | | | 78,138 | |
Total current liabilities | | | 1,997,444 | | | | 1,996,635 | |
| | | | | | | | |
Long-term deferred revenue | | | 5,555,743 | | | | 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; 7,575,167 and 7,555,167 shares issued, 7,164,233 and 7,156,281 shares outstanding as of September 30, 2017 and December 31, 2016, respectively | | | 7,575 | | | | 7,555 | |
Additional paid-in capital | | | 33,303,898 | | | | 32,945,240 | |
Retained earnings | | | 39,294,524 | | | | 30,610,849 | |
Treasury stock, 410,934 and 398,886 shares at cost as of September 30, 2017 and December 31, 2016, respectively | | | (7,898,200 | ) | | | (7,281,701 | ) |
Total stockholders’ equity | | | 64,707,797 | | | | 56,281,943 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 72,260,984 | | | $ | 64,696,280 | |
4
BioSpecifics Technologies Corp.
Condensed Consolidated Income Statements (unaudited)
| | Three Months Ended March 31, | |
| | 2019 | | | 2018 | |
Revenues: | | | | | | |
Royalties | | $ | 8,129,141 | | | $ | 7,085,000 | |
Licensing revenues | | | - | | | | 4,409 | |
Total Revenues | | | 8,129,141 | | | | 7,089,409 | |
| | | | | | | | |
Costs and expenses: | | | | | | | | |
Research and development | | | 149,536 | | | | 195,227 | |
General and administrative | | | 2,907,160 | | | | 2,069,633 | |
Total Costs and Expenses | | | 3,056,696 | | | | 2,264,860 | |
| | | | | | | | |
Operating income | | | 5,072,445 | | | | 4,824,549 | |
| | | | | | | | |
Other income: | | | | | | | | |
Interest income | | | 449,425 | | | | 217,951 | |
Other income | | | - | | | | 14,678 | |
| | | 449,425 | | | | 232,629 | |
| | | | | | | | |
Income before income tax expense | | | 5,521,870 | | | | 5,057,178 | |
Provision for income tax expense | | | (1,105,275 | ) | | | (1,078,574 | ) |
| | | | | | | | |
Net income | | $ | 4,416,595 | | | $ | 3,978,604 | |
| | | | | | | | |
| | | | | | | | |
Basic net income per share | | $ | 0.61 | | | $ | 0.55 | |
Diluted net income per share | | $ | 0.60 | | | $ | 0.54 | |
| | | | | | | | |
Shares used in computation of basic net income per share | | | 7,276,885 | | | | 7,192,900 | |
Shares used in computation of diluted net income per share | | | 7,338,128 | | | | 7,303,336 | |
See accompanying notes to condensed consolidated financial statements.
BioSpecifics Technologies Corp.
Condensed consolidated Statements of Stockholders' Equity
| | Amount | | | Additional Paid in Capital | | | Retained Earnings | | | Treasury Stock | | | Stockholders’ Equity Total | |
Balances - December 31, 2017 | | | 7,600,167 | | | $ | 7,600 | | | $ | 33,468,323 | | | $ | 41,939,115 | | | $ | (7,898,200 | ) | | $ | 67,516,838 | |
Adjustment due to adoption of ASC606 | | | - | | | | - | | | | - | | | | 10,184,335 | | | | - | | | | 10,184,335 | |
Issuance of common stock upon stock option exercise | | | 10,000 | | | | 10 | | | | 132,390 | | | | - | | | | - | | | | 132,400 | |
Stock compensation expense | | | - | | | | - | | | | 32,512 | | | | - | | | | - | | | | 32,512 | |
Net income | | | - | | | | - | | | | - | | | | 3,978,604 | | | | - | | | | 3,978,604 | |
Balances – March 31, 2018 | | | 7,610,167 | | | $ | 7,610 | | | $ | 33,633,225 | | | $ | 56,102,054 | | | $ | (7,898,200 | ) | | $ | 81,844,689 | |
| | Common Stock Shares Amount | | | Additional Paid in Capital | | | Retained Earnings | | | Treasury Stock | | | Stockholders’ Equity Total | |
Balances - December 31, 2018 | | | 7,738,167 | | | $ | 7,738 | | | $ | 36,302,446 | | | $ | 72,176,719 | | | $ | (10,898,383 | ) | | $ | 97,588,520 | |
Issuance of common stock upon stock option exercise | | | 2,000 | | | | 2 | | | | 58,418 | | | | - | | | | - | | | | 58,420 | |
Stock compensation expense | | | - | | | | - | | | | 141,788 | | | | - | | | | - | | | | 141,788 | |
Net income | | | - | | | | - | | | | - | | | | 4,416,595 | | | | - | | | | 4,416,595 | |
Balances – March 31, 2019 | | | 7,740,167 | | | $ | 7,740 | | | $ | 36,502,652 | | | $ | 76,593,314 | | | $ | (10,898,383 | ) | | $ | 102,205,323 |
|
See accompanying notes to condensed consolidated financial statements.
BioSpecifics Technologies Corp.
Condensed Consolidated Income Statements(unaudited)
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Revenues: | | | | | | | | | | | | |
Royalties | | $ | 6,511,700 | | | $ | 6,119,815 | | | $ | 20,729,017 | | | $ | 18,843,273 | |
Licensing revenues | | | 4,408 | | | | 762,345 | | | | 13,226 | | | | 787,034 | |
Total Revenues | | | 6,516,108 | | | | 6,882,160 | | | | 20,742,243 | | | | 19,630,307 | |
| | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Research and development | | | 356,847 | | | | 312,907 | | | | 949,359 | | | | 1,005,884 | |
General and administrative | | | 2,175,501 | | | | 1,843,368 | | | | 6,916,501 | | | | 5,909,785 | |
Total Cost and Expenses | | | 2,532,348 | | | | 2,156,275 | | | | 7,865,860 | | | | 6,915,669 | |
| | | | | | | | | | | | | | | | |
Operating income | | | 3,983,760 | | | | 4,725,885 | | | | 12,876,383 | | | | 12,714,638 | |
| | | | | | | | | | | | | | | | |
Other income: | | | | | | | | | | | | | | | | |
Interest income | | | 193,462 | | | | 80,674 | | | | 436,210 | | | | 200,704 | |
Other income | | | 14,667 | | | | 6,254 | | | | 40,651 | | | | 37,448 | |
| | | 208,129 | | | | 86,928 | | | | 476,861 | | | | 238,152 | |
| | | | | | | | | | | | | | | | |
Income before income tax expense | | | 4,191,889 | | | | 4,812,813 | | | | 13,353,244 | | | | 12,952,790 | |
Provision for income tax expense | | | (1,477,057 | ) | | | (1,759,220 | ) | | | (4,669,569 | ) | | | (4,497,359 | ) |
| | | | | | | | | | | | | | | | |
Net income | | $ | 2,714,832 | | | $ | 3,053,593 | | | $ | 8,683,675 | | | $ | 8,455,431 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic net income per share | | $ | 0.38 | | | $ | 0.43 | | | $ | 1.21 | | | $ | 1.20 | |
Diluted net income per share | | $ | 0.37 | | | $ | 0.42 | | | $ | 1.19 | | | $ | 1.16 | |
| | | | | | | | | | | | | | | | |
Shares used in computation of basic net income per share | | | 7,164,934 | | | | 7,062,543 | | | | 7,166,470 | | | | 7,031,068 | |
Shares used in computation of diluted net income per share | | | 7,314,609 | | | | 7,280,375 | | | | 7,325,602 | | | | 7,277,780 | |
See accompanying notes to condensed consolidated financial statements.
BioSpecifics Technologies Corp.
Condensed Consolidated Statements of Cash Flows
(unaudited)
| | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
Cash flows from operating activities: | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
Net income | | $ | 8,683,675 | | | $ | 8,455,431 | | | $ | 4,416,595 | | | $ | 3,978,604 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | |
Amortization | | | 1,632,823 | | | | 1,215,814 | | | | 153,261 | | | | 699,703 | |
Stock-based compensation expense | | | 100,428 | | | | 100,428 | | | | 141,788 | | | | 32,512 | |
Deferred tax expense | | | 298,121 | | | | (2,747,864 | ) | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
Accounts receivable | | | (871,093 | ) | | | (1,298,832 | ) | | | 41,897 | | | | (6,955,839 | ) |
Income tax receivable | | | 437,781 | | | | 916,843 | | |
Income tax payable | | | | 1,097,913 | | | | 1,067,002 | |
Prepaid expenses and other current assets | | | (48,719 | ) | | | (170,591 | ) | | | 42,359 | | | | 42,582 | |
Patent costs | | | - | | | | (23,341 | ) | | | - | | | | (44,598 | ) |
Accounts payable and accrued expenses | | | 46,626 | | | | 380,858 | | | | 146,073 | | | | 308,152 | |
Income taxes payable | | | - | | | | 279,333 | | |
Deferred revenue | | | (907,776 | ) | | | 7,667,163 | | | | - | | | | (4,409 | ) |
Net cash provided by operating activities | | | 9,371,866 | | | | 14,775,242 | | |
Net cash provided by (used in) operating activities | | | | 6,039,886 | | | | (876,291 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Maturity of marketable investments | | | 43,579,082 | | | | 32,548,040 | | | | 20,152,229 | | | | 20,287,000 | |
Purchases of marketable investments | | | (50,933,705 | ) | | | (47,568,734 | ) | | | (21,829,557 | ) | | | (14,318,018 | ) |
Net cash used in investing activities | | | (7,354,623 | ) | | | (15,020,694 | ) | |
Net cash (used in) provided by investing activities | | | | (1,677,328 | ) | | | 5,968,982 | |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Proceeds from stock option exercises | | | 258,250 | | | | 529,300 | | | | 58,420 | | | | 132,400 | |
Payments for repurchase of common stock | | | (616,499 | ) | | | (898,025 | ) | |
Excess tax benefits from share-based payment arrangements | | | - | | | | 224,047 | | |
Net cash used in financing activities | | | (358,249 | ) | | | (144,678 | ) | |
Net cash provided by financing activities | | | | 58,420 | | | | 132,400 | |
| | | | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 1,658,994 | | | | (390,130 | ) | |
Increase in cash and cash equivalents | | | | 4,420,978 | | | | 5,225,091 | |
Cash and cash equivalents at beginning of year | | | 4,763,364 | | | | 5,137,875 | | | | 13,176,452 | | | | 7,333,810 | |
Cash and cash equivalents at end of period | | $ | 6,422,358 | | | $ | 4,747,745 | | | $ | 17,597,430 | | | $ | 12,558,901 | |
| | | | | | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | | | | | |
Interest | | | - | | | | - | | | | - | | | | - | |
Taxes | | $ | 4,410,000 | | | $ | 5,825,000 | | | $ | 7,362 | | | | - | |
See accompanying notes to condensed consolidated financial statements.
BIOSPECIFICS TECHNOLOGIES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2019
(Unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
We are a biopharmaceutical company involved in the development of an injectable collagenase clostridium histolyticum (CCH) for multiple indications. We maintain intellectual property with respect to injectable CCH that treats, among other indications, Dupuytren’s contracture (DC), Peyronie’s disease (PD), frozen shoulder syndrome, and removal of adipose tissue. Injectable CCH currently have a developmentis approved and marketed in the U.S. under the trademark XIAFLEX® for the treatment of both DC and PD. XIAFLEX® also is commercialized in Japan, Europe (where it is marketed as Xiapex®), Canada, and Australia for DC, and for PD in Canada, Europe and Australia. We generate revenue primarily from our license agreement (the “License Agreement”) with Endo, Global Ventures, a Bermuda unlimited liability company (“Endo Global Ventures”), an affiliateunder which we receive license, sublicense income, royalties, milestones and mark-up on cost of Endo International plc (“Endo”), for injectable collagenase for marketed indicationsgoods sold payments related to the sale, regulatory submissions and indications in development. Endo assumed this agreement when Endo acquiredapproval of XIAFLEX®.
On August 31, 2011, we entered into the Second Amended and Restated Development and License Agreement (as amended, the “License Agreement”) with Auxilium Pharmaceuticals, Inc. (“Auxilium”(“Auxilium”) on January 29, 2015 (the “Acquisition”), an entity that was acquired by Endo in 2015. The License Agreement originally was entered into in June 2004 to obtain exclusive worldwide rights to develop, market, and sell certain products containing our enzyme CCH, which Endo markets for approved indications under the trademark XIAFLEX®. Injectable collagenase clostridium histolyticumEndo’s licensed rights concern the development and commercialization of products, other than dermal formulations labeled for topical administration. Currently, Endo’s licensed rights cover the indications of DC, Dupuytren’s nodules, PD, frozen shoulder, cellulite, canine and human lipomas, plantar fibromatosis, lateral hip fat, and other potential aesthetic indications. We and Endo may further expand the License Agreement to cover other indications as they are developed.
Pursuant to the License Agreement, Endo currently is marketed as XIAFLEX® (or Xiapex®selling XIAFLEX® in Europe).the U.S. for the treatment of DC and PD and is distributing XIAFLEX® in Canada through its operating company, Paladin Labs Inc. Additionally, Endo has entered into several non-affiliated sublicensee agreements (as permitted by the License Agreement), including the following:
An agreement with Swedish Orphan Biovitrum AB (“Sobi”), pursuant to which Sobi has marketing rights for Xiapex® for the treatment of DC and PD in Europe and certain Eurasian countries;
An agreement with Asahi Kasei Pharma Corporation (“Asahi”), pursuant to which Asahi has the right to commercialize XIAFLEX® for the treatment of DC and PD in Japan; and
An agreement with Actelion Pharmaceuticals Ltd. (“Actelion”), pursuant to which Actelion obtained marketing and commercial rights for XIAFLEX® in Australia and New Zealand.
On February 1, 2016, we entered into with Endo the First Amendment (the “First Amendment”) to 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, wethe Company and Endo Global Ventures 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.
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. Endo has opted-in to the following indications: frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis and human lipoma.
On February 26, 2019, we and Endo entered into the Second Amendment to Second Amended and Restated Development and License Agreement (the “Second Amendment”) to amend certain provisions of the License Agreement. The Second Amendment has an effective date of January 1, 2019. Pursuant to the terms of the Second Amendment, we have consented to the assignment of the License Agreement by Endo Global Ventures to Endo Global Aesthetics Limited, an Irish private company and an affiliate of Endo Global Ventures that is indirectly wholly-owned by Endo. In addition, the Second Amendment amends certain provisions of the License Agreement to require Endo to provide timely estimates of royalties to assist us in complying with our financial reporting obligations.
The two marketed indications involving our injectable collagenase are Dupuytren’s contractureDC and Peyronie’s disease. Prior to the Acquisition, Auxilium had, and after the Acquisition,PD. 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 XIAFLEXXIAFLEX® for uterine fibroids and initiate the development of XIAFLEXXIAFLEX® 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 ongoingpresented positive results from two Phase 3 studies, RELEASE-1 and RELEASE-2, 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 but Endo is moving forward with the cellulite indication and has stated publicly their interest to move forward with the frozen shoulder indication.
Endo is currently selling XIAFLEX in the U.S.CCH for the treatment of Dupuytrencellulite. ’Subjects receiving CCH showed highly statistically significant levels of improvement in the appearance of cellulite with treatment, as measured by the trial's primary endpoint (RELEASE-1, p=0.006 & RELEASE-2, p=0.002), which was at least a 2-level composite improvement in cellulite severity at Day 71 as compared to subjects receiving placebo. s contractureStatistically significant improvements with CCH versus placebo were observed for 8 of 8 (RELEASE-1) and Peyronie’s disease7 of 8 (RELEASE-2) secondary endpoints, in addition to patient-centric endpoints. These data were presented at 2019 American Academy of Dermatology Annual Meeting on March 2, 2019. Endo expects to file its Biologics License Application (BLA) with the U.S. Food and has an agreement with Swedish Orphan Biovitrum AB (“Sobi”), pursuant to which Sobi has marketing rightsDrug Administration (FDA) for Xiapex for Dupuytren’s contracture and Peyronie’s disease in Europe and certain Eurasian countries. In addition, Endo has an agreement with Asahi Kasei Pharma Corporation (“Asahi”) pursuant to which Asahi has the right to commercialize XIAFLEXCCH for the treatment of Dupuytren’s contracture and Peyronie’s diseasecellulite in Japan. Endo is currently distributing XIAFLEXthe second half of 2019 with an expected commercial launch in Canada through Paladin Labs Inc, an operating companythe second half of Endo2020 upon approval.. 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.
7We presented data from the Phase 1 clinical trial of CCH for the treatment of uterine fibroids at the 66th Annual Meeting of the Society of Reproductive Investigation (SRI) on March 14, 2019 in Paris, France. This presentation follows positive top-line results announced in October 2018 demonstrating that CCH significantly reduced collagen content in uterine fibroids. BioSpecifics and its clinical partners continue to analyze the full Phase 1 data to guide the design of a Phase 2 study of CCH for the treatment of uterine fibroids.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2019, as compared to the significant accounting policies disclosed in Note 2 of the Consolidated Financial Statements in the Company’s 2018 Annual Report.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited, but include all adjustments (consisting only of normal, recurring adjustments) whichthat 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 SEC (“Securities and Exchange Commission (the “SEC”Commission”) for quarterly reporting.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the risk factors discussed in “PartPart I, Item 1A. Risk Factors”Factors in our Quarterly Reports on Form 10Q for the periods ended March 31, 2017 and June 30, 20172018 Annual Report filed with the SEC on May 10, 2017 and August 9, 2017, respectively, and our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 16, 2017.April 2, 2019.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its subsidiary, Advance Biofactures Corp. 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 revenues, deferred tax assets, third party royalties and deferred royalty buy-down. We base our estimates on historical experience, and other relevant data including interim data provided by Endo and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and the amount of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions. For further details, see notes “Revenue Recognition”, “Provision for Income Taxes” and “Third-Party Royalties and Royalty Buy-Down.” Actual results may differ from those estimates.
Revenue Recognition
Beginning in 2014, Financial Accounting Standards Board (“FASB”) issued several Accounting Standards Updates establishing Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). ASC 606 requires retrospective implementation, and replaces most industry-specific revenue recognition guidance in U.S. GAAP with a new principles-based, five-step revenue recognition model. The Company adopted ASC 606 effective January 1, 2018. Under ASC 606, we recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation(s).
Revenues, and their respective treatment for financial reporting purposes under ASC 606 and our license agreement with Endo, are as follows:
Royalty / Mark-Up on Cost of Goods Sold
We receive royalty revenues on net sales and mark-up on cost of goods sold revenue in the U.S. under our License Agreement with Endo. These are presented in “Royalties” in our condensed consolidated statements of income. We do not have future performance obligations under this revenue stream. In accordance with ASC 606, we record these revenues based on estimates of the net sales that occurred during the relevant period. The relevant period estimates of these royalties are based on interim data provided by Endo and analysis of historical royalties and mark-up on cost of goods sold revenue that have been paid to us, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known. The royalties payable by Endo to us are subject to set-off for certain patent costs.
Licensing Revenue
We include revenue recognized from upfront licensing, sublicensing and milestone payments in “License Revenues” in our condensed consolidated statements of income.
The Company recognizes licensing revenues generated through development and/or commercialization agreements. The terms of these agreements typically include payment to the Company of one or more of the following: nonrefundable, upfront license fees; sublicensing; development and commercial milestone payments; development activities; and royalties on net sales of licensed products. Each of these types of payments results in licensing revenues except for revenues from royalties on net sales of licensed products and the mark-up of cost of goods sold revenues which are classified as royalty revenues. Revenue is recognized upon satisfaction of a performance obligation by transferring control of a good or service to the customer.
For each development and/or commercialization agreement that result in revenues, the Company identifies all performance obligations, aside from those that are immaterial, which may include a license to intellectual property and know-how, development activities and/or transition activities. In order to determine the transaction price, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.
If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront license fees based on the relative standalone selling price prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Development and Regulatory Milestone Payments
Depending on facts and circumstances, the Company may conclude that it is appropriate to include the milestone, representing variable consideration, in the estimated total transaction price, or that it is appropriate to fully constrain the milestone. The Company may include revenues from certain milestones in the total transaction price in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company records a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period. The Company adjusts its estimate of the total transaction price, including the amount of revenue that it has recorded, if necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Adopted
In February 2016, FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). 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 ASC 606. 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. The adoption of the new standard as of January 1, 2019 did not have a material impact on our consolidated financial statements due to the short term nature of our leases.
Accounting Pronouncements Not Yet Adopted
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.
Cash, Cash Equivalents and Investments
Cash equivalents include only securities having a maturity of three months90 days 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, municipal bonds and corporate and municipal bonds. All investments are classified as held to maturity. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the aggregate fair valueamortized cost of these cash, cash equivalents and investments was $61.3$70.5 million and $52.8$68.8 million, respectively. No unrealized gains or losses were recorded in either period.
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 natureduration of those instruments. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, there were no recorded unrealized gains or losses on our investments as they are classified as held to maturity. As of September 30, 2017March 31, 2019 ,and December 31, 2018, amortized cost basis of the investments approximated their fair value. At September 30, 2017March 31, 2019 and December 31, 2016,2018, the amortized premiumnet discount / net (premium) included in interest income was $497,000approximately $50,000 and $610,000,($372,000), respectively.
The following table presents the Company’s schedule of maturities at September 30, 2017March 31, 2019 and December 31, 2016:2018:
| | Maturities as of March 31, 2019 | | | Maturities as of December 31, 2018 | |
| | 1 Year or Less | | | Greater than 1 Year | | | 1 Year or Less | | | Greater than 1 Year | |
Municipal bonds | | $ | 11,560,848 | | | $ | - | | | $ | 1,295,350 | | | $ | - | |
Corporate bonds | | | 49,787,288 | | | | 3,435,177 | | | | 61,321,162 | | | | 1,099,834 | |
Certificates of deposit | | | 5,551,524 | | | | 199,938 | | | | 5,090,631 | | | | | |
Total | | $ | 66,899,660 | | | $ | 3,635,115 | | | $ | 67,707,143 | | | $ | 1,099,834 | |
| | Maturities as of September 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 | | $ | 1,460,078 | | | $ | - | | | $ | 6,967,954 | | | $ | 586,074 | |
Corporate bonds | | | 43,880,944 | | | | 6,472,487 | | | | 30,418,120 | | | | 2,936,287 | |
Certificates of deposit | | | 2,825,561 | | | | 244,709 | | | | 6,868,788 | | | | 249,019 | |
Total | | $ | 48,166,583 | | | $ | 6,717,196 | | | $ | 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 30, 2017,March 31, 2019, 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 30, 2017March 31, 2019 and December 31, 2016:2018:
March 31, 2019 | | Type of Instrument | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Cash equivalents | | Institutional Money Market | | $ | 10,370,601 | | | $ | 10,370,601 | | | $ | - | | | $ | - | |
Cash equivalents | | Municipal Bonds | | | 330,000 | | | | 330,000 | | | | - | | | | - | |
Investments | | Municipal Bonds | | | 11,560,848 | | | | - | | | | 11,560,848 | | | | - | |
Investments | | Corporate Bonds | | | 53,222,465 | | | | - | | | | 53,222,465 | | | | - | |
Investments | | Certificates of Deposit | | | 5,751,462 | | | | 5,751,462 | | | | - | | | | - | |
September 30, 2017 | Type of Instrument | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | | | | | |
Cash equivalents | Institutional Money Market | | $ | 3,565,530 | | | $ | 3,565,530 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
Investments | Municipal Bonds | | | 1,460,078 | | | | - | | | | 1,460,078 | | | | - | |
| | | | | | | | | | | | | | | | | |
Investments | Corporate Bonds | | | 50,353,431 | | | | - | | | | 50,353,431 | | | | - | |
| | | | | | | | | | | | | | | | | |
Investments | Certificates of Deposit | | | 3,070,270 | | | | 3,070,270 | | | | - | | | | - | |
December 31, 2016 | Type of Instrument | | Fair Value | | | Level 1 | | | Level 2 | | | | Level 3 | | |
| | | | | | | | | | | | | | |
December 31, 2018 | | | Type of Instrument | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Cash equivalents | Institutional Money Market | | $ | 2,290,331 | | | $ | 2,290,331 | | | $ | - | | | $ | - | | | Institutional Money Market | | $ | 6,078,025 | | | $ | 6,078,025 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | |
Investments | Municipal Bonds | | | 7,554,028 | | | | - | | | | 7,554,028 | | | | - | | | Municipal Bonds | | | 1,295,350 | | | | - | | | | 1,295,350 | | | | - | |
| | | | | | | | | | | | | | | | | | |
Investments | Corporate Bonds | | | 33,354,407 | | | | - | | | | 33,354,407 | | | | - | | | Corporate Bonds | | | 62,420,996 | | | | - | | | | 62,420,996 | | | | - | |
| | | | | | | | | | | | | | | | | | |
Investments | Certificates of Deposit | | | 7,117,807 | | | | 7,117,807 | | | | - | | | | - | | | Certificates of Deposit | | | 5,090,631 | | | | 5,090,631 | | | | - | | | | - | |
Concentration of Credit Risk and Major Customers
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 investments in FDIC insured certificates of deposits, municipal bonds and corporate bonds.
The Company is currently dependent on one customer, Endo, whowhich generates almost all itsthe Company’s revenues. For the three and nine months ended September 30, 2017,March 31, 2019 and 2018, licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately $6.5$8.1 million and $20.7 million, respectively, and for the three and nine months ended September 30, 2016, the licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately $6.9 million and $19.6$7.1 million, respectively.
At September 30, 2017March 31, 2019 and December 31, 2016,2018, our accounts receivable balances from Endo were $4.7$16.5 million and $3.8 million, respectively.at the end of each period.
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.
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 $266,000 and $895,000 for the three and nine months ended September 30, 2017, respectively. We recognized approximately $274,000 and $546,000 for the three and nine months ended September 30, 2016, respectively.
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. 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 $4,408 and $13,226 for the three and nine months ended September 30, 2017, respectively, and $12,345 and $37,034 for the three and nine months ended September 30, 2016, respectively.
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.
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 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 month periods ended September 30, 2017 and 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 ninethree months ended September 30, 2017March 31, 2019 and 2018, we repurchased 12,048there were no shares at an average price of $51.17 as compared to the repurchase of 24,020 shares at an average price of $37.39 in the corresponding 2016 period.repurchased.
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.minimal and therefore no allowance is recorded. 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 30, 2017March 31, 2019 and December 31, 20162018 our accounts receivable balance was $4.7$16.5 million and $3.8 million, respectively,at the end of each period, and was from one customer, Endo.
Deferred Revenue13
Reimbursable Third-Party Patent Costs
We accrue patent costs that are reimbursable to Endo by us under the License Agreement. We capitalize certain patent costs related to patent prosecution and maintenance and expense others. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, our net reimbursable third party patent expense was zero and $25,000, respectively.$40,000 at the end of each period.
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 underlyingnet sales by Endohave occurred. For the three and nine month periods ended September 30, 2017,March 31, 2019 and 2018, third-party royalty expenses were $0.4 million and $1.4$0.5 million, respectively. ForAs of March 31, 2019, we have no further third party royalties in connection with Peyronie’s disease as the three and nine month periods ended September 30, 2016, third-party royalty expenses were $0.4 million and $1.2 million, 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 increase and potential new indications for XIAFLEX and Xiapex are approved, marketed and sold.agreement has expired.
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.PD. 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, fourall of which have been paid as of September 30, 2017. We are currently making the payments to buy down the future royalty obligations, which royaltyJanuary 1, 2018. Royalty obligations terminate five years after first commercial sale, which occurred in January 2014. 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 XIAFLEXXIAFLEX® and XiapexXiapex® for Peyronie’s diseasePD on an annual basis as measured by the proportion of the total estimated sales over the five year period. For the three and nine months ended September 30, 2017,March 31, 2019 and 2018, we amortized approximately $0.4$0.2 million and $1.1$0.5 million related to this agreement respectively, and $0.2 millionis recorded as part of general and $0.7 million for the three and nine months ended September 30, 2016, respectively.administrative expenses. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the remaining capitalized balances were approximately $2.3zero and $0.2 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. As of September 30, 2017, there was no indicator that an impairment existed.
Research and Development Expenses
R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab 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 consultants. 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, 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.
Stock-Based Compensation
The Company currently has one stock-based compensation plan in effect. Accounting Standards CodificationASC 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.
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. NoFor the three months ended March 31, 2019, there were no stock options were granted during the nine months ended September 30, 2017 and 2016.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 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 $142,000 and $33,000 and $100,000 for eachthe three and nine month periods ended September 30, 2017March 31, 2019 and approximately $33,000 and $100,000 for the three and nine months ended September 30, 2016,2018, respectively.
Stock Option Activity
A summary of our stock option activity during the ninethree months ended September 30, 2017March 31, 2019 is presented below:
| | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term | | | Aggregate Intrinsic Value | |
Outstanding at December 31, 2016 | | | 297,000 | | | $ | 20.14 | | | | 3.10 | | | $ | 10,561,380 | |
Grants | | | - | | | | - | | | | - | | | | - | |
Exercised | | | (20,000 | ) | | | 12.91 | | | | - | | | | - | |
Forfeitures or expirations | | | - | | | | - | | | | - | | | | - | |
Outstanding at September 30, 2017 | | | 277,000 | | | $ | 20.66 | | | | 2.49 | | | $ | 7,162,770 | |
Exercisable at September 30, 2017 | | | 242,000 | | | $ | 18.90 | | | | 2.20 | | | $ | 6,683,370 | |
| | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term | | | Aggregate Intrinsic Value | |
Outstanding at December 31, 2018 | | | 175,500 | | | $ | 37.73 | | | | 6.33 | | | $ | 4,014,235 | |
Grants | | | - | | | | - | | | | - | | | | - | |
Exercised | | | (2,000 | ) | | | 29.21 | | | | - | | | | 66,240 | |
Outstanding at March 31, 2019 | | | 173,500 | | | $ | 37.83 | | | | 6.14 | | | $ | 4,251,610 | |
Exercisable at March 31, 2019 | | | 92,000 | | | $ | 26.13 | | | | 3.51 | | | $ | 3,330,690 | |
During the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, the Company received $0.3 millionapproximately $58,000 and $0.5 million,$132,000, 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 $46.52$62.33 on September 30, 2017,March 31, 2019, which would have been received by the option holders had all option holders exercised their options as of that date. We have approximately $169,000$1.6 million in unrecognized compensation cost related to stock options outstanding as of September 30, 2017,March 31, 2019, which we expect to recognize over the next 1.53.39 years.
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. At each of September 30, 2017March 31, 2019 and December 31, 2016,2018, property and equipment were fully depreciated.
Comprehensive Income
For each of the three and nine month periods ended September 30, 2017March 31, 2019 and 2016,2018, we had no components of other comprehensive income other than net income itself.
Provision for Income Taxes
Deferred tax assetsWe use the asset and liabilitiesliability method of accounting for income taxes, as set forth in ASC 740-10-25-2. Under this method, deferred income taxes, when required, are recognized basedprovided on the expected future tax consequences, using current tax rates,basis of temporary differencesthe difference between the financial statement carrying amountsreporting and the income tax basis of assets and liabilities.liabilities at the statutory rates enacted for future periods when the differences are expected to reverse. 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 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. In 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.
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 benefits recognized in the consolidated financial statements from such position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate settlement. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the Company has not recorded any unrecognized tax benefits. We classify interest associated with income taxes under interest expense and tax penalties under other.
Commitments and Contingencies
On November 6, 2017,August 14, 2018, the Company entered into an agreement with the Landlord35 Wilbur Street Associates, LLC (the “Landlord”) to extend the term of the lease to the Headquartersour corporate headquarters, which are currently located at 35 Wilbur St., Lynbrook, NY 11563, for an additional one year period (the “Extended Lease Agreement”). The one year extension will end on November 30, 2018.2019. Pursuant to the Extended Lease Agreement, the base rent is $11,165$11,500 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, 2017.
Adopted Accounting Standard
In March 2016, the Financial Accounting Standards Board, (“FASB”) issued ASU 2016-09, which amends the existing accounting standardsOur rent expense amounted to approximately $34,000 and $32,000 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, 2017,2019 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 nine months ended September 30, 2017.
New Accounting Pronouncements
FASB, issued several accounting standards updates establishing ASC Topic 606, “Revenue from Contracts with Customers”. ASC 606 requires retrospective implementation, and replaces most industry-specific revenue recognition guidance in U.S. GAAP with a new principles-based, five-step revenue recognition model. It also requires new disclosures, such as qualitative and quantitative information about revenue recognized from contracts with customers (including disaggregated revenue, contract balances, and performance obligations) and significant judgments and changes in judgments. ASC 606 provides specific guidance for determining whether to recognize licensing revenue at a point in time or over time, and application of this guidance may result in a different pattern of recognition than under current us GAAP. We plan to adopt this guidance effective January 1, 2018, as required. We understand that the adoption of ASC 606, and particularly the standards enhanced use of management estimates, has the potential to materially impact our revenue recognition process, opening balances and related disclosures. We are in the process of completing the analysis of ASC 606’s impact on our royalty and licensing revenue and expect to complete this process in the fourth quarter of 2017.
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 disclosure but we do not currently have any available-for-sale equity investments.
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.
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.respectively.
3. NET INCOME PER SHARE
In accordance with Accounting Standards Codification ASC 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.
The following table summarizes For the numberthree month periods ended March 31, 2019 and 2018, there were 61,243 and 110,436, respectively of common equivalent shares attributable to stock options that were included in the calculation of diluted net income per share. There were 50,000 and zero stock options to purchase shares excluded forfrom the calculation of diluted net income per share reported infor the condensed consolidated statement of operations.periods ended March 31, 2019 and 2018, respectively, because their effects are anti-dilutive.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Stock options | | | 20,000 | | | | 20,000 | | | | 20,000 | | | | 20,000 | |
For the three and nine months ended September 30, 2017 and 2016, 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. As of October 25, 2017, these 20,000 options have been cancelled due to a change in status of a certain consultant.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
| | September 30, 2017 | | | December 31, 2016 | | | March 31, 2019 | | | December 31, 2018 | |
Trade accounts payable | | $ | 218,020 | | | $ | 505,098 | | | $ | 60,125 | | | $ | 122,199 | |
Accrued legal and other professional fees | | | 233,240 | | | | 51,000 | | | | 843,117 | | | | 308,725 | |
Accrued payroll and related costs | | | 244,045 | | | | 182,551 | | | | 427,705 | | | | 173,123 | |
Third party royalties | | | | 379,000 | | | | 1,168,837 | |
Other accruals | | | 89,970 | | | | - | | | | 234,716 | | | | 25,704 | |
| | | | | | | | | |
Total | | $ | 785,275 | | | $ | 738,649 | | | $ | 1,944,663 | | | $ | 1,798,588 | |
5. PATENT COSTS
We amortize intangible assets with definite lives on a straight-line basis over their remaining estimated useful lives, ranging from two to 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.exists. As of March 31, 2019 and December 31, 2018, no impairment existed and no adjustments were warranted.
For the nine months ended September 30, 2017, we did not increaseThere were no additions to our capitalized patent costs based on reports provided to us by Endo.during the three months ended March 31, 2019 and 2018. Patent costs may be creditable against future royalty revenues. For each period presented below, net patent costs consisted of:
| | September 30, 2017 | | | December 31, 2016 | | | | | | | |
Patents | | $ | 720,601 | | | $ | 720,601 | | | $ | 1,046,216 | | | $ | 1,046,216 | |
Accumulated amortization | | | (492,733 | ) | | | (462,246 | ) | | | (620,538 | ) | | | (601,738 | ) |
| | $ | 227,868 | | | $ | 258,355 | | | $ | 425,678 | | | $ | 444,478 | |
The amortization expense for patents for the three and nine months ended September 30, 2017March 31, 2019 and 2018 was approximately $10,200$19,000 and $30,500, respectively and for the three and nine months ended September 30, 2016 was approximately $10,300 and $29,600,$17,000, respectively. The estimated aggregate amortization expense for the remaining threenine months of 20172019 and each of the years below is approximately as follows:
October 1, 2017 - December 31, 2017 | | $ | 10,200 | | |
2018 | | | 40,600 | | |
2019 | | | 40,600 | | |
April 1, 2019 – December 31, 2019 | | | $ | 56,400 | |
2020 | | | 28,600 | | | | 58,300 | |
2021 | | | 16,600 | | | | 41,500 | |
2022 | | | | 41,400 | |
2023 | | | | 41,500 | |
Thereafter | | | 91,300 | | | | 186,600 | |
6. PROVISION FOR INCOME TAXES
In determining ourOur 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 and other items. The provision for income taxes we consider all available information, including operating results, ongoingis based on an estimated effective tax planning,rate derived from our consolidated earnings before taxes, adjusted for nondeductible expenses and forecasts of future taxable income. The significant components ofother permanent differences for the Company’s deferred tax assets consist of stock-based compensation and deferred revenues.fiscal year. For the three and nine months ended September 30, 2017,March 31, 2019 and 2018, the provision for income taxes was $1.5$1.1 million and $4.7 million, respectively.in both periods. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, our remaining deferred tax assets were approximately $3.0$0.3 million and $3.3 million, respectively.at the end of each period.
ForThe estimated effective tax rate for the three and nine months ended September 30, 2016,March 31, 2019 and 2018 was 20.0% and 21.3%, respectively, of pre-tax income reported in the provisionperiod, calculated based on the estimated annual effective rate anticipated for income taxes was $1.8 millionthe year ending December 31, 2019 and $4.5 million, respectively.2018 plus the effects, if any, of certain discrete items occurring in 2019 and 2018.
As of September 30, 2017, the Company believes that there are no significant uncertain tax positions and no amounts have been recorded for interest and penalties.
| 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 histolyticumCCH for multiple indications. We maintain intellectual property with respect to injectable CCH that treats, among other indications, Dupuytren’s contracture (DC), Peyronie’s disease (PD), frozen shoulder syndrome, and removal of adipose tissue. Injectable CCH currently have a developmentis approved and marketed in the U.S. under the trademark XIAFLEX® for the treatment of both DC and PD. XIAFLEX® also is commercialized in Japan, Europe (where it is marketed as Xiapex®), Canada, and Australia for DC, and for PD in Canada, Europe and Australia. We generate revenue primarily from our license agreement (the “License Agreement”) with Endo, Global Ventures, a Bermuda unlimited liability company (“Endo Global Ventures”), an affiliateunder which we receive license, sublicense income, royalties, milestones and mark-up on cost of Endo International plc (“Endo”), for injectable collagenase for marketed indicationsgoods sold payments related to the sale, regulatory submissions and indications in development. Endo assumed this agreement when Endo acquiredapproval of XIAFLEX®.
On August 31, 2011, we entered into the Second Amended and Restated Development and License Agreement (as amended, the “License Agreement”) with Auxilium Pharmaceuticals, Inc. (“Auxilium”(“Auxilium”) on January 29, 2015 (the “Acquisition”), an entity that was acquired by Endo in 2015. The License Agreement originally was entered into in June 2004 to obtain exclusive worldwide rights to develop, market, and sell certain products containing our enzyme CCH, which Endo markets for approved indications under the trademark XIAFLEX®. Injectable collagenase clostridium histolyticumEndo’s licensed rights concern the development and commercialization of products, other than dermal formulations labeled for topical administration. Currently, Endo’s licensed rights cover the indications of DC, Dupuytren’s nodules, PD, frozen shoulder, cellulite, canine and human lipomas, plantar fibromatosis, lateral hip fat, and other potential aesthetic indications. We and Endo may further expand the License Agreement to cover other indications as they are developed.
Pursuant to the License Agreement, Endo currently is marketed as XIAFLEX® (or Xiapex®selling XIAFLEX® in Europe).the U.S. for the treatment of DC and PD and is distributing XIAFLEX® in Canada through its operating company, Paladin Labs Inc. Additionally, Endo has entered into several non-affiliated sublicensee agreements (as permitted by the License Agreement), including the following:
An agreement with Swedish Orphan Biovitrum AB (“Sobi”), pursuant to which Sobi has marketing rights for Xiapex® for the treatment of DC and PD in Europe and certain Eurasian countries;
An agreement with Asahi Kasei Pharma Corporation (“Asahi”), pursuant to which Asahi has the right to commercialize XIAFLEX® for the treatment of DC and PD in Japan; and
An agreement with Actelion Pharmaceuticals Ltd. (“Actelion”), pursuant to which Actelion obtained marketing and commercial rights for XIAFLEX® in Australia and New Zealand.
On February 1, 2016, we entered into with Endo the First Amendment (the “First Amendment”) to 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, wethe Company and Endo Global Ventures 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.
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. Endo has opted-in to the following indications: frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis and human lipoma.
On February 26, 2019, we and Endo entered into the Second Amendment to Second Amended and Restated Development and License Agreement (the “Second Amendment”) to amend certain provisions of the License Agreement. The Second Amendment has an effective date of January 1, 2019. Pursuant to the terms of the Second Amendment, we have consented to the assignment of the License Agreement by Endo Global Ventures to Endo Global Aesthetics Limited, an Irish private company and an affiliate of Endo Global Ventures that is indirectly wholly-owned by Endo. In addition, the Second Amendment amends certain provisions of the License Agreement to require Endo to provide timely estimates of royalties to assist us in complying with our financial reporting obligations.
The two marketed indications involving our injectable collagenase are Dupuytren’s contractureDC and Peyronie’s disease. Prior to the Acquisition, Auxilium had, and after the Acquisition,PD. 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 XIAFLEXXIAFLEX® for uterine fibroids and initiate the development of XIAFLEXXIAFLEX® 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 but Endo is moving forward with the cellulite indication and has stated publicly their interest to move forward with the frozen shoulder indication.Operational Highlights
Endo is currently selling XIAFLEX in the U.S.presented positive results from two Phase 3 studies, RELEASE-1 and RELEASE-2, of CCH for the treatment of Dupuytrencellulite. ’Subjects receiving CCH showed highly statistically significant levels of improvement in the appearance of cellulite with treatment, as measured by the trial's primary endpoint (RELEASE-1, p=0.006 & RELEASE-2, p=0.002), which was at least a 2-level composite improvement in cellulite severity at Day 71 as compared to subjects receiving placebo. s contractureStatistically significant improvements with CCH versus placebo were observed for 8 of 8 (RELEASE-1) and Peyronie’s disease7 of 8 (RELEASE-2) secondary endpoints, in addition to patient-centric endpoints. These data were presented at 2019 American Academy of Dermatology Annual Meeting on March 2, 2019. Endo expects to file its Biologics License Application (BLA) with the U.S. Food and has an agreement with Swedish Orphan Biovitrum AB (“Sobi”), pursuant to which Sobi has marketing rightsDrug Administration (FDA) for Xiapex for Dupuytren’s contracture and Peyronie’s disease in Europe and certain Eurasian countries. In addition, Endo has an agreement with Asahi Kasei Pharma Corporation (“Asahi”) pursuant to which Asahi has the right to commercialize XIAFLEXCCH for the treatment of Dupuytren’s contracture and Peyronie’s diseasecellulite in Japan. Endo is currently distributing XIAFLEXthe second half of 2019 with an expected commercial launch in Canada through Paladin Labs Inc, an operating companythe second half of Endo2020 upon approval.. 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
OurWe presented data from the Phase 1 clinical trial of XIAFLEXCCH for the treatment of uterine fibroids is ongoingat the 66th Annual Meeting of the Society of Reproductive Investigation (SRI) on March 14, 2019 in Paris, France. This presentation follows positive top-line results announced in October 2018 demonstrating that CCH significantly reduced collagen content in uterine fibroids. BioSpecifics and we planits clinical partners continue to announceanalyze the results in 2018. Thefull Phase 1 data to guide the design of a Phase 2 study of CCH for the treatment of uterine fibroids.
On April 1, 2019, the Company appointed Dr. Ronald Law to the role of Principal Executive Officer of the Company and Mr. Pat Caldwell to the role of Principal Financial Officer, assuming both the principal financial officer and principal accounting officer functions on an interim basis pending an executive search being conducted atby the Department of Gynecology & Obstetrics at Johns Hopkins University, is designed to enroll 15 female subjects treated prior to hysterectomy. The primary endpoint of the study will assess the safety and tolerability of a single injection of XIAFLEX directly into the uterine fibroids 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 size, increased rates of apoptosis in treated fibroids and a decrease in the collagen content of the treated fibroids.Company.
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 XIAFLEXXIAFLEX® 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 XIAFLEXXIAFLEX® for Dupuytren’s contractureDC and Peyronie’s disease,PD, successfully develop XIAFLEXXIAFLEX® for additional indications, obtain required regulatory approvals, manufacture XIAFLEXXIAFLEX® 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.
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 of our Quarterly Reports on Form 10Q for the periods ended March 31, 2017 June 30, 2017 filed with the SEC on May 10, 2017 and filed with the SEC on August 9, 2017, respectively and under item 1A of Part 1 of our 2018 Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 16, 2017.Report.
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, interim data provided by Endo and on various other assumptions that we believe are reasonable under the circumstances. The financial information at September 30, 2017March 31, 2019 and for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 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, 20162018 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 20162018 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, 20162018 included in the Company’s 2018 Annual Report on Form 10-K and with the unaudited condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q for the first and second quarter of 2017 filed with the SEC.Report. 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 performAs described 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 relatesNote 2 to our performance obligation, when our licensee confirms that weaccompanying Condensed Consolidated Financial Statements, there 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.
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.
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.
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. accordingbeen no significant changes to our revenue recognition policy. We recognized approximately $266,000 and $895,000critical accounting policies for the three and nine months ended September 30, 2017, respectively. We recognized approximately $274,000March 31, 2019, compared to the critical accounting policies disclosed in “Management’s Discussion and $546,000 for the threeAnalysis of Financial Condition and nine months ended September 30, 2016, respectively.
Reimbursable Third-Party Patent CostsResults of Operations” included in our 2018 Annual Report.
We accrue patent costs that are reimbursable to Endo by us under the License Agreement. We capitalize certain patent costs related to patent prosecution and maintenance and expense others. As of September 30, 2017 and December 31, 2016, our net reimbursable third party patent expense was zero and $25,000, respectively.
Receivables
At September 30, 2017 and December 31, 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 $4.7 million and $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 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 30, 2017 and December 31, 2016, deferred revenue was approximately $6.7 million and $7.6 million, respectively.
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 underlyingnet sales by Endohave occurred. For the three and nine month periods ended September 30, 2017,March 31, 2019 and 2018, third-party royalty expenses were $0.4 million and $1.4 million, respectively. For the three and nine month periods ended September 30, 2016, third-party royalty expenses were $0.4 million and $1.2$0.5 million, respectively. Our third-party royalty expense under general and administrative expenses may increase if net sales by Endo and its partners for XIAFLEXXIAFLEX® and XiapexXiapex® increase and potential new indications for XIAFLEXXIAFLEX® and XiapexXiapex® are approved, marketed and sold. As of March 31, 2019, we have no further third party royalties in connection with PD as the agreement has expired.
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, fourall of which have been paid as of September 30, 2017. We are currently making the payments to buy down the future royalty obligations, which royaltyJanuary 1, 2018. Royalty obligations terminate five years after first commercial sale which occurred in January 2014. 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 XIAFLEXXIAFLEX® and XiapexXiapex® for Peyronie’s disease on an annual basis as measured by the proportion of the total estimated sales over the five year period. For the three and nine months ended September 30, 2017,March 31, 2019 and 2018, we amortized approximately $0.4$0.2 million and $1.1$0.5 million related to this agreement respectively, and $0.2 millionis recorded as part of general and $0.7 million for the three and nine months ended September 30, 2016, respectively.administrative expenses. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the remaining capitalized balances were approximately $2.3zero and $0.2 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. As of September 30, 2017, there was no indicator that an impairment existed.
Stock Based Compensation
Under ASC 718,Compensation - Stock Compensation, or 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 common 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. Wevolatility. As required under the accounting rules, we review our estimatesvaluation assumptions 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 to 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 isare 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 30, 2017MARCH 31, 2019 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2016MARCH 31, 2018
Revenues
We generate revenue primarily from royalties under the License Agreement and, to a lesser degree, licensing fees, sublicensing fees, and milestones.
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 30, 2017March 31, 2019 were $6.5$8.1 million as compared to $6.1$7.1 million in the corresponding 20162018 period, an increase of $0.4$1.0 million or 7%14%. ThisThe increase in royalties andtotal revenues for the mark-up on cost of goods soldquarterly period was primarily due to the increase inroyalties associated with higher net sales of XIAFLEX for the treatment of Peyronie’s diseaseXIAFLEX® in DC and Dupuytren’s contracture partially offset by lowerPD, and slightly higher mark-up on cost of goods sold revenue.
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 License Agreement in prior years and amortized them over the expected development period. For the three month periods ended September 30, 2017 and 2016,March 31, 2019, we recognized licensingzero revenue related to nonrefundable upfront product license fees for product candidates as compared to $4,409 in the development of injectable collagenase of $4,408 and $12,345 respectively. For the three months ended September 30, 2016, we recognized licensing fees related to the exercise of an opt-in right by Endo for the human lipoma indication of $750,000.2018 period.
Milestone revenue recognized for the three months ended September 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 three month periods ended September 30, 2017March 31, 2019 and 2016,2018, R&D expenses were approximately $357,000$150,000 and $313,000,$195,000, respectively and in each case, are primarily related to the development work associated with our clinical, programs, preclinical and other R&D programs. The decrease in the 2019 period as compared to the 2018 period was mainly due to cost associated with other R&D programs partially offset by higher clinical costs.
We manage the development of XIAFLEXXIAFLEX® for uterine fibroids and initiate the development of XIAFLEXXIAFLEX® in new potential indications, not licensed by Endo. On April 18, 2017, we announcedWe presented data from the initiation of an open-label, dose escalation Phase 1 clinical trial of XIAFLEXCCH for the treatment of uterine fibroids at the 66th Annual Meeting of the Society of Reproductive Investigation on March 14, 2019 in Paris, France. This presentation follows positive top-line results announced in October 2018 demonstrating that CCH significantly reduced collagen content in uterine fibroids. BioSpecifics and its clinical partners continue to analyze the full Phase 1 data to guide the design of a Phase 2 study of CCH 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 March 31, 2019 | | | Three Months Ended March 31, 2018 | |
Program | | | | | | |
Uterine Fibroids | | $ | 60,285 | | | $ | 22,331 | |
Pre-clinical/other research projects | | | 89,251 | | | | 172,896 | |
Total R&D expenses | | $ | 149,536 | | | $ | 195,227 | |
| | Three Months Ended September 30, 2017 | | | Three Months Ended September 30, 2016 | |
Program | | | | | | |
Human Lipoma | | $ | - | | | $ | 100,973 | |
Uterine Fibroids | | | 129,276 | | | | 18,762 | |
Pre-clinical/other research projects | | | 227,571 | | | | 193,172 | |
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 XIAFLEXXIAFLEX® and Xiapex,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; |
We believe that our current resources and liquidity are sufficient to advance our current clinical and R&D projects.
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 30, 2017March 31, 2019 and 20162018 were $2.2 million$2.9 and $1.8$2.1 million, respectively. The increaseIncreases in general and administrative expenses was mainly due to the higher legal fees, personnel expenses, stock compensation expense and professional fees partially offset by lower third party royalties associated with XIAFLEX® and the amortization of theassociated with deferred royalty buy-down consulting fees and third party royalties.related to PD.
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 September 30, 2017,March 31, 2019, our provision for income taxes was $1.5$1.1 million. Our deferred tax assets as of September 30, 2017March 31, 2019 were $3.0$0.3 million. The estimated effective tax rate for the three months ended March 31, 2019 was 20.0% of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated for the year ending December 31, 2019 plus the effects of certain discrete items occurring in 2019. For the three month period ended September 30, 2016, theMarch 31, 2018, our provision for income taxes was $1.8$1.1 million. Our deferred tax assets as of March 31, 2018 were $0.4 million. Our effective tax rate for the three months ended March 31, 2018 was impacted primarily by the Tax Cuts and Jobs Act of 2017, which was enacted on December 22, 2017 and lowered the U.S. corporate tax rate from 35% to 21%, beginning in 2018. Our effective tax rate was also impacted by the discrete impact of current period stock option exercises which impacts the effective rate in the period in which it occurs.
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 30, 2017March 31, 2019 and December 31, 2016,2018, we had cash and cash equivalents and investments in the aggregate of approximately $61.3$88.1 million and $52.8$82.0 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 from the date of this filing.
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
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 and accounts payable and long-term obligations.payable. 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 30, 2017,March 31, 2019, amounting to approximately $61.3$88.1 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 September 30, 2017.March 31, 2019.