SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________to __________________
001-34236
(Commission file number)
BIOSPECIFICS TECHNOLOGIES CORP
.(Exact Name of Registrant as Specified in Its Charter)
| | |
Delaware | 11-3054851 | |
(State or Other Jurisdiction | (I.R.S. Employer | |
of Incorporation or Organization) | Identification No.) |
| | |
2 Righter Parkway, Suite 200, Wilmington, DE19803 | ||
(Address of Principal Executive Offices) (Zip Code) | ||
| ||
302.842.8450 | ||
(Registrant’s Telephone Number, Including Area Code) |
Indicate by check mark whether the registrant: (1)has filed all reports required to be filed by Section13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12months (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 90days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T (§232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.
| | | |
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | BSTC | The Nasdaq Capital Market |
As of November 11, 2019,6, 2020, there were 7,339,3707,344,955 shares of Common Stock, par value $0.001 per share, outstanding.
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| PARTI– FINANCIAL INFORMATION | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |
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| PARTII– OTHER INFORMATION | |
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2
Introductory Comments– Terminology
Throughout this Quarterly Report on Form10-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 Form10-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”.
This Quarterly Report on Form10-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 Form10-Q include statements concerning, among other things, (i)the opportunity for minimally invasive non-surgical treatment XIAFLEX® in several potential pipeline indications; (ii)whether and when the Company will receive from Endo the results of their full commercial assessment and analysis regarding XIAFLEX® research and development (R&D) pipeline; (iii) the Company’s ability to achieve its future growth initiatives with regard to Dupuytren’s Contracture and Peyronie’s disease; (iv) the expansion 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 keloids; (vii) whether XIAFLEX® will be the only U.S. Food and Drug Administration (FDA) approved nonsurgical therapy for frozen shoulder (adhesive capsulitis); (viii) the projected receipt of payments from Endo and sublicense income payments based on Endo’s partnerships; and (ix) and the strength of the Company’s IP portfolio.
In some cases, these statements can be identified by forward-looking words such as “expect,” “plan,” “anticipate,” “potential,” “estimate,” “can,” “will,” “continue,"expect," "plan," "anticipate," "potential," "estimate," "can," "will," "continue," “believe,” the negative or plural of these words, and other similar expressions. These forward-looking statements are predictions based on ourthe Company’s current expectations and ourthe Company’s projections about future events and various assumptions. There can be no assurance that wethe Company will realize ourits expectations or that ourthe Company’s beliefs will prove correct. There are a number of important factors that could cause BioSpecifics’the Company’s actual results to differ materially from those indicated by such forward-looking statements, including, but not limited to: 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 theirits objectives for XIAFLEX® in their applicable territories;XIAFLEX® and Qwo™; the market for XIAFLEX®XIAFLEX® in, and timing, initiation, and outcome of clinical trials for, additional indications, which will determine the amount of milestone, royalty, mark-up on cost of goods sold, license, and sublicense income that BioSpecificsthe Company may receive; the potential of XIAFLEX®XIAFLEX® to be used in additional indications; Endo modifying its objectives or allocating resources other than to XIAFLEX®XIAFLEX® and Qwo™; the risks and uncertainties inherent in the Offer and the Merger, including, among other things, regarding how many of the Company’s stockholders will tender their shares in the Offer, the possibility that competing offers will be made, the ability to obtain requisite regulatory approvals relating to the acquisition, the ability to satisfy the conditions to the closing of the Offer and the Merger, the expected timing of the Offer and the Merger, the risk of litigation relating to the transaction, including resulting expense or delay, difficulties or unanticipated expenses in connection with integrating the Company’s operations into Endo’s and the possibility that anticipated synergies and other benefits of the transaction will not be realized in the amounts anticipated within the expected timeframe or at all; the impacts of the novel coronavirus (COVID-19) global pandemic (such as, without limitation, the scope and duration of the pandemic and the resulting economic crisis and levels of unemployment, governmental actions and restrictive measures implemented in response, material delays and cancellations of certain medical procedures, potential manufacturing and supply chain disruptions and other potential impacts to Endo’s and/or our business as a result of COVID-19); and other risk factors identified herein and in the Company’s Annual Report on Form10-K for theyear ended December 31, 2018 (2018 Annual Report) and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019,(the “2019 Annual Report”), specifically in PartI, ItemIA of the 2019 Annual Report under the heading “Risk Factors” and under the section “Management’s Discussion and Analysis.”Analysis”, and in the Company’s Quarterly Reports on Form 10-Q for the period ended March 31, 2020 and June 30, 2020. Additionally,
3
the prolonged impact of COVID-19 could heighten the impact of one or more of such risk factors. All forward-looking statements included in this Quarterly Report on Form10-Q for the fiscal period ended September 30, 20192020 are made as of the date hereof, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form10-Q and, except as may be required by law, we assume no obligation to update these forward-looking statements.
4
PARTI– FINANCIAL INFORMATION
September 30, 2019 | December 31, 2018 | |||||||
(unaudited) | (audited) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 12,769,293 | $ | 13,176,452 | ||||
Short term investments | 69,089,724 | 67,707,143 | ||||||
Accounts receivable | 17,768,757 | 16,518,687 | ||||||
Deferred royalty buy-down | - | 184,931 | ||||||
Prepaid expenses and other current assets | 836,708 | 646,749 | ||||||
Prepaid income taxes | 951,776 | |||||||
Total current assets | 101,416,258 | 98,233,962 | ||||||
Long-term investments | 16,492,528 | 1,099,834 | ||||||
Deferred tax assets, net | - | 313,768 | ||||||
Patent costs, net | 562,503 | 444,478 | ||||||
Total assets | $ | 118,471,289 | $ | 100,092,042 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 877,228 | $ | 1,798,588 | ||||
Income tax payable | - | 704,934 | ||||||
Total current liabilities | 877,228 | 2,503,522 | ||||||
Deferred tax liability, net | 593,059 | - | ||||||
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 7,811,230 and 7,738,167 shares issued, 7,342,756 and 7,275,902 shares outstanding as of September 30, 2019 and December 31, 2018, respectively | 7,811 | 7,738 | ||||||
Additional paid-in capital | 38,956,156 | 36,302,446 | ||||||
Retained earnings | 89,292,707 | 72,176,719 | ||||||
Treasury stock, 468,474 and 462,265 shares at cost as of September 30, 2019 and December 31, 2018, respectively | (11,255,672 | ) | (10,898,383 | ) | ||||
Total stockholders’ equity | 117,001,002 | 97,588,520 | ||||||
Total liabilities and stockholders’ equity | $ | 118,471,289 | $ | 100,092,042 |
| | | | | | | |
| | September 30, | | December 31, | | ||
|
| 2020 |
| 2019 |
| ||
| | | (unaudited) | | | (audited) | |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 2,873,726 | | $ | 4,999,183 | |
Short term investments | |
| 83,844,739 | |
| 84,239,918 | |
Accounts receivable | |
| 13,593,641 | |
| 19,065,919 | |
Prepaid expenses and other current assets | |
| 1,757,250 | |
| 966,456 | |
Total current assets | |
| 102,069,356 | |
| 109,271,476 | |
| | | | | | | |
Long-term investments | |
| 34,321,898 | |
| 16,569,024 | |
Property and equipment, net | | | 61,366 | | | — | |
Operating lease right-of-use asset | |
| 181,783 | |
| 239,491 | |
Patent costs, net | |
| 511,345 | |
| 573,277 | |
Other assets | | | 124,348 | | | — | |
Total assets | | $ | 137,270,096 | | $ | 126,653,268 | |
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Liabilities and stockholders' equity | |
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Current liabilities: | |
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Accounts payable and accrued expenses | | $ | 1,461,380 | | $ | 998,409 | |
Income tax payable | |
| — | |
| 354,984 | |
Current portion of lease obligation | |
| 79,770 | |
| 69,099 | |
Total current liabilities | |
| 1,541,150 | |
| 1,422,492 | |
| | | | | | | |
Lease obligation | |
| 106,500 | |
| 167,014 | |
Deferred tax liability, net | |
| 307,457 | |
| 572,660 | |
Total liabilities | | | 1,955,107 | | | 2,162,166 | |
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Commitments and contingencies | | | | | | | |
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Stockholders' equity: | | | | | | | |
Preferred stock, $0.50 par value, 700,000 shares authorized (150,000 shares designated as Series A Convertible Redeemable Preferred Stock and 10,000 shares designated as Series C Junior Participating Preferred Stock); none outstanding | | | — | | | — | |
Common stock, $0.001 par value; 15,000,000 shares authorized; 7,826,180 and 7,813,230 shares issued, 7,344,955 and 7,339,578 shares outstanding as of September 30, 2020 and December 31, 2019, respectively | |
| 7,826 | |
| 7,813 | |
Additional paid-in capital | |
| 40,591,223 | |
| 39,355,797 | |
Retained earnings | |
| 106,647,736 | |
| 96,646,527 | |
Treasury stock, 481,225 and 473,652 shares at cost as of September 30, 2020 and December 31, 2019, respectively | |
| (11,931,796) | |
| (11,519,035) | |
Total stockholders' equity | |
| 135,314,989 | |
| 124,491,102 | |
Total liabilities and stockholders’ equity | | $ | 137,270,096 | | $ | 126,653,268 | |
See accompanying notes to condensed consolidated financial statements.
5
BioSpecifics Technologies Corp.
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues: | ||||||||||||||||
Royalties | $ | 9,442,253 | $ | 8,168,081 | $ | 26,424,380 | $ | 23,068,585 | ||||||||
Licensing revenues | - | - | - | 39,679 | ||||||||||||
Total Revenues | 9,442,253 | 8,168,081 | 26,424,380 | 23,108,264 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Research and development | 143,185 | 162,625 | 454,042 | 569,648 | ||||||||||||
General and administrative | 1,978,078 | 2,232,077 | 6,613,362 | 6,345,662 | ||||||||||||
Total Cost and Expenses | 2,121,263 | 2,394,702 | 7,067,404 | 6,915,310 | ||||||||||||
Operating income | 7,320,990 | 5,773,379 | 19,356,976 | 16,192,954 | ||||||||||||
Other income: | ||||||||||||||||
Interest income | 504,909 | 359,637 | 1,471,489 | 851,334 | ||||||||||||
Other income | - | - | - | 96,663 | ||||||||||||
504,909 | 359,637 | 1,471,489 | 947,997 | |||||||||||||
Income before income tax expense | 7,825,899 | 6,133,016 | 20,828,465 | 17,140,951 | ||||||||||||
Provision for income tax expense | (1,552,966 | ) | (1,089,966 | ) | (3,712,477 | ) | (3,271,366 | ) | ||||||||
Net income | $ | 6,272,933 | $ | 5,043,050 | $ | 17,115,988 | $ | 13,869,585 | ||||||||
Basic net income per share | $ | 0.86 | $ | 0.69 | $ | 2.34 | $ | 1.92 | ||||||||
Diluted net income per share | $ | 0.85 | $ | 0.69 | $ | 2.33 | $ | 1.89 | ||||||||
Shares used in computation of basic net income per share | 7,334,212 | 7,281,388 | 7,306,665 | 7,230,106 | ||||||||||||
Shares used in computation of diluted net income per share | 7,359,034 | 7,356,885 | 7,347,701 | 7,327,029 |
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Revenues: | | | | | | | | | | | | | |
Royalties | | $ | 9,255,864 |
| $ | 9,442,253 | | $ | 22,827,933 | | $ | 26,424,380 | |
License revenues | | | 2,000,000 | | | — | | | 2,000,000 | | | — | |
Total revenues | | | 11,255,864 | |
| 9,442,253 | | | 24,827,933 | |
| 26,424,380 | |
| | | | | | | | | | | | | |
Costs and expenses: | |
|
| |
|
| |
|
| |
|
| |
Research and development | |
| 179,450 | |
| 143,185 | |
| 461,881 | |
| 454,042 | |
General and administrative | |
| 3,064,484 | |
| 1,978,078 | |
| 10,226,391 | |
| 6,613,362 | |
Milestone fee | | | 1,500,000 | | | — | | | 1,500,000 | | | — | |
Restructuring charges | | | — | | | — | | | 1,146,045 | | | — | |
Total costs and expenses | |
| 4,743,934 | |
| 2,121,263 | |
| 13,334,317 | |
| 7,067,404 | |
Operating income | |
| 6,511,930 | |
| 7,320,990 | |
| 11,493,616 | |
| 19,356,976 | |
| | | | | | | | | | | | | |
Other income: | |
|
| |
|
| |
|
| |
|
| |
Interest income | |
| 264,641 | |
| 504,909 | |
| 1,135,238 | |
| 1,471,489 | |
| | | | | | | | | | | | | |
Income before income tax expense | |
| 6,776,571 | |
| 7,825,899 | |
| 12,628,854 | |
| 20,828,465 | |
Provision for income tax expense | |
| (1,389,964) | |
| (1,552,966) | |
| (2,627,645) | |
| (3,712,477) | |
Net income | | $ | 5,386,607 | | $ | 6,272,933 | | $ | 10,001,209 | | $ | 17,115,988 | |
| | | | | | | | | | | | | |
Basic net income per share | | $ | 0.73 | | $ | 0.86 | | $ | 1.36 | | $ | 2.34 | |
Diluted net income per share | | $ | 0.73 | | $ | 0.85 | | $ | 1.36 | | $ | 2.33 | |
| |
|
| |
|
| |
|
| |
|
| |
Shares used in computation of basic net income per share | |
| 7,344,955 | |
| 7,334,212 | |
| 7,340,046 | |
| 7,306,665 | |
Shares used in computation of diluted net income per share | |
| 7,366,768 | |
| 7,359,034 | |
| 7,363,373 | |
| 7,347,701 | |
See accompanying notes to condensed consolidated financial statements.
6
BioSpecifics Technologies Corp.
Condensed Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | |
|
| |
| | |
| Additional |
| | |
| | |
| Stockholders’ | ||
| | Common Stock | | Paid in | | Retained | | Treasury | | Equity | |||||||
| | Shares | | Amount | | Capital | | Earnings | | Stock | | Total | |||||
Balances - December 31, 2019 | | 7,813,230 | | $ | 7,813 | | $ | 39,355,797 | | $ | 96,646,527 | | $ | (11,519,035) | | $ | 124,491,102 |
Issuance of common stock upon vesting of restricted stock units |
| 11,450 | |
| 11 | |
| (11) | |
| — | |
| — | |
| — |
Issuance of common stock upon stock option exercise |
| 1,500 | |
| 2 | |
| 61,723 | |
| — | |
| — | |
| 61,725 |
Stock compensation expense |
| — | |
| — | |
| 1,173,714 | |
| — | |
| — | |
| 1,173,714 |
Repurchases of common stock |
| — | |
| — | |
| — | |
| — | |
| (412,761) | |
| (412,761) |
Net income |
| — | |
| — | |
| — | |
| 10,001,209 | |
| — | |
| 10,001,209 |
Balances - September 30, 2020 |
| 7,826,180 | | $ | 7,826 | | $ | 40,591,223 | | $ | 106,647,736 | | $ | (11,931,796) | | $ | 135,314,989 |
| | | | | | | | | | | | | | | | | |
|
| |
| | |
| Additional |
| | |
| | |
| Stockholders’ | ||
| | Common Stock | | Paid in | | Retained | | Treasury | | Equity | |||||||
| | Shares | | Amount | | Capital | | Earnings | | Stock | | Total | |||||
Balances - June 30, 2020 | | 7,826,180 | | $ | 7,826 | | $ | 40,080,279 | | $ | 101,261,129 | | $ | (11,931,796) | | $ | 129,417,438 |
Stock compensation expense |
| — | |
| — | |
| 510,944 | |
| — | |
| — | |
| 510,944 |
Net income |
| — | |
| — | |
| — | |
| 5,386,607 | |
| — | |
| 5,386,607 |
Balances - September 30, 2020 |
| 7,826,180 | | $ | 7,826 | | $ | 40,591,223 | | $ | 106,647,736 | | $ | (11,931,796) | | $ | 135,314,989 |
| | | | | | | | | | | | | | | | | |
|
| |
| | |
| Additional |
| | |
| | |
| Stockholders’ | ||
| | Common Stock | | Paid in | | Retained | | Treasury | | Equity | |||||||
| | Shares | | Amount | | Capital | | Earnings | | Stock | | 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 |
| 73,063 | | | 73 | |
| 2,133,323 | |
| — | |
| — | |
| 2,133,396 |
Stock compensation expense |
| — | |
| — | |
| 520,387 | |
| — | |
| — | |
| 520,387 |
Repurchases of common stock |
| — | |
| — | |
| — | |
| — | |
| (357,289) | |
| (357,289) |
Net income |
| — | |
| — | |
| — | |
| 17,115,988 | |
| — | |
| 17,115,988 |
Balances - September 30, 2019 |
| 7,811,230 | | $ | 7,811 | | $ | 38,956,156 | | $ | 89,292,707 | | $ | (11,255,672) | | $ | 117,001,002 |
| | | | | | | | | | | | | | | | | |
|
| |
| | |
| Additional |
| | |
| | |
| Stockholders’ | ||
| | Common Stock | | Paid in | | Retained | | Treasury | | Equity | |||||||
| | Shares | | Amount | | Capital | | Earnings | | Stock | | Total | |||||
Balances - June 30, 2019 | | 7,796,230 | | $ | 7,796 | | $ | 38,299,800 | | $ | 83,019,774 | | $ | (11,016,949) | | $ | 110,310,421 |
Issuance of common stock upon stock option exercise |
| 15,000 | |
| 15 | |
| 396,435 | |
| — | |
| — | |
| 396,450 |
Stock compensation expense |
| — | |
| — | |
| 259,921 | |
| — | |
| — | |
| 259,921 |
Repurchases of common stock |
| — | |
| — | |
| — | |
| — | |
| (238,723) | |
| (238,723) |
Net income |
| — | |
| — | |
| — | |
| 6,272,933 | |
| — | |
| 6,272,933 |
Balances - September 30, 2019 |
| 7,811,230 | | $ | 7,811 | | $ | 38,956,156 | | $ | 89,292,707 | | $ | (11,255,672) | | $ | 117,001,002 |
See accompanying notes to condensed consolidated financial statements.
7
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 | 73,063 | 73 | $ | 2,133,323 | - | - | 2,133,396 | |||||||||||||||||
Stock compensation expense | - | - | $ | 520,387 | - | - | 520,387 | |||||||||||||||||
Repurchases of common stock | - | - | - | - | (357,289 | ) | (357,289 | ) | ||||||||||||||||
Net income | - | - | - | 17,115,988 | - | 17,115,988 | ||||||||||||||||||
Balances – September 30, 2019 | 7,811,230 | $ | 7,811 | $ | 38,956,156 | $ | 89,292,707 | $ | (11,255,672 | ) | $ | 117,001,002 |
Common Stock | ||||||||||||||||||||||||
Shares | Amount | Additional Paid in Capital | Retained Earnings | Treasury Stock | Stockholders’ Equity Total | |||||||||||||||||||
Balances – June 30, 2019 | 7,796,230 | $ | 7,796 | $ | 38,299,800 | $ | 83,019,774 | $ | (11,016,949 | ) | $ | 110,310,421 | ||||||||||||
Issuance of common stock upon stock option exercise | 15,000 | 15 | 396,435 | - | - | 396,450 | ||||||||||||||||||
Stock compensation expense | - | - | 259,921 | - | - | 259,921 | ||||||||||||||||||
Repurchases of common stock | - | - | - | - | (238,723 | ) | (238,723 | ) | ||||||||||||||||
Net income | - | - | - | 6,272,933 | - | 6,272,933 | ||||||||||||||||||
Balances – September 30, 2019 | 7,811,230 | $ | 7,811 | $ | 38,956,156 | $ | 89,292,707 | $ | (11,255,672 | ) | $ | 117,001,002 |
Common Stock | ||||||||||||||||||||||||
Shares | 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 | 138,000 | 138 | 2,570,692 | - | - | 2,570,830 | ||||||||||||||||||
Stock compensation expense | - | - | 159,883 | - | - | 159,883 | ||||||||||||||||||
Repurchases of common stock | - | - | - | - | (2,559,050 | ) | (2,559,050 | ) | ||||||||||||||||
Net income | - | - | - | 13,869,585 | - | 13,869,585 | ||||||||||||||||||
Balances – September 30, 2018 | 7,738,167 | $ | 7,738 | $ | 36,198,898 | $ | 65,993,035 | (10,457,250 | ) | $ | 91,742,421 |
Common Stock | ||||||||||||||||||||||||
Shares | Amount | Additional Paid in Capital | Retained Earnings | Treasury Stock | Stockholders’ Equity Total | |||||||||||||||||||
Balances – June 30, 2018 | 7,655,167 | $ | 7,655 | $ | 34,424,632 | $ | 60,949,985 | $ | (7,898,200 | ) | $ | 87,484,072 | ||||||||||||
Issuance of common stock upon stock option exercise | 83,000 | 83 | 1,710,697 | - | - | 1,710,780 | ||||||||||||||||||
Stock compensation expense | - | - | 63,569 | - | - | 63,569 | ||||||||||||||||||
Repurchases of common stock | - | - | - | - | (2,559,050 | ) | (2,559,050 | ) | ||||||||||||||||
Net income | - | - | - | 5,043,050 | - | 5,043,050 | ||||||||||||||||||
Balances – September 30, 2018 | 7,738,167 | $ | 7,738 | $ | 36,198,898 | $ | 65,993,035 | $ | (10,457,250 | ) | $ | 91,742,421 |
BioSpecifics Technologies Corp.
Condensed Consolidated Statements of Cash Flows
(unaudited)
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2020 |
| 2019 | ||
Cash flows from operating activities: | | | | | | |
Net income | | $ | 10,001,209 | | $ | 17,115,988 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
|
Depreciation and amortization | | | 70,037 | | | 256,610 |
Stock-based compensation expense | |
| 1,173,714 | |
| 520,387 |
Deferred tax expense (benefit) | |
| (265,203) | |
| 199,908 |
Non-cash lease expense | |
| 57,708 | |
| — |
(Accretion) amortization of bond (discount) premium | | | 790,006 | | | (53,735) |
Changes in operating assets and liabilities: | |
|
| |
|
|
Accounts receivable | |
| 5,472,278 | |
| (1,250,070) |
Income tax payable | |
| (354,984) | |
| (949,791) |
Prepaid expenses and other assets | |
| (915,142) | |
| (189,959) |
Patent costs | |
| — | |
| (189,704) |
Accounts payable, accrued expenses and lease obligation | |
| 413,127 | |
| (921,360) |
Net cash provided by operating activities | |
| 16,442,750 | |
| 14,538,274 |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Purchases of property and equipment | | | (69,470) | | | — |
Maturities of marketable investments | |
| 87,283,693 | |
| 76,636,059 |
Purchases of marketable investments | |
| (105,431,394) | |
| (93,357,599) |
Net cash used in investing activities | |
| (18,217,171) | |
| (16,721,540) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from stock option exercises | |
| 61,725 | |
| 2,133,396 |
Payments for repurchase of common stock | |
| (412,761) | |
| (357,289) |
Net cash (used in) provided by financing activities | |
| (351,036) | |
| 1,776,107 |
| | | | | | |
Decrease in cash and cash equivalents | |
| (2,125,457) | |
| (407,159) |
Cash and cash equivalents at beginning of year | |
| 4,999,183 | |
| 13,176,452 |
Cash and cash equivalents at end of period | | $ | 2,873,726 | | $ | 12,769,293 |
| | | | | | |
Supplemental disclosures of cash flow information: | |
|
| |
|
|
Cash paid during the period for: | |
|
| |
|
|
Taxes | | $ | 3,473,278 | | $ | 4,462,362 |
See accompanying notes to condensed consolidated financial statements.
8
Nine Months Ended September 30, | ||||||||
Cash flows from operating activities: | 2019 | 2018 | ||||||
Net income | $ | 17,115,988 | $ | 13,869,585 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization | 202,875 | 1,984,577 | ||||||
Stock-based compensation expense | 520,387 | 159,883 | ||||||
Deferred tax expense | 199,908 | 128,418 | ||||||
Extinguishment of accrued liabilities | - | (78,138 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (1,250,070 | ) | (2,245,522 | ) | ||||
Income tax payable / receivable | (949,791 | ) | (774,624 | ) | ||||
Prepaid expenses and other current assets | (189,959 | ) | (178,453 | ) | ||||
Patent costs | (189,704 | ) | (95,399 | ) | ||||
Accounts payable and accrued expenses | (921,360 | ) | (356,548 | ) | ||||
Deferred revenue | - | (139,680 | ) | |||||
Net cash provided by operating activities | 14,538,274 | 12,274,099 | ||||||
Cash flows from investing activities: | ||||||||
Maturity of marketable investments | 76,636,059 | 58,380,000 | ||||||
Purchases of marketable investments | (93,357,599 | ) | (64,618,676 | ) | ||||
Net cash used in investing activities | (16,721,540 | ) | (6,238,676 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from stock option exercises | 2,133,396 | 2,570,830 | ||||||
Payments for repurchase of common stock | (357,289 | ) | (2,559,050 | ) | ||||
Net cash provided by financing activities | 1,776,107 | 11,780 | ||||||
Increase (decrease) in cash and cash equivalents | (407,159 | ) | 6,047,203 | |||||
Cash and cash equivalents at beginning of year | 13,176,452 | 7,333,810 | ||||||
Cash and cash equivalents at end of period | $ | 12,769,293 | $ | 13,381,013 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | - | - | ||||||
Taxes | $ | 4,462,362 | $ | 3,917,572 |
BIOSPECIFICS TECHNOLOGIES CORP.
September 30, 2019
(Unaudited)
1. | ORGANIZATION AND DESCRIPTION OF BUSINESS |
We are a biopharmaceutical company involved in the development of an injectable collagenase clostridium histolyticum (CCH)(“CCH”) for multiple indications. We maintain intellectual property with respect to injectable CCH that treats, among other indications, Dupuytren’s contracture (DC)(“DC”), Peyronie’s disease (PD)(“PD”), cellulite, frozen shoulder cellulite,syndrome, plantar fibromatosis, and uterine fibroids. Injectable CCH currently is approved and marketed in the U.S. under the trademark XIAFLEX®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 with Endo, under which we receive license, and sublicense income, royalties, milestones, and mark-up on cost of goods sold payments related to the sale, regulatory submissions, and approval of XIAFLEX®.
Endo has filed a biologics license application for CCH for the treatment of cellulite with the FDA. On July 6, 2020, Endo announced that it received FDA approval of Qwo™ (collagenase clostridium histolyticum-aaes) for the treatment of moderate to severe cellulite in the buttocks of adult women. Endo anticipates Qwo™ to be available commercially in the U.S. starting in spring 2021. In July 2020, Endo dosed the first patient in a clinical trial in plantar fibromatosis in June 2020 and adhesive capsulitis, also known as frozen shoulder. Adhesive capsulitis is an inflammation and thickening of the shoulder capsule due to collagen, which causes decreased motion in the shoulder. Plantar fibromatosis is a non-malignant thickening of the feet’s deep connective tissue or fascia. There are currently no FDA-approved pharmaceutical therapies available to treat either condition.
We have developed injectable CCH for 12 clinical indications to date. Under our license agreement with Endo, Endo has the right to further develop CCH for frozen shoulder and plantar fibromatosis, as well as certain other licensed indications. Endo has a right to opt-in for use of CCH in the treatment of uterine fibroids.
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”), 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®. Endo’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, cellulite, 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.
On February 26, 2019, we and Endo entered into the Second Amendment to the Second Amended and Restated Development and License Agreement (the “Second Amendment”) (effective as of January 1, 2019) to amend certain provisions of the License Agreement. The Second Amendment has an effective dateAgreement to, among other things, require Endo to provide timely estimates of January 1, 2019.royalties to assist us in complying with our financial reporting obligations. 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
Under the License Agreement, Endo is responsible, at its own cost and expense, for developing the formulation and finished dosage form of products and arranging for the clinical supply of products. Endo has the option to requirelicense development and marketing rights to these indications based on a full analysis of the data from the clinical trials, which would transfer responsibility for the future development costs to Endo and trigger opt-in payments and potential future milestone and royalty payments to provide timely estimatesus.
The License Agreement extends, on a country-by-country and product-by-product basis, for the longer of royaltiesthe patent life, the expiration of any regulatory exclusivity period or twelve years from the effective date. Either party may terminate the License Agreement as a result of the other party’s breach or bankruptcy.
Endo must pay us on a country-by-country and product-by-product basis a specified percentage, which typically is in the low double digits, of net sales for products covered by the License Agreement. This royalty applies to assist us in complying with our financial reporting obligations.
9
certain cost of goods related to supply of XIAFLEX® (which mark-up is capped at a specified percentage of the cost of goods of XIAFLEX®) for products sold by Endo and PD, its affiliates.
Endo has opted-inpreviously collaborated with partners to commercialize XIAFLEX® and Xiapex® outside of the United States; however, Endo terminated third party partnership agreements for markets outside of the United States, which will reduce the amount of royalty revenues received by us. We do not believe that this reduction will have a material effect on our future consolidated statements of operations.
On October 19, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Endo, and Beta Acquisition Corp., a Delaware corporation and wholly-owned indirect subsidiary of Endo (“Purchaser”). Pursuant to the following indications: frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosisMerger Agreement, and human lipoma. Endo exercised, with our consent, an early opt-in for lateral hip faton the terms and plantar fibromatosis insubject to the conditions thereof, Purchaser commenced a tender offer on November 2015. Endo opted-in for human lipoma in July 2016. We manage the development of XIAFLEX® for uterine fibroids and initiate the development of XIAFLEX® in new potential indications, not licensed by Endo.
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 ninemonths ended September 30, 2019,2020, as compared to the significant accounting policies disclosed in Note2 of the Consolidated Financial Statements in the Company’s 20182019 Annual Report.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited, but include all adjustments (consisting only of normal, recurring adjustments) that 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 rulesand regulations of the Securities and Exchange Commission (“SEC”) for quarterly reporting.
The information included in this Quarterly Report on Form10-Q should be read in conjunction with the risk factors discussed herein and in PartI, Item1A. Risk Factors in our 20182019 Annual Report filed with the SEC on April 2, 2019.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the CompanyBioSpecifics 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, income taxes, and third partythird-party royalties. 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
10
results may differ from these estimates under different assumptions or conditions. For further details, see notes “Revenue Recognition.Recognition,”, “Provision for Income Taxes”Taxes,” and “Third-Party Royalties.” Actual results may differ from those estimates.
Revenue Recognition
Under 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 agreementLicense 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,
11
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
We adopted ASU No. 2016-02,
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 2023. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes. This standard removes certain exceptions to the general principles of ASC 740 and improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. 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 90 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, commercial paper, U.S. government agency bonds, municipal bonds, and corporate bonds. All investments are classified as held to maturity. As of September 30, 20192020, and December31, 2018,2019, the amortized cost of these investments was $85.6$118.2 million and $68.8$100.8 million, respectively. NoNaN 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 maturityheld-to-maturity investments, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the duration of those instruments. As of September 30, 20192020, and December31, 2018,2019, there were no0 recorded unrealized gains or losses on our investments as they are classified as held to maturity. held-to-maturity. As of September 30, 2019 2020, and December31, 2018,2019, amortized cost basis of the investments approximated their fair value. Interest income for the three and nine months ended September 30, 2019 was $0.5 million and $1.5 million, respectively as compared to $0.4 million and $0.9 million in the 2018 periods. For the nine months ended September 30, 2019 and 2018, the amortized net premium / (net discount) included in interest income was approximately $56,000 and ($361,000), respectively. At September 30, 2019 and December 31, 2018, the remaining unamortized net premium / (net discount) was approximately $198,000 and ($121,000), respectively.
12
The following table presents the Company’s schedule of maturities atas of September 30, 20192020 and December31, 2018:
Maturities as of September 30, 2019 | Maturities as of December 31, 2018 | |||||||||||||||
1 Year or Less | Greater than 1 Year | 1 Year or Less | Greater than 1 Year | |||||||||||||
U.S Government agency | $ | 4,234,076 | $ | 6,228,685 | $ | - | $ | - | ||||||||
Municipal bonds | 6,593,224 | 545,265 | 1,295,350 | - | ||||||||||||
Corporate bonds | 56,061,185 | 5,948,250 | 61,321,162 | 1,099,834 | ||||||||||||
Certificates of deposit | 2,201,239 | 3,770,328 | 5,090,631 | - | ||||||||||||
Total | $ | 69,089,724 | $ | 16,492,528 | $ | 67,707,143 | $ | 1,099,834 |
| | | | | | | | | | | | | |
| | Maturities as of | | Maturities as of | | ||||||||
| | September 30, 2020 | | December 31, 2019 | | ||||||||
|
| 1 Year or Less |
| Greater than 1 Year |
| 1 Year or Less |
| Greater than 1 Year |
| ||||
Municipal bonds | | $ | 12,596,326 | | $ | 2,512,697 | | $ | 11,341,249 | | $ | — | |
Government agency bonds | |
| 1,158,191 | |
| 3,500,000 | |
| 11,950,738 | |
| 6,231,804 | |
US Treasury bonds | | | 6,006,593 | | | — | | | — | | | — | |
Corporate bonds | |
| 60,012,228 | |
| 27,812,183 | |
| 57,321,784 | |
| 6,675,958 | |
Certificates of deposit | |
| 4,071,401 | |
| 497,018 | |
| 3,626,147 | |
| 3,661,262 | |
Total | | $ | 83,844,739 | | $ | 34,321,898 | | $ | 84,239,918 | | $ | 16,569,024 | |
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, 2019,2020, 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, 20192020 and December31, 2018:
September 30, 2019 | Type of Instrument | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash equivalents | Institutional Money Market | $ | 2,433,542 | $ | 2,433,542 | $ | - | $ | - | ||||||||
Cash equivalents | U.S. Government Agency | $ | 3,995,097 | $ | 3,995,097 | ||||||||||||
Investments | U.S. Government Agency | 10,462,761 | - | 10,462,761 | - | ||||||||||||
Investments | Municipal Bonds | 7,138,489 | - | 7,138,489 | - | ||||||||||||
Investments | Corporate Bonds | 62,009,435 | - | 62,009,435 | - | ||||||||||||
Investments | Certificates of Deposit | 5,971,567 | 5,971,567 | - | - |
December 31, 2018 | Type of Instrument | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash equivalents | Institutional Money Market | $ | 6,078,025 | $ | 6,078,025 | $ | - | $ | - | ||||||||
Investments | Municipal Bonds | 1,295,350 | - | 1,295,350 | - | ||||||||||||
Investments | Corporate Bonds | 62,420,996 | - | 62,420,996 | - | ||||||||||||
Investments | Certificates of Deposit | 5,090,631 | 5,090,631 | - | - |
| | | | | | | | | | | | | | |
September 30, 2020 |
| Type of Instrument |
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||
Cash equivalents | | Institutional Money Market | | $ | 253,460 | | $ | 253,460 | | $ | — | | $ | — |
Investments | | Certificates of Deposit | | | 4,568,419 | | | 4,568,419 | | | — | | | — |
Investments | | Municipal Bonds | | | 15,109,023 | | | — | | | 15,109,023 | | | — |
Investments |
| Government Agency Bonds |
| | 4,658,191 |
| | — |
| | 4,658,191 |
| | — |
Investments |
| US Treasury Bonds |
| | 6,006,593 |
| | — |
| | 6,006,593 |
| | — |
Investments | | Corporate Bonds | | | 87,824,411 | | | — | | | 87,824,411 | | | — |
| | | | | | | | | | | | | | |
December 31, 2019 |
| Type of Instrument |
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||
Cash equivalents | | Institutional Money Market | | $ | 950,658 | | $ | 950,658 | | $ | — | | $ | — |
Investments | | Certificates of Deposit | | | 7,287,409 | | | 7,287,409 | | | — | | | — |
Investments |
| Municipal Bonds |
| | 11,341,249 |
| | — |
| | 11,341,249 |
| | — |
Investments | | Government Agency Bonds | | | 18,182,542 | | | — | | | 18,182,542 | | | — |
Investments |
| Corporate Bonds |
| | 63,997,742 |
| | — |
| | 63,997,742 |
| | — |
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, U.S. government agency bonds, municipal bonds, and corporate bonds.
The Company is currently dependent on one1 customer, Endo, which generates almost all of the Company’s revenues. For the three and nine months ended September 30, 2020, licensing, sublicensing, milestones, and royalty revenues under the License Agreement with Endo were $11.3 million and $24.8 million, respectively and for the three and nine months ended September 30, 2019, licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately $9.4 million and $26.4 million, respectively and for the three and nine months ended September 30, 2018, licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately $8.2 million and $23.1 million, respectively.
At September 30, 20192020 and December31, 2018,2019, our accounts receivable balances from Endo were $17.8$13.6 million and $16.5$19.1 million, respectively.
13
Treasury Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. For the nine months ended September 30, 2020, we repurchased 7,573 shares at an average price of $54.50. For the nine months ended September 30, 2019, there were 6,209 shares repurchased at an average price of $57.54 compared to 43,705 shares at an average price of $58.55 in the 2018 comparable period.
Receivables and Doubtful Accounts
Trade accounts receivable are stated at the amount the Company expects to collect. We may maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Our accounts receivable balance is typically due from Endo, our onesingle 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 and therefore no0 allowance is recorded. If the financial condition of our customerEndo 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, 20192020 and December31, 20182019, our accounts receivable balance was $17.8$13.6 million and $16.5$19.1 million, respectively, and was from one1 customer, Endo.
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.agreement. 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 the net sales have occurred. For the three and nine month periodsmonths ended September 30, 2019 and 2018,2020, third-party royalty expenses on royalty revenue were $0.2 million and $0.7$0.4 million, respectively. For the three and nine month periods ended September 30, 2018, third-party royalty expenses were $0.6 million and $1.7 million, respectively. As of March 1, 2019, we have no further third party royalties in connection with PD as the agreement expired in February 2019.
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 ofClinical 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.organizations. In the normal course of business, we contract with third parties to perform various clinical trial activities in the ongoing development of potential drugs. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, the completion of portions of the clinical trial, 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
14
down of the clinical trial. Our estimates and assumptions could differ significantly from the amounts that may actually be incurred.
Stock-Based Compensation and 2019 Omnibus Incentive Compensation Plan
ASC 718, Compensation - Stock Compensation (“ASC 718”), requires the recognition of compensation expense, using a fair-value based method, for costs related to all stock awards 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 fair value of each service-based restricted stock unit granted is estimated on the day of grant based on the closing price of the Company’s common stock. 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 the
Company’s 2019 Omnibus Incentive Compensation Plan2019 Omnibus Incentive Compensation Plan (2019 Plan)
Restricted Stock Awards
A summary of the restricted stock awards
activity during the nine months ended September 30,Restricted Stock | Weighted-Average Grant Date Fair Value Per Share | |||||||
Nonvested at December 31, 2018 | - | $ | - | |||||
Issued | 9,950 | 60.85 | ||||||
Vested | - | - | ||||||
Forfeited | - | - | ||||||
Nonvested at September 30, 2019 | 9,950 | $ | 60.85 |
| | | | | |
|
| |
| Weighted- | |
| | | | Average Grant | |
| | | | Date Fair Value | |
| | Restricted Stock | | Per Share | |
Nonvested at December 31, 2019 |
| 10,450 | | $ | 60.47 |
Issued |
| 13,666 | |
| 62.62 |
Vested |
| (11,450) | |
| 59.60 |
Forfeited |
| — | |
| — |
Nonvested at September 30, 2020 |
| 12,666 | | $ | 63.58 |
Stock-based compensation expense related to restricted stock awards recognized in general and administrative expense was approximately$178,000 and $515,000 for the three month and nine months ended September 30, 2020, respectively, and $146,000 for both the three and nine months ended September 30, 2019.
As of September 30, 2019,2020, there was approximately $460,000$578,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to restricted stock. This cost is expected to be recognized over the vesting periods of the restricted stock, with a weighted-average period of approximately 1.25 years.
Stock Option Activity under the 2001 Stock Option Plan (2001 Plan)
For the nine months ended September 30, 2019,2020, we granted a total of 10,000202,000 stock options from the 2001 Plan with a weighted average grant date fair value of $27.97$61.92 per share.
15
Nine Months Ended September 30, 2019 | ||||
Risk-free interest rate | 2.18% | |||
Expected term of option | 6.25 years | |||
Expected stock price volatility | 39.5% | |||
Expected dividend yield | $ | 0.0 |
| | | | |
|
| Nine Months Ended |
| |
| | September 30, 2020 | | |
Risk-free interest rate |
| | 0.29% - 1.61% |
|
Expected term of option |
| | 5.5 - 6.25 years |
|
Expected stock price volatility |
| | 39.5% - 41.5% |
|
Expected dividend yield | | $ | 0.0 | |
A summary of our stock option activity during the nine months ended September 30, 20192020 is presented below:
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 | 10,000 | 66.40 | - | - | ||||||||||||
Exercised | (73,063 | ) | 29.20 | - | 2,229,195 | |||||||||||
Forfeitures | (11,250 | ) | 41.82 | - | - | |||||||||||
Outstanding at September 30, 2019 | 101,187 | $ | 46.26 | 7.63 | $ | 1,061,135 | ||||||||||
Exercisable at September 30, 2019 | 28,812 | $ | 21.74 | 3.96 | $ | 915,593 |
| | | | | | | | | | |
|
| |
| | |
| Weighted |
| | |
| | | | Weighted | | Average | | Aggregate | ||
| | | | Average | | Remaining | | Intrinsic | ||
| | Shares | | Exercise Price | | Contractual Term | | Value | ||
Outstanding at December 31, 2019 |
| 189,187 |
| $ | 46.79 |
| 8.62 |
| $ | 1,920,684 |
Grants |
| 202,000 |
| | 61.92 |
| — |
| | — |
Exercised |
| (1,500) |
| | 41.15 |
| — |
| | — |
Forfeited |
| (147,500) |
| | 56.51 |
| — |
| | — |
Outstanding at September 30, 2020 |
| 242,187 |
| $ | 56.49 |
| 8.35 |
| $ | 0 |
Exercisable at September 30, 2020 |
| 42,687 | | $ | 33.45 |
| 2.77 | | $ | 827,256 |
During the nine months ended September 30, 20192020 and 2018,2019, the Company received approximately $2.1$0.1 million and $2.6$2.1 million, 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 $53.52$52.83 on September 30, 2019,2020, which would have been received by the option holders had all option holders exercised their options as of that date. We have approximately $1.7$4.4 million in unrecognized compensation cost related to stock options outstanding as of September 30, 2019,2020, which we expect to recognize over the next 3.068.35 years.
Stock-based compensation expense related to stock options recognized in general and administrative expenses was approximately$333,000 for the three months ended September 30, 2020 and $469,000 for the nine months ended September 30, 2020, and $114,000 and $374,000 for the three and nine month periodsmonths ended September 30, 2019, respectively. Stock compensation expense related to restructuring associated with the acceleration of vesting of certain stock options and $64,000 and $160,000restricted stock units was $190,000 for the three and nine month periodsmonths ended September 30, 2018, respectively.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Machinery and equipment, furniture and fixtures, andautos 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, 2019 and December 31, 2018,2020, total gross property and equipment were fully depreciated.
Comprehensive Income
For each of the three and nine month periodsmonths ended September 30, 20192020 and 2018,2019, we had no0 components of other comprehensive income other than net income itself.
Provision for Income Taxes
We use the asset and liability method of accounting for income taxes, as set forth in ASC 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 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.
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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, 20192020 and December31, 2018,2019, the Company has not0t recorded any unrecognized tax benefits. We classify interest associated with income taxes under interest expense and tax penalties under other.
Commitments and Contingencies
We determine if an arrangement includes a lease at inception. Right-of-use lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The right-of-use lease asset includes any lease payments made and excludes lease incentives. Incremental borrowing rate is used in determining the present value of future payments. We apply a portfolio approach to the property leases to apply an incremental borrowing rate to leases with similar lease terms. The lease terms may include options to extend or terminate the lease. We recognize the options to extend the lease as part of the right-of-use lease assets and lease liabilities only if it is reasonably certain that the option would be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the non-cancelable lease term. The adoption of the new standard as of January 1, 2019 did not have a material impact on our consolidated financial statements for the nine months ended September 30, 2019 due to the short-term nature of our then-existing lease in Lynbrook, New York.
In December 2019, we recorded a right-of-use lease asset of $243,000, a short-term lease liability of $76,000, and a long-term lease liability of $167,000 associated with the lease of our new headquarters in Wilmington, Delaware.
The following table summarizes the maturity of the Company’s lease obligations on an undiscounted cash flow basis and a reconciliation to the operating lease liabilities recognized on our balance sheet as of September 30, 2020 and December 31, 2019:
| | | | | | |
|
| September 30, 2020 |
| December 31, 2019 | ||
2020 |
| $ | 20,605 | | $ | 75,352 |
2021 |
| | 84,893 | | | 84,893 |
2022 |
| | 87,428 | | | 87,428 |
Total lease payments |
| | 192,926 | | | 247,673 |
Less: interest |
| | (6,656) | | | (11,560) |
Total lease obligation | | $ | 186,270 | | $ | 236,113 |
On November 6, 2019,January7, 2020, the Company entered into an agreement withprovided three months’ notice to 35 Wilbur Street Associates, LLC (the “Landlord”) to extend the term of the Company’s intent to terminate the lease toagreement for our former corporate headquarters, which are currently located at 35 Wilbur St., Lynbrook, NY 11563, for an additional six month period (the “Extended Lease Agreement”). The six month extension will endNew York 11563. Accordingly, the lease terminated on May 31,April7, 2020. Pursuant toAs the Extended Lease Agreement, the base rent is $12,075 per month andlease provided the Company maythe option to cancel the lease withby giving threemonths’ prior written notice, to the Landlord atCompany did not incur any time during the term.
Total operating lease expenses amounted to approximately$21,000 and $101,000 for the three and nine months ended September 30, 2020 and $34,000 and $101,000 for the three and nine months ended September 30, 2019, respectively,respectively.
Since XIAFLEX® is used primarily in elective procedures, which have been curtailed during the outbreak, and $32,000based on public statements made by Endo, the Company believes that the COVID-19 outbreak may have a material adverse effect on its business and $97,000financial results until the easing of the restrictions that have been imposed as a result of the outbreak.
On June 12, 2020, the Company filed an arbitration demand against the Research Foundation of the State University of New York for and on behalf of Stony Brook University (“Research Foundation”) seeking a declaration that one of its former employees is a co-inventor of the Research Foundation’s patent for the threetreatment of cellulite (U.S. Patent No. 10,123,959, which has an expiration date of February 7, 2027), and nine monthschallenging the Research Foundation’s prospective rights to royalties under the Cellulite License Agreement dated August 23, 2007, which is described in the 2018 periods, respectively.
17
See Note 8 “Subsequent Events” for disclosure regarding litigation related to the Merger Agreement.
Stockholders’ Equity
At the Company’s annual meeting of stockholders held on June 12, 2020 (the “2020 Annual Meeting”), the stockholders approved an amendment to the Company’s Certificate of Incorporation, as amended, to increase the authorized number of shares of common stock from 10,000,000 shares to 15,000,000 shares.
On April 10, 2020, the Board approved an amendment to the Company's Rights Agreement, dated as of May 14, 2002 and amended June 19, 2003, February 3, 2011, March 5, 2014, May 27, 2016, and May 11, 2018 (the “Original Rights Agreement”), by and between the Company and Worldwide Stock Transfer, LLC (successor in interest to OTC Corporate Transfer Service Company), as rights agent (the “Rights Agent”). The amendment, which was subsequently executed on that date by the Company and the Original Rights Agent, changes the Final Expiration Date (as defined in the Original Rights Agreement) of the rights under the Original Rights Agreement (the “Original Rights”) from the close of business on May 31, 2020 to the close of business on April 10, 2020. As a result, the Original Rights have expired, and the Original Rights Agreement terminated.
Also, on April 10, 2020, the Board approved and adopted a Rights Agreement, dated as of April 10, 2020 (the “Rights Agreement”), by and between the Company and the Rights Agent. Pursuant to the Rights Agreement, the Board declared a dividend of 1 preferred share purchase right (each, a “Right”) for each outstanding share of common stock, par value $0.001, of the Company (each, a “Common Share" and, collectively, the “Common Shares”). The Rights are distributable to stockholders of record as of the close of business on April 21, 2020 (the “Record Date”). NaN Right also will be issued together with each Common Share issued by the Company after April 21, 2020, but before the Distribution Date (as defined in the Rights Agreement) (or the earlier redemption or expiration of the Rights) and, in certain circumstances, after the Distribution Date.
Generally, the Rights Agreement works by causing substantial dilution to any person or group that acquires beneficial ownership of 20 percent (20%) or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. The Rights Agreement is not intended to interfere with any merger, tender or exchange offer or other business combination approved by the Board. The Rights Agreement also does not prevent the Board from considering any offer that it considers to be in the best interest of its stockholders.
A proposal to ratify the adoption by the Board of the Rights Agreement was approved by the stockholders at the Company’s 2020 Annual Meeting.
The Rights Agreement was amended on October 19, 2020; see Note 8 “Subsequent Events” for disclosure relating to the Rights Agreement amendment.
Shelf Registration Statement
On June 26, 2020, we filed a shelf registration statement on Form S-3, which we subsequently amended on July 15, 2020, relating to the sale, from time to time, in one or more transactions, of up to $200,000,000 of common stock, preferred stock, debt securities, warrants, and units (the “Shelf Registration Statement”). The Shelf Registration Statement was declared effective on July 17, 2020. As of September 30, 2020, $200,000,000 remained available for issuance under the Shelf Registration Statement. As set forth in the Shelf Registration Statement, the Company expects to use a substantial portion of the net proceeds from the sale of securities under the Shelf Registration Statement for general corporate purposes; the Company, however, has not allocated the net proceeds for any specific purposes.
At-The-Market Equity Offering Sales Agreement
On August 31, 2020, the Company entered into an At-The-Market Equity Sales Agreement (the “ATM Agreement”) with Stifel, Nicolaus & Company, Incorporated (“Stifel”) and Oppenheimer & Co. Inc. (“Oppenheimer” and, together with Stifel, the “Agents”) pursuant to which the Company may issue and sell, from time to time, at its option, shares of its common stock, $0.001 par value per share, having an aggregate offering price of up to $75,000,000 (the “ATM Shares”) through the Agents, as its sales agents.
18
Subject to the terms and conditions of the ATM Agreement, the Agents will use their commercially reasonable efforts to sell the ATM Shares from time to time, based upon the Company’s instructions, by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The Company has agreed to pay the Agents’ commissions for their services in acting as the Company’s agents in the sale of the ATM Shares in the amount of 3.0% of gross proceeds from the sale of the ATM Shares pursuant to the ATM Agreement. The Company also has agreed to provide the Agents with customary indemnification and contribution rights. The offering of the ATM Shares will terminate upon the earliest of (a) the sale of the maximum number or amount of the ATM Shares permitted to be sold under the ATM Agreement and (b) the termination of the ATM Agreement by the parties thereto.
During the third quarter, the Company did not make any sales under the ATM Agreement.
3. | NET INCOME PER SHARE |
In accordance with 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 and restricted stock awards using the treasury stock method. For the three and nine month periodsmonths ended September 30, 20192020, there were 24,01521,813 and 39,626,23,327, respectively, of common equivalent shares attributable to stock options and 807restricted stock awards that were included in the calculation of diluted net income per share. For the three and 1,410nine months ended September 30, 2019 there were 24,822 and 41,036, respectively, of common equivalent shares attributable to stock options and restricted stock awards that were included in the calculation of diluted net income per share. There were 60,000200,630 and 176,389 stock options in each period to purchase shares and 500 and zero restricted stock awards excluded from the calculation of diluted net income per share for the three and nine month periodsmonths ended September 30, 2019,2020, respectively, because their effects are anti-dilutive.
4. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consisted of the following:
September 30, 2019 | December 31, 2018 | |||||||
Trade accounts payable | $ | 87,446 | $ | 122,199 | ||||
Accrued legal and other professional fees | 450,300 | 308,725 | ||||||
Accrued payroll and related costs | 94,205 | 173,123 | ||||||
Third party royalties | 173,005 | 1,168,837 | ||||||
Other accruals | 72,272 | 25,704 | ||||||
Total | $ | 877,228 | $ | 1,798,588 |
| | | | | | | |
| | September 30, | | December 31, | | ||
|
| 2020 |
| 2019 |
| ||
Trade accounts payable | | $ | 98,665 | | $ | 197,077 | |
Accrued legal and other professional fees | |
| 526,099 | |
| 330,787 | |
Accrued payroll, severance, and related costs | |
| 591,116 | |
| 209,330 | |
Third-party royalties | |
| 156,000 | |
| 228,000 | |
Restructuring accrual | | | 10,000 | | | — | |
Other accruals | |
| 79,500 | |
| 33,215 | |
Total | | $ | 1,461,380 | | $ | 998,409 | |
5. | |
5. | PATENT COSTS |
We amortize intangible assets with definite lives on a straight-line basis over their 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 exists. As of September 30, 20192020 and December31, 2018, no2019, 0 impairment existed, and no adjustments were warranted.
19
NaN costs were capitalized approximately $97,000during the three and nine months ended September 30, 2020, as compared to $97,000 and $190,000 of patent costs for the three and nine months ended September 30, 2019, as compared to approximately $16,000 and $95,000 for three and nine months ended September 30, 2018, respectively. Patent costs may be creditable against future royalty revenues. For each period presented below, net patent costs consisted of:
September 30, 2019 | December 31, 2018 | |||||||
Patents | $ | 1,235,919 | $ | 1,046,216 | ||||
Accumulated amortization | (673,416 | ) | (601,738 | ) | ||||
Total | $ | 562,503 | $ | 444,478 |
| | | | | | | |
| | September 30, | | December 31, | | ||
|
| 2020 | | 2019 | | ||
Patents | | $ | 1,272,625 |
| $ | 1,272,625 | |
Accumulated amortization | |
| (761,280) | |
| (699,348) | |
| | $ | 511,345 | | $ | 573,277 | |
The amortization expense for patents for the three and nine months ended September 30, 2020 was $21,000 and $62,000 respectively, and for the three and nine months ended September 30, 2019 was approximately $29,000 and $72,000, respectively, and for the three and nine months ended September 30, 2018 was approximately $19,000 and $54,000, respectively. The estimated aggregate amortization expense for the remaining three months of 20192020 and each of theyears below is approximately as follows:
| | | |
October 1, 2020 – December 31, 2020 |
| $ | 20,644 |
2021 | |
| 65,427 |
2022 | |
| 65,427 |
2023 | |
| 65,427 |
2024 | |
| 65,427 |
Thereafter | |
| 228,993 |
6. | |
$ | 24,000 | |||
78,000 | ||||
61,000 | ||||
61,000 | ||||
61,000 | ||||
Thereafter | 278,000 | |||
Total | $ | 563,000 |
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 revenue recognized and other items. ForThe provision for income taxes is based on an estimated effective tax rate derived from our consolidated earnings before taxes, adjusted for nondeductible expenses and other permanent differences for the fiscal year. The provision for income taxes for the three and nine months ended September 30, 2020 was $1.4 million and $2.6 million, respectively, and for the three and nine months ended September 30, 2019 our provision for income taxes was $1.6 million and $3.7 million. Ourmillion, respectively. As of September 30, 2020 and December31, 2019, our net deferred tax liabilities as ofwere $0.3 and $0.6 million, respectively.
The estimated effective tax rate for both the three and nine months ended September 30, 20192020 was $0.6 million. 21% of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated for theyear ending December31, 2020 plus the effects, if any, of certain discrete items occurring in 2020.
The estimated effective tax rate for the three and nine months ended September 30, 2019 was approximately 20% and 18% of pre-tax income reported in the period, calculated based on the estimated annual effective tax rate anticipated for the year ending December 31, 2019 plus the effects of certain discrete items occurring in 2019 including the impact of U.S. Treasury guidance issued in 2019 on the application of certain provisions in the Tax Cuts and Jobs Act of 2017 (“TCJA”) allowing the Company to refine its calculations and current period stock option exercises.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act made various tax ratelaw changes including, among other things, (i) increasing the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest, (ii) enacting a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k) and (iii) making modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid taxes. The income tax provisions of the CARES Act had limited applicability to the Company as of September 30, 2020, and therefore, the enactment of the CARES Act did not have a material impact on the Company’s consolidated financial statements as of, and for the three and nine months ended, September 30, 20182020. We will continue to evaluate the impact of tax legislation and will update our disclosures as additional information and interpretative guidance becomes available.
7. | RESTRUCTURING AND SEPARATION COSTS |
On January 7, 2020, we announced that we would be relocating our corporate headquarters from Lynbrook, New York to Wilmington, Delaware as of April 7, 2020. On January 6, 2020, in connection with this relocation, we notified 5 employees and 1 consultant that their services would no longer be required effective March 31, 2020. On March 23,
20
2020, the 5 employees and 1 consultant were given separation agreements detailing the termination benefits to which they would be entitled.
As a result, we recorded a one-time restructuring charge of $1.1 million in the first quarter of fiscal 2020. The restructuring charge is associated with $0.9 million of one-time termination benefits that we expect to pay out in cash over a period of nine months and $0.2 million of one-time non-cash termination expenses associated with the acceleration of vesting of certain stock options and restricted stock units. The estimated liability for termination benefits was impacted primarilyrecorded at fair value during the first quarter of 2020 as a current liability in the consolidated balance sheet. These termination benefits consist of severance payments, reimbursement of benefits payments, and guaranteed consulting payments. Total charges and payments related to the restructuring plan recognized in the consolidated statement of operations are as follows:
| | | |
| | Nine Months Ended | |
| | September 30, | |
|
| 2020 | |
Restructuring accrual, January 1, 2020 | | $ | — |
Termination costs | | | 1,070,024 |
Facility exit costs | | | 76,020 |
Payments | | | (945,612) |
Stock compensation expense charged to additional paid-in-capital | | | (190,432) |
Restructuring accrual, September 30, 2020 | | $ | 10,000 |
On April 6, 2020, the Company and Mr. J. Kevin Buchi mutually agreed that Mr. Buchi would step down as Chief Executive Officer and as a director of the Company, effective immediately. The Company and Mr. Buchi have entered into a separation agreement that details the termination benefits to which he is entitled. The Company recorded zero and $0.6 million in separation costs related to this agreement in general and administrative expenses for the three and nine months ended September 30, 2020, respectively. The remaining accrual of $0.3 million at September 30, 2020 is included in accounts payable and accrued expenses and will be paid out over the next 6 months.
8. SUBSEQUENT EVENTS
Merger Agreement
On October 19, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Endo, and Beta Acquisition Corp., a Delaware corporation and wholly-owned indirect subsidiary of Endo (“Purchaser”).
Pursuant to the Merger Agreement, and on the terms and subject to the conditions thereof, Purchaser commenced a tender offer on November 2, 2020 (the “Offer”) to acquire all of the Company’s issued and outstanding shares of common stock (the “Company Shares”) at a purchase price of $88.50 per share, net to the holder thereof in cash, subject to reduction for any applicable withholding taxes and without interest.
The Offer will initially remain open for 20 business days from the date of commencement of the Offer. Under certain circumstances as set forth in the Merger Agreement, Purchaser may be required to extend, or may elect to extend, the Offer on one or more occasions.
Following the consummation of the Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Purchaser will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Endo, pursuant to Section 251(h) of the General Corporation Law of the State of Delaware without a vote of the Company stockholders (the “Merger”). At the effective time of the Merger (the “Effective Time”), and without any action on the part of the holders of any Company Shares, each Company Share, other than any Company Shares (i) owned at the commencement of the Offer and immediately prior to the Effective Time by Parent, Purchaser, or the Company or any direct or indirect wholly-owned subsidiary thereof, (ii) irrevocably accepted for purchase pursuant to the Offer, or (iii) owned by Company stockholders who are entitled to demand and have properly and validly demanded their appraisal rights under Delaware law, will be automatically converted into the right to receive an amount in cash equal to the Offer Price, subject to reduction for any applicable withholding taxes and without interest.
We expect the Merger to be completed in December 2020.
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Schedule 14D-9 and Schedule TO
In connection with the Merger, the Company filed a Solicitation/Recommendation Statement on Schedule 14D-9 (the “Schedule 14D-9”) with the SEC by the TCJA, which was enactedCompany in connection with the proposed Merger on December 22, 2017November 2, 2020. Also on November 2, 2020 and loweredin connection with the U.S. corporate tax rate from 35%Merger, Endo filed a Tender Offer Statement on Schedule TO (the “Schedule TO”).
Amendment to 21%, beginningRights Agreement
On October 19, 2020, in 2018. Our effective tax rate was also impactedconnection with the execution of the Merger Agreement, the Company and Worldwide Stock Transfer, LLC (the “Rights Agent”) entered into Amendment No. 1 to Rights Agreement (the “Rights Amendment”) to the Rights Agreement, for the purpose of amending the Rights Agreement to render it inapplicable to the Merger Agreement, the execution thereof, and the performance or consummation of the transactions contemplated thereby, including, without limitation, the Merger and the Offer. In particular, the Amendment provides that (i) none of the approval, adoption, execution, delivery, and/or amendment of the Merger Agreement, the public announcement and/or public disclosure by any person of the Merger Agreement or any of the transactions contemplated thereby, including, without limitation, the Merger and the Offer, or the performance and/or consummation of any of the transactions contemplated by the discrete impactMerger Agreement, including, without limitation, the Merger and the Offer, will result in (A) any of current period stock option exercises which impacts the effective rateEndo or Purchaser, or any of their respective affiliates or associates, either individually or together, being deemed to be an Acquiring Person, Beneficial Owner of or of Beneficially Owning (each as defined in the periodRights Agreement) the Company’s common stock or other securities, (B) the occurrence of a Triggering Event (as defined in which it occurs.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensedconsolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and is qualified by reference to them.
Overview
We are a biopharmaceutical company involved in the development of an injectable CCHcollagenase clostridium histolyticum (“CCH”) for multiple indications. Collagenases are naturally occurring enzymes responsible for the breakdown of collagen, which is the main structural protein in the extracellular matrix in the various connective tissues of the body and is the most abundant protein in mammals. Local accumulations of excess collagen are associated with a number of medical conditions.
We maintain intellectual property with respect to injectable CCH that treats, among other indications, Dupuytren’s contracture (DC)(“DC”), Peyronie’s disease (PD)(“PD”), cellulite, frozen shoulder syndrome, plantar fibromatosis, and removal of adipose tissue.uterine fibroids. Injectable CCH currently is approved and marketed in the U.S. by our partner Endo under the trademark XIAFLEX®XIAFLEX® for the treatment of both DC and PD. XIAFLEX® also is commercialized in Japan, Europe (where it is marketed as Xiapex®), Canada,the first and Australiaonly FDA-approved nonsurgical treatment for DC, and for PD in Canada, Europe and Australia.these two indications. We generate revenue primarily from our license agreement with Endo, under which we receive license, sublicense income, royalties, milestones and mark-up on cost of goods sold payments related to the sale, regulatory submissions and approval of XIAFLEX®.
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®. Endo’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.
We have developed injectable CCH for 12 clinical indications to date. Under our license agreement with Endo, Endo has the right to further develop CCH for frozen shoulder and plantar fibromatosis, as well as certain other licensed indications. Endo has a Phase 1 clinical trialright to opt-in for use of CCH forin the treatment of uterine fibroidsfibroids.
On October 19, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Endo, and Beta Acquisition Corp., a Delaware corporation and wholly-owned indirect subsidiary of Endo (“Purchaser”). Pursuant to the Merger Agreement, and on the terms and subject to the conditions thereof, Purchaser commenced a tender offer on November 2, 2020 (the “Offer”) to acquire all of the Company’s issued and outstanding shares of common stock (the “Company Shares”) at a purchase price of $88.50 per share, net to the
Third Quarter Highlights and Outlook
● | Overall revenues for the quarter increased over the prior quarter as a result of a $2.0 million milestone payment received from Endo which was due upon the FDA approval of Qwo™ (collagenase clostridium histolyticum-aaes) as well as a recovery over the previous quarter in sales of XIAFLEX®. Endo expects revenues to continue to recover during the remainder of 2020 as physician and patient activities continue returning toward pre-COVID-19 levels. |
● | In July 2020, Qwo™ (collagenase clostridium histolyticum-aaes), the first and only U.S Food and Drug Administration (FDA)-approved injectable treatment for cellulite was approved by the FDA. Endo’s commercial launch is expected to occur in spring 2021. |
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Impact of COVID-19
The presentations follows positive top-line results announced in October 2018 demonstratingoutbreak of COVID-19 has adversely impacted the U.S. and global economies. Our year-to-date 2020 royalty revenues declined by 14% as compared to year-to-date 2019 as a result of royalties associated with lower net sales due to the impact of COVID-19, including, but not limited to the effect of significant office closures and less office visits for physician-administered products. Based on public disclosures made by Endo, we currently anticipate that CCH significantly reduced collagen content in uterine fibroids. We intend to use the Phase 1 data to inform the development of future clinical studies. BioSpecifics and its clinical partnersrevenues from our license agreement with Endo will continue to analyzerecover during the full Phase 1 dataremainder of 2020 as patient activities return to guide the designpre-COVID-19 levels. We also currently expect full-year 2020 revenues to decline compared to full-year 2019 revenues due to Endo’s termination of a Phase 2 study of CCHthird-party partnership agreements that provided for the treatmentsale of uterine fibroids.
License Agreement with Endo
We generatedgenerate revenue from primarily one source, the License Agreement. Under the License Agreement,our license agreement with Endo (the “License Agreement”), under which we receive license, sublicense income, royalties, milestones, and mark-up on cost of goods sold payments related to the sale, regulatory submissions, and approval of XIAFLEX® as described above. Currently, Endo’s licensed rights cover the indications of DC, PD, frozen shoulder, plantar fibromatosis, and other potential indications. We and Endo may further expand the License Agreement to cover other indications as they are developed.
Under the License Agreement, Endo is responsible, at its own cost and expense, for developing the formulation and finished dosage form of products and arranging for the clinical supply of products. Endo has the option to license development and marketing rights to these indications based on a full analysis of the data from the clinical trials, which would transfer responsibility for the future development costs to Endo and trigger opt-in payments and potential future milestone and royalty payments to us.
Endo must pay us on a country-by-country and product-by-product basis a specified percentage, which typically is in the low double digits, of net sales for products covered by the License Agreement. This royalty applies to net sales by Endo or its sublicensees. Endo also is obligated to pay a percentage of any future regulatory or commercial milestone payments received from such sublicensees. In addition, Endo and its affiliates pay us an amount equal to a specified mark-up on certain cost of goods related to supply of XIAFLEX® (which mark-up is capped at a specified percentage of the cost of goods of XIAFLEX®) for products sold by Endo and its affiliates.
Endo previously collaborated with partners to commercialize XIAFLEX® and Xiapex® outside of the United States; however, Endo terminated third-party partnership agreements for markets outside of the United States, which will reduce the amount of royalty revenues received by us. We do not believe that this reduction will have a material effect on our future consolidated statements of operations.
Significant Risks
We are dependent on third parties, and our licensee, Endo, may not be able to continue successfully commercializing XIAFLEX® for DC and PD, successfully develop XIAFLEX® for additional indications, obtain required regulatory approvals, manufacture XIAFLEX® at an acceptable cost, in a timely manner and with appropriate quality, or successfully market products or maintain desired margins for products sold, and, as a result, we may not achieve sustained profitable operations.
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 money market funds, certificates of deposit, commercial paper, U.S. government agency bonds, municipal bonds, and corporate bonds.
The Company is subject to risks and uncertainties as a result of the global COVID-19 pandemic. While we expect that COVID-19 will impact our business to some degree, the significance and duration of the impact on our business cannot be determined at this time due to numerous uncertainties, including the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and business closures, the effectiveness of actions taken to contain the disease, and other unforeseeable consequences.
For more information regarding the risks facing the Company, please see the risk factors discussed under the heading “Risk Factors” under Part II, Item 1A. herein, under Part II, Item 1A. of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and Item 1A. of Part 1 of our 2019 Annual Report.
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Critical Accounting Policies, Estimates and Assumptions
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience, interim data provided by Endo, and on various other assumptions that we believe are reasonable under the circumstances. The financial information at September 30, 20192020 and for the three and nine months ended September 30, 2020 and 2019 and 2018 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, 20182019 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 20182019 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, 20182019 included in the Company’s 20182019 Annual Report andwith the unaudited condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q for the first and second quarters of 2019 filed with the SEC.
As described in Note2to our accompanying Condensed Consolidated Financial Statements, there have been no significant changes to our critical accounting policies for the three and nine months ended September 30, 2019, 2020, compared to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 20182019 Annual Report and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019.
RESULTS OF OPERATIONS
THREEMONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THREEMONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2018
Revenues
Royalties
Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the three month periodmonths ended September 30, 20192020 were $9.4$9.3 million as compared to $8.2$9.4 million in the corresponding 2018 period, an increase2019 period.
License Revenue
Under a development and license agreement with Endo, the Company received a milestone payment of $1.2$2.0 million or 15%. The increase in total revenues for the quarterly period was primarily due to royalties associated with higher net sales of XIAFLEX® in PD and DC.
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 partythird-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 periodsmonths ended September 30, 20192020 and 2018,2019, R&D expenses were approximately$179,000 and $143,000, and $162,000, respectively, and in each case, are primarily related to the development work associated with our clinical, preclinical and other R&D programs. The decrease in the 2019 period as compared to the 2018 period was mainly due to reduced cost associated with other R&D programs and lower clinical costs.
Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | |||||||
Program | ||||||||
Uterine Fibroids | $ | 42,819 | $ | 82,716 | ||||
Pre-clinical/other research projects | 100,366 | 79,909 | ||||||
Total R&D expenses | $ | 143,185 | $ | 162,625 |
The successful development of drugs is inherently difficult and uncertain. Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if the Company is able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX® and Xiapex®, to continue to commercialize these drug candidates.
There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:
● | the nature, timing, and estimated costs of the efforts necessary to complete the development of our drug candidate projects; |
● | the anticipated completion dates for such drug candidate projects; |
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● | the scope, rate of progress, and cost of such clinical trials that we may commence in the future with respect to such drug candidate projects; |
● | the scope, rate of progress of preclinical studies, and other R&D activities related to such drug candidate projects; |
● | clinical trial results for such drug candidate projects; |
● | the cost of filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights relating to such drug candidate projects; |
● | the terms and timing of any strategic alliance, licensing, and other arrangements that we have or may establish in the future relating to our drug candidate projects; |
● | costs relating to future product opportunities; |
● | the cost and timing of regulatory approvals with respect to such drug candidate projects; and |
● | the cost of establishing clinical supplies for our drug candidate projects. |
We believe that our current resources and liquidity are sufficient to advance our current clinical and R&D projects.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs for personnel, third-party royalty fees, amortization of deferred royalty buy-down, consultant costs, legal fees, investor relations, professional fees, and overhead costs. General and administrative expenses for the three months ended September 30, 2020 and 2019 were $3.1 million and 2018 were $2.0 million, and $2.2 million, respectively. The decreaseIncreases in general and administrative expenses waswere mainly due to lower third party royaltiesan increase in headcount and associated with XIAFLEX® and the amortization associated with deferred royalty buy-down related to PD, partially offset bycompensation costs, legal fees, personnel expenses and stock compensation expense.
Other Income
Other income for the three months ended September 30, 20192020 was approximately $505,000$265,000 compared to $360,000$505,000 in the corresponding 20182019 period. Other income consists of interest earned on our investments.
Provision for Income Taxes
Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business R&D activities, vesting of nonqualified options,including stock-based compensation, revenue recognized and other items.leases. For the three month periodmonths ended September 30, 2019,2020, our provision for income taxes was $1.6 million. Our net deferred tax liabilities as of September 30, 2019 was $0.6 million. The estimated effective tax rate for the three months ended September 30, 2019 was approximately 20% of pre-tax income reported in the period, calculated based on the estimated annual effective tax rate anticipated for the year ending December 31, 2019 plus the effects of certain discrete items occurring in 2019 including the impact of U.S. Treasury guidance issued in 2019 on the application of certain provisions in the Tax Cuts and Jobs Act of 2017 (“TCJA”) allowing the Company to refine its calculations and current period stock option exercises.
Net Income
For the three months ended September 30, 2019,2020, we recorded net income of $5.4 million, or $0.73 per basic common share and $0.73 per diluted common share, compared to a net income of $6.3 million, or $0.86 per basic common share and $0.85 per diluted common share, compared to a net income of $5.0 million, or $0.69 per basic common share and per diluted common share, for the same period in 2018.2019.
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NINE MONTHS ENDED SEPTEMBER 30, 20192020 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2018
Revenues
Royalties
Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the nine month periodmonths ended September 30, 20192020 were $26.4$22.8 million as compared to $23.1$26.4 million in the corresponding 20182019 period, an increaserepresenting a decrease of $3.3$3.6 million, or 14%. The increasedecrease in total revenues for the quarterly period was primarily due to royalties associated with higherlower net sales due to the impact of COVID-19, including, but not limited to the effect of significant office closures and less office visits for physician-administered products. Royalties also decreased due to Endo’s termination of third-party partnership agreements that provided for the sale of XIAFLEX® and and Xiapex® in PDmarkets outside of the United States.
License Revenue
Under a development and DC, and higher mark-up on costlicense agreement with Endo, the Company received a milestone payment of goods sold revenue.
Research and Development Activities and Expenses
R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expenses, facility costs and overhead. R&D expenses also consist of third-party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. For the nine month periodsmonths ended September 30, 20192020 and 2018,2019, R&D expenses were approximately $0.5 million$462,000 and $0.6 million,$454,000, respectively, and in each case, are primarily related to the development work associated with our clinical, preclinical and other R&D programs.
The decreasesuccessful development of drugs is inherently difficult and uncertain. Our business requires investments in the 2019 period as compared to the 2018 period was mainly due to reduced cost associated with other R&D programs 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 abilityand lowerthe ability of our partners, particularly with respect to XIAFLEX® to continue to commercialize these drug candidates.
There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:
● | the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects; |
● | the anticipated completion dates for our drug candidate projects; |
● | the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drug candidate projects; |
● | the scope, rate of progress of our preclinical studies and other R&D activities related to our drug candidate projects; |
● | clinical trial results for our drug candidate projects; |
● | the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidate projects; |
● | the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drug candidate projects; |
● | the cost and timing of regulatory approvals with respect to our drug candidate projects; and |
● | the cost of establishing clinical supplies for our drug candidate projects. |
We believe that our current resources and liquidity are sufficient to advance our current clinical costs.and R&D projects.
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Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | |||||||
Program | ||||||||
Uterine Fibroids | $ | 169,231 | $ | 210,250 | ||||
Pre-clinical/other research projects | 284,811 | 359,398 | ||||||
Total R&D expenses | $ | 454,042 | $ | 569,648 |
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs for personnel, third-party royalty fees, consultant costs, legal fees, investor relations, professional fees and overhead costs. General and administrative expenses for the nine months ended September 30, 2020 and 2019 and 2018 were $6.6$10.2 million and $6.3$6.6 million, respectively. The increase in general and administrative expenses was mainly due to increased legal fees, personnel expenses,an increase in headcount and associated compensation costs, separation costs, stock compensation expense and professional fees, partially offset by lowerdirectors’ fees.
Milestone Fee
Under a third-party licensing and royalty agreement, the Company incurred a milestone fee of $1.5 million in the third party royaltiesquarter 2020 upon the FDA approval of Qwo™ (collagenase clostridium histolyticum-aaes) for the treatment of cellulite.
Restructuring Charges
On January 7, 2020, we announced that we would be relocating our corporate headquarters from Lynbrook, New York to Wilmington, Delaware as of April 7, 2020. On January 6, 2020, in connection with the relocation, we notified five employees and one consultant that their services would no longer be required effective March 31, 2020. On March 23, 2020, the five employees and one consultant were given separation agreements detailing the termination benefits to which they would be entitled. As a result, we recorded a one-time restructuring charge of $1.1 million in the first quarter of fiscal 2020. The restructuring charge is primarily associated with XIAFLEX®$0.9 million of one-time termination benefits being paid out in cash over the six months beginning April 2020 and the amortization$0.2 million of one-time non-cash termination expenses associated with the deferred royalty buy-down related to PD.
Other Income
Other income for the nine months ended September 30, 20192020 was approximately $1.5$1.1 million compared to $0.9$1.5 million in the corresponding 20182019 period. Other income consists of interest earned on our investments and, in the 2018 period, limited product sales of collagenase for laboratory use.
Provision for Income Taxes
Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business including stock-based compensation, revenue and leases. For the nine monthmonths ended September 30, 2020, the provision for income taxes was $2.6 million. The estimated effective tax rate for the nine months ended September 30, 2020 was 21% of pre-tax income reported in the period, calculated based on the estimated annual effective tax rate anticipated for the year ending December 31, 2020 plus the effects of certain discrete items occurring in 2020. For the nine months ended September 30, 2019, our provision for income taxes was $3.7 million. Our net deferred tax liabilities as of September 30, 2019 was $0.6 million. The estimated effective tax rate for the nine months ended September 30, 2019 was approximately 18% of pre-tax income reported in the period, calculated based on the estimated annual effective tax rate anticipated for the year ending December 31, 2019 plus the effects of certain discrete items occurring in 2019 including the impact of U.S. Treasury guidance issued in 2019 on the application of certain provisions in the TCJA allowing the Company to refine its calculations and current period stock option exercises.
Net Income
For the nine months ended September 30, 2019,2020, we recorded net income of $10.0 million, or $1.36 per basic common share and $1.36 per diluted common share, compared to a net income of $17.1 million, or $2.34 per basic common share and $2.33 per diluted common share, compared to a net income of $13.9 million, or $1.92 per basic common share and $1.89 per diluted common share, for the same period in 2018.
Liquidity and Capital Resources
To date, we have financed our operations primarily through product sales, licensing revenues and royalties under agreements with third parties licensing revenues, limited product sales, and sales of our common stock.
At September 30, 20192020 and December 31, 2018,2019, we had cash and cash equivalents and investments in the aggregate of approximately $98.4$121.0 million and $82.0$105.8 million, respectively. We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for at least the next 12 months from the date of this filing.
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On June 26, 2020, we filed a shelf registration statement on Form S-3, which we subsequently amended on July 15, 2020, relating to the sale, from time to time, in one or more transactions, of up to $200,000,000 of common stock, preferred stock, debt securities, warrants, and units (the “Shelf Registration Statement”). The Shelf Registration Statement was declared effective on July 17, 2020. As of September 30, 2020, $200,000,000 remained available for issuance under the Shelf Registration Statement. As set forth in the Shelf Registration Statement, the Company expects to use a substantial portion of the net proceeds from the sale of securities under the Shelf Registration Statement for general corporate purposes; the Company, however, has not allocated the net proceeds for any specific purposes.
On August 31, 2020, the Company entered into an At-The-Market Equity Sales Agreement (the “ATM Agreement”) with Stifel, Nicolaus & Company, Incorporated (“Stifel”) and Oppenheimer & Co. Inc. (“Oppenheimer” and, together with Stifel, the “Agents”) pursuant to which the Company may issue and sell, from time to time, at its option, shares of its common stock, $0.001 par value per share, having an aggregate offering price of up to $75,000,000 (the “ATM Shares”) through the Agents, as its sales agents.
Subject to the terms and conditions of the ATM Agreement, the Agents will use their commercially reasonable efforts to sell the ATM Shares from time to time, based upon the Company’s instructions, by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act. The Company has agreed to pay the Agents’ commissions for their services in acting as the Company’s agents in the sale of the ATM Shares in the amount of 3.0% of gross proceeds from the sale of the ATM Shares pursuant to the ATM Agreement. The Company also has agreed to provide the Agents with customary indemnification and contribution rights. The offering of the ATM Shares will terminate upon the earliest of (a) the sale of the maximum number or amount of the ATM Shares permitted to be sold under the ATM Agreement and (b) the termination of the ATM Agreement by the parties thereto.
During the third quarter, the Company did not make any sales under the ATM Agreement.
Net cash provided by operating activities for the nine months ended September 30, 20192020 was $14.5$16.4 million as compared to $12.3$14.5 million in the 20182019 period. Net cash provided by operating activities in the 2020 period was primarily attributable to net income, a reduction in accounts receivable of $5.5 million, and non-cash items used to reconcile net income to net cash provided by operating activities of $1.8 million. Net cash provided by operating activities in the 2019 period was primarily attributable to our net income partially offset by a reduction in accounts payable, accrued expenses and income taxes payable of $1.9 million and an increase in prepaid expenses and other current assetsaccounts receivable of $0.2$1.3 million. Non-cash items used to reconcile net income to net cash provided by operating activities of $0.9 million included amortization of patent costs, bond premiums and discounts, stock-based compensation expense and deferred tax expense. Net cash provided by operating activities in the 2018 period was primarily attributable to our net income partially offset by an increase in accounts receivable of $2.2 million due to an increase in XIAFLEX® net sales and accrued tax liability of $0.8 million. Non-cash items included amortization, stock-based compensation expense, and deferred taxes which was reduced by adjustments to reconcile net income to net cash provided by operating activities of $2.2 million.
Net cash used in investing activities for the nine months ended September 30, 20192020 was $16.7$18.2 million as compared to $6.2net cash used in investing activities of $16.7 million for the corresponding 20182019 period. The net cash used in investing activities in the 2020 period primarily reflects the investment of $105.4 million and the maturing of $87.3 million in marketable securities. The net cash used in investing activities in the 2019 period reflects the investment of $93.4 million and the maturing of $76.6 million in marketable securities. The net
Net cash used in investing activities in the 2018 period reflects the investment of $64.6 million and the maturing of $58.4 million in marketable securities.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.