UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
  Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2017
OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 ACT OF 1934
 For the transition period from __________________to __________________

 001-34236
 (Commission file number)

BIOSPECIFICS TECHNOLOGIES CORP.
 (Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
11-3054851
(State or Other Jurisdiction
 
(I.R.S. Employer
of Incorporation or Organization)
 
Identification No.)
 
35 Wilbur Street Lynbrook, NY 11563
 (Address of Principal Executive Offices) (Zip Code)

516.593.7000
 (Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐ No ☒

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

Class of Stock
Outstanding November 8, 2017
Common Stock ($.001 par value)
7,189,233
 
BIOSPECIFICS TECHNOLOGIES CORP.
 
TABLE OF CONTENTS
 
 
Page
 
PART I – FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements
 
 
4
 
5
 
6
 
7
ITEM 2.
17
ITEM 3.
25
ITEM 4.
26

 
PART II – OTHER INFORMATION
 
ITEM 1.
26
ITEM 1A.
26
ITEM 2.
26
ITEM 6.
28
 
29
 
2
Introductory Comments – Terminology

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

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

This Report includes “forward-looking statements” within the meaning of, and made pursuant to the safe harbor provisions of, the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, expected revenue growth, and the assumptions underlying or relating to such statements, are “forward-looking statements.” The forward-looking statements in this Report include statements concerning, among other things, the continued commercialization of XIAFLEX to treat Dupuytren’s contracture and Peyronie’s disease; the continued marketing and commercialization of XIAFLEX to treat Dupuytren’s contracture and Peyronie’s disease in Europe, Eurasia, Japan, Canada and Australia; Endo’s ability to obtain required regulatory approvals; Endo’s ability to manufacture XIAFLEX at an acceptable cost, in a timely manner and with appropriate quality; successful development of XIAFLEX for additional indications;   the ability to successfully develop, market and commercialize our drug candidates; the funding of research and development at medical institutions under agreements that are generally cancellable; the future receipt of payments from Endo, including milestone and royalty payments, in connection with the License Agreement; the recognition of the $8.25 million payment from Endo in connection with the First Amendment;   the plans for the repurchase of stock and reacquired stock; the suspension or discontinuation of the stock repurchase plan; the risk of doubtful accounts and how we provide for estimates of uncollectable accounts; the adoption of new accounting pronouncements and their impact; which accounting policies we consider to be critical to the estimates and judgments used to prepare the unaudited condensed consolidated financial statements; the effect of changes in interest rates on the Company’s results of operations, financial position and cash flow; changes in internal controls; the ability of internal controls and procedures to achieve desired control objectives; the existence of significant uncertain tax positions and provision for income taxes; the sufficiency of the Company’s available funds and cash flow from operations to meet our operational cash needs; whether the carrying amounts of the Company’s financial instruments approximate fair value due to the nature of the instruments; the changes in the Company’s exposure to market risk; the fair value of the Company’s stock option awards; whether the Company’s bank account balances will exceed insured limits; whether the Company is exposed to any significant credit risk on our cash; our milestone achievements and payments; whether we will continue to make payments to buy down our future royalty obligations; whether we will experience uneven payment flows due to the variance in financial terms in contracts with third parties to perform clinical trial activities and ongoing development of potential drugs; estimates concerning our development period; our interpretation of the definition of milestone; whether the Company will choose to cancel the lease prior to the expiration of the term; whether and when we will hear from Endo the results of their ongoing commercial review regarding the XIAFLEX pipeline; the timing of Endo’s determination of clinical trial timelines for additional indications; and the nature of our accounts receivable balance. In some cases, these statements can be identified by forward-looking words such as “believe,” “expect,” “anticipate,” “estimate,” “likely,” “may,” “will,” “can,” and “could,” the negative or plural of these words, and other similar expressions. These forward-looking statements are predictions based on our current expectations and our projections about future events and various assumptions.  There can be no assurance that we will realize our expectations or that our beliefs will prove correct. There are a number of important factors that could cause BioSpecifics’ actual results to differ materially from those indicated by such forward-looking statements, including the timing of regulatory filings and action; the ability of Endo and its partners, Asahi Kasei Pharma Corporation, Actelion Ltd. and Swedish Orphan Biovitrum AB, to achieve their objectives for XIAFLEX in their applicable territories; the market for XIAFLEX in, and timing, initiation and outcome of clinical trials for, additional indications that will determine the amount of milestone, royalty, mark-up on cost of goods sold, license and sublicense income BioSpecifics may receive; the potential of XIAFLEX to be used in additional indications; Endo modifying its objectives or allocating resources other than to XIAFLEX ; and other risk factors identified in BioSpecifics’ Quarterly Reports on Form 10Q for the periods ended March 31, 2017 and June 30, 2017 and our Annual Report on Form 10-K for the year ended December 31, 2016 and its Current Reports on Form 8-K filed with the Securities and Exchange Commission. All forward-looking statements included in this Report are made as of the date hereof, are expressly qualified in their entirety by the cautionary statements included in this Report and, except as may be required by law, we assume no obligation to update these forward-looking statements.
 
3
PART I – FINANCIAL INFORMATION

Item 1:
Condensed Consolidated Financial Statements

BioSpecifics Technologies Corp.
Condensed Consolidated Balance Sheets

     
September 30,
2017
     
December 31,
2016
  
   
(unaudited)
   
(audited)
 
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
6,422,358
   
$
4,763,364
 
Short term investments
   
48,166,583
     
44,254,862
 
Accounts receivable
   
4,681,885
     
3,810,792
 
Income tax receivable
   
56,930
     
494,711
 
Deferred royalty buy-down
   
1,566,078
     
1,451,893
 
Prepaid expenses and other current assets
   
673,064
     
624,345
 
Total current assets
   
61,566,898
     
55,399,967
 
                 
Long-term investments
   
6,717,196
     
3,771,380
 
Deferred royalty buy-down – long term, net
   
757,021
     
1,976,456
 
Deferred tax assets, net
   
2,992,001
     
3,290,122
 
Patent costs, net
   
227,868
     
258,355
 
                 
Total assets
 
$
72,260,984
   
$
64,696,280
 
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable and accrued expenses
 
$
785,275
   
$
738,649
 
Deferred revenue
   
1,134,031
     
1,179,848
 
Accrued liabilities of discontinued operations
   
78,138
     
78,138
 
Total current liabilities
   
1,997,444
     
1,996,635
 
                 
Long-term deferred revenue
   
5,555,743
     
6,417,702
 
                 
Stockholders’ equity:
               
Series A Preferred stock, $.50 par value, 700,000 shares authorized; none outstanding
   
-
     
-
 
Common stock, $.001 par value; 10,000,000 shares authorized; 7,575,167 and 7,555,167 shares issued, 7,164,233 and 7,156,281 shares outstanding as of September 30, 2017 and December 31, 2016, respectively
   
7,575
     
7,555
 
Additional paid-in capital
   
33,303,898
     
32,945,240
 
Retained earnings
   
39,294,524
     
30,610,849
 
Treasury stock, 410,934 and 398,886 shares at cost as of September 30, 2017 and December 31, 2016, respectively
   
(7,898,200
)
   
(7,281,701
)
Total stockholders’ equity
   
64,707,797
     
56,281,943
 
                 
Total liabilities and stockholders’ equity
 
$
72,260,984
   
$
64,696,280
 

See accompanying notes to condensed consolidated financial statements.
 
BioSpecifics Technologies Corp.
Condensed Consolidated Income Statements
(unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Revenues:
                       
Royalties
 
$
6,511,700
   
$
6,119,815
   
$
20,729,017
   
$
18,843,273
 
Licensing revenues
   
4,408
     
762,345
     
13,226
     
787,034
 
Total Revenues
   
6,516,108
     
6,882,160
     
20,742,243
     
19,630,307
 
                                 
Costs and expenses:
                               
Research and development
   
356,847
     
312,907
     
949,359
     
1,005,884
 
General and administrative
   
2,175,501
     
1,843,368
     
6,916,501
     
5,909,785
 
Total Cost and Expenses
   
2,532,348
     
2,156,275
     
7,865,860
     
6,915,669
 
                                 
Operating income
   
3,983,760
     
4,725,885
     
12,876,383
     
12,714,638
 
                                 
Other income:
                               
Interest income
   
193,462
     
80,674
     
436,210
     
200,704
 
Other income
   
14,667
     
6,254
     
40,651
     
37,448
 
     
208,129
     
86,928
     
476,861
     
238,152
 
                                 
Income before income tax expense
   
4,191,889
     
4,812,813
     
13,353,244
     
12,952,790
 
Provision for income tax expense
   
(1,477,057
)
   
(1,759,220
)
   
(4,669,569
)
   
(4,497,359
)
                                 
Net income
 
$
2,714,832
   
$
3,053,593
   
$
8,683,675
   
$
8,455,431
 
                                 
                                 
Basic net income per share
 
$
0.38
   
$
0.43
   
$
1.21
   
$
1.20
 
Diluted net income per share
 
$
0.37
   
$
0.42
   
$
1.19
   
$
1.16
 
                                 
Shares used in computation of basic net income per share
   
7,164,934
     
7,062,543
     
7,166,470
     
7,031,068
 
Shares used in computation of diluted net income per share
   
7,314,609
     
7,280,375
     
7,325,602
     
7,277,780
 
 
See accompanying notes to condensed consolidated financial statements.
 

BioSpecifics Technologies Corp.
Condensed Consolidated Statements of Cash Flows
(unaudited)

   
Nine Months Ended
September 30,
 
Cash flows from operating activities:
 
2017
   
2016
 
Net income
 
$
8,683,675
   
$
8,455,431
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization
   
1,632,823
     
1,215,814
 
Stock-based compensation expense
   
100,428
     
100,428
 
Deferred tax expense
   
298,121
     
(2,747,864
)
Changes in operating assets and liabilities:
               
Accounts receivable
   
(871,093
)
   
(1,298,832
)
Income tax receivable
   
437,781
     
916,843
 
Prepaid expenses and other current assets
   
(48,719
)
   
(170,591
)
Patent costs
   
-
     
(23,341
)
Accounts payable and accrued expenses
   
46,626
     
380,858
 
Income taxes payable
   
-
     
279,333
 
Deferred revenue
   
(907,776
)
   
7,667,163
 
Net cash provided by operating activities
   
9,371,866
     
14,775,242
 
                 
Cash flows from investing activities:
               
Maturity of marketable investments
   
43,579,082
     
32,548,040
 
Purchases of marketable investments
   
(50,933,705
)
   
(47,568,734
)
Net cash used in investing activities
   
(7,354,623
)
   
(15,020,694
)
                 
Cash flows from financing activities:
               
Proceeds from stock option exercises
   
258,250
     
529,300
 
Payments for repurchase of common stock
   
(616,499
)
   
(898,025
)
Excess tax benefits from share-based payment arrangements
   
-
     
224,047
 
Net cash used in financing activities
   
(358,249
)
   
(144,678
)
                 
Increase (decrease) in cash and cash equivalents
   
1,658,994
     
(390,130
)
Cash and cash equivalents at beginning of year
   
4,763,364
     
5,137,875
 
Cash and cash equivalents at end of period
 
$
6,422,358
   
$
4,747,745
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
   
-
     
-
 
Taxes
 
$
4,410,000
   
$
5,825,000
 

See accompanying notes to condensed consolidated financial statements.
 
BIOSPECIFICS TECHNOLOGIES CORP.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017
(Unaudited)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

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

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

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

Endo is currently selling XIAFLEX in the U.S. for the treatment of Dupuytren ’ s contracture and Peyronie ’ s disease and has an agreement with Swedish Orphan Biovitrum AB ( “ Sobi ” ), pursuant to which Sobi has marketing rights for Xiapex for Dupuytren ’ s contracture and Peyronie ’ s disease in Europe and certain Eurasian countries. In addition, Endo has an agreement with Asahi Kasei Pharma Corporation ( “ Asahi ” ) pursuant to which Asahi has the right to commercialize XIAFLEX for the treatment of Dupuytren ’ s contracture and Peyronie ’ s disease in Japan. Endo is currently distributing XIAFLEX in Canada through Paladin Labs Inc, an operating company of Endo . In December 2016, Endo entered into a new out-licensing agreement with Actelion, pursuant to which Actelion obtained marketing and commercial rights for XIAFLEX in Australia and New Zealand.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

Principles of Consolidation

The condensed   consolidated financial statements include the accounts of the Company and its subsidiary, Advance Biofactures Corp. All intercompany balances and transactions have been eliminated.

Critical Accounting Policies, Estimates and Assumptions

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

Cash, Cash Equivalents and Investments

Cash equivalents include only securities having a maturity of three months or less at the time of purchase.   Investments are stated on an amortized cost basis. The Company limits its credit risk associated with cash, cash equivalents and investments by placing its investments with banks it believes are highly creditworthy and with highly rated money market funds, certificates of deposit and corporate and municipal bonds. All investments are classified as held to maturity. As of September 30, 2017 and December 31, 2016, the aggregate fair value of these cash, cash equivalents and investments was $61.3 million and $52.8 million, respectively.

Fair Value Measurements

Management believes that the carrying amounts of the Company’s financial instruments, including cash, cash equivalents, held to maturity investments, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of those instruments. As of September 30, 2017 and December 31, 2016, there were no recorded unrealized gains or losses on our investments as they are held to maturity. As of September 30, 2017 , amortized cost basis of the investments approximated their fair value.   At September 30, 2017 and December 31, 2016, the amortized premium included in interest income was $497,000 and $610,000, respectively.

The following table presents the Company’s schedule of maturities at September 30, 2017 and December 31, 2016:
 
 
   
Maturities as of
September 30, 2017
   
Maturities as of
December 31, 2016
 
   
1 Year or
Less
   
Greater than 1
Year
   
1 Year or
Less
   
Greater than
1 Year
 
Municipal bonds
 
$
1,460,078
   
$
-
   
$
6,967,954
   
$
586,074
 
Corporate bonds
   
43,880,944
     
6,472,487
     
30,418,120
     
2,936,287
 
Certificates of deposit
   
2,825,561
     
244,709
     
6,868,788
     
249,019
 
Total
 
$
48,166,583
   
$
6,717,196
   
$
44,254,862
   
$
3,771,380
 
 
The authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.

As of September 30, 2017, 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, 2017 and December 31, 2016:
 
September 30, 2017
Type of Instrument
 
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
                                   
Cash equivalents
Institutional Money Market
 
$
3,565,530
   
$
3,565,530
   
$
-
   
$
-
 
                                   
Investments
Municipal Bonds
   
1,460,078
     
-
     
1,460,078
     
-
 
                                   
Investments
Corporate Bonds
   
50,353,431
     
-
     
50,353,431
     
-
 
                                   
Investments
Certificates of Deposit
   
3,070,270
     
3,070,270
     
-
     
-
 
 
December 31, 2016
Type of Instrument
 
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
                           
Cash equivalents
Institutional Money Market
 
$
2,290,331
   
$
2,290,331
   
$
-
   
$
-
 
                                   
Investments
Municipal Bonds
   
7,554,028
     
-
     
7,554,028
     
-
 
                                   
Investments
Corporate Bonds
   
33,354,407
     
-
     
33,354,407
     
-
 
                                   
Investments
Certificates of Deposit
   
7,117,807
     
7,117,807
     
-
     
-
 

Concentration of Credit Risk and Major Customers

The Company maintains bank account balances, which, at times, may exceed insured limits. The Company has not experienced any losses with these accounts and believes that it is not exposed to any significant credit risk on cash.

The Company maintains investments in FDIC insured certificates of deposits, municipal bonds and corporate bonds.

The Company is currently dependent on one customer, Endo, who generates almost all its revenues. For the three and nine months ended September 30, 2017, licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately $6.5 million and $20.7 million, respectively, and for the three and nine months ended September 30, 2016, the licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately $6.9 million and $19.6 million, respectively.

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

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

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

Royalty / Mark-Up on Cost of Goods Sold

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

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

Pursuant to the First Amendment with Endo, in exchange for a $8.25 million lump sum payment, we will not receive future additional mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S.; provided, however, that Endo will still be required to pay a mark-up on cost of goods sold for sales made in the “Endo Territory,” which includes sales made in the U.S. and sales made in any other country where Endo sells the product directly or through affiliated sublicensees. We received this $8.25 million lump sum payment in February 2016. We classified this payment as deferred revenue in our balance sheet and began recognizing this income over time in the second quarter of 2016 based on sales by non-affiliated sublicensees of Endo outside of the U.S. according to our revenue recognition policy. We recognized approximately $266,000 and $895,000 for the three and nine months ended September 30, 2017, respectively. We recognized approximately $274,000 and $546,000 for the three and nine months ended September 30, 2016, respectively.

Licensing Revenue

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

Upfront License and Sublicensing Fees

We generally recognize revenue from upfront licensing and sublicensing fees when the license or sublicense agreement is signed, we have completed the earnings process and we have no ongoing performance obligation with respect to the arrangement. Nonrefundable upfront technology license fees for product candidates for which we are providing continuing services related to product development are deferred and recognized as revenue over the development period. We recognized deferred revenue of $4,408 and $13,226 for the three and nine months ended September 30, 2017, respectively, and $12,345 and $37,034 for the three and nine months ended September 30, 2016, respectively.

Milestones

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

The timing and amount of revenue that we recognize from licenses of technology, either from upfront fees or milestones where we are providing continuing services related to product development, are primarily dependent upon our estimates of the development period. We define the development period as the point from which research activities commence up to regulatory approval of either our or our partners’ submission, assuming no further research is necessary. As product candidates move through the development process, it is necessary to revise these estimates to consider changes to the product development cycle, such as changes in the clinical development plan, regulatory requirements, or various other factors, many of which may be outside of our control. Should the U.S. Food and Drug Administration or other regulatory agencies require additional data or information, we would adjust our development period estimates accordingly. The impact on revenue of changes in our estimates and the timing thereof is recognized prospectively over the remaining estimated product development period. We did not recognize any milestone revenue in the three and nine month periods ended September 30, 2017 and 2016.
 
Treasury Stock
 
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. For the nine months ended September 30, 2017 , we repurchased 12,048 shares at an average price of $51.17 as compared to the repurchase of 24,020 shares at an average price of $37.39 in the corresponding 2016 period.
 
Receivables and Doubtful Accounts
 
Trade accounts receivable are stated at the amount the Company expects to collect. We may maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms.  Our accounts receivable balance is typically due from Endo, our one large specialty pharmaceutical customer.  Endo has historically paid timely and has been a financially stable organization.  Due to the nature of the accounts receivable balance, we believe the risk of doubtful accounts is minimal.  If the financial condition of our customer were to deteriorate, adversely affecting its ability to make payments, additional allowances would be required.  We may provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.   At September 30, 2017 and December 31, 2016 our accounts receivable balance was $4.7 million and $3.8 million, respectively, and was from one customer, Endo.

Deferred Revenue

Deferred revenue consists of the remaining $6.5 million related to the First Amendment with Endo of mark-up on cost of goods sold revenue for sales by non-affiliated sublicensees, approximately $44,000 related to nonrefundable upfront product license fees for product candidates for which we are providing continuing services related to product development and $100,000 related to a milestone payment withheld by Endo due to a foreign tax withholding which remains uncollected. Currently, the Company expects to recover the full amount. As of September 30, 2017 and December 31, 2016, deferred revenue was $6.7 million and $7.6 million, respectively.

Reimbursable Third-Party Patent Costs

We accrue patent costs that are reimbursable to Endo by us under the License Agreement. We capitalize certain patent costs related to patent prosecution and maintenance and expense others. As of September 30, 2017 and December 31, 2016, our net reimbursable third party patent expense was zero and $25,000, respectively.

Third-Party Royalties

We have entered into licensing and royalty agreements with third parties and agreed to pay certain royalties on net sales of products for specific indications. The royalty rates differ from agreement to agreement and, in certain cases, have been redacted with the permission of the SEC.  No assumptions should be made that any disclosed royalty rate payable to a particular third party is the same or similar with respect to any royalty rate payable to any other third parties.  We accrue third-party royalty expenses on net sales reported to us by Endo. Third-party royalty costs are generally expensed under general and administrative in the quarter that Endo provides the written reports and related information to us; that is, generally one quarter following the quarter in which the underlying sales by Endo occurred. For the three and nine month periods ended September 30, 2017, third-party royalty expenses were $0.4 million and $1.4 million, respectively. For the three and nine month periods ended September 30, 2016, third-party royalty expenses were $0.4 million and $1.2 million, respectively. Our third-party royalty expense under general and administrative expenses may increase if net sales by Endo and its partners for XIAFLEX and Xiapex increase and potential new indications for XIAFLEX and Xiapex are approved, marketed and sold.
 
Royalty Buy-Down

On March 31, 2012, we entered into an amendment to our existing agreement with Dr. Martin K. Gelbard, dated August 27, 2008, related to our future royalty obligations in connection with Peyronie’s disease. The amendment enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment of $1.5 million and five additional cash payments of $600,000, four of which have been paid as of September 30, 2017.  We are currently making the payments to buy down the future royalty obligations, which royalty obligations terminate five years after first commercial sale which occurred in January 2014. The Company amortizes long-term contracts with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. Dr. Gelbard’s agreement is amortized based on an income forecast method by estimating sales of XIAFLEX and Xiapex for Peyronie’s disease on an annual basis as measured by the proportion of the total estimated sales over the five year period. For the three and nine months ended September 30, 2017, we amortized approximately $0.4 million and $1.1 million related to this agreement, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017 and December 31, 2016, the remaining capitalized balances were approximately $2.3 million and $3.4 million, respectively. We perform an evaluation of the recoverability of the carrying value to determine if facts and circumstances indicate that the carrying value of the assets may be impaired and if any adjustment is warranted.  As of September 30, 2017, there was no indicator that an impairment existed.
 
Research and Development Expenses

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

Clinical Trial Expenses

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

Stock-Based Compensation

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

Under ASC 718, we estimate the fair value of our employee stock option awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of an award. When establishing an estimate of the expected term of an option award, we consider the vesting period for the award, our recent historical experience of employee stock option exercises (including forfeitures) and the expected volatility of our common stock.  As required under the accounting rules, we review our estimates at each grant date and, as a result, the valuation assumptions that we use to value employee stock-based awards granted in future periods may change. No stock options were granted during the nine months ended September 30, 2017 and 2016.
 
Further, ASC 718 requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line are estimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period.

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

Stock Option Activity

A summary of our stock option activity during the nine months ended September 30, 2017 is presented below:
 
   
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term
   
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2016
   
297,000
   
$
20.14
     
3.10
   
$
10,561,380
 
Grants
   
-
     
-
     
-
     
-
 
Exercised
   
(20,000
)
   
12.91
     
-
     
-
 
Forfeitures or expirations
   
-
     
-
     
-
     
-
 
Outstanding at September 30, 2017
   
277,000
   
$
20.66
     
2.49
   
$
7,162,770
 
Exercisable at September 30, 2017
   
242,000
   
$
18.90
     
2.20
   
$
6,683,370
 

During the nine months ended September 30, 2017 and 2016, the Company received $0.3 million and $0.5 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 $46.52 on September 30, 2017, which would have been received by the option holders had all option holders exercised their options as of that date. We have approximately $169,000 in unrecognized compensation cost related to stock options outstanding as of September 30, 2017, which we expect to recognize over the next 1.5 years.

Property and Equipment

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

Comprehensive Income

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

Provision for Income Taxes

Deferred tax assets and liabilities are recognized based on the expected future tax consequences, using current tax rates, of temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
 
We use the asset and liability method of accounting for income taxes, as set forth in Accounting Standards Codification 740-10-25-2. Under this method, deferred income taxes, when required, are provided on the basis of the difference between the financial reporting and income tax basis of assets and liabilities at the statutory rates enacted for future periods. In accordance with Accounting Standards Codification 740-10-45-25, Income Statement Classification of Interest and Penalties , we classify interest associated with income taxes under interest expense and tax penalties under other.

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

Commitments and Contingencies

On November 6, 2017, the Company entered into an agreement with the Landlord to extend the term of the lease to the Headquarters for an additional one year period (the “Extended Lease Agreement”). The one year extension will end on November 30, 2018. Pursuant to the Extended Lease Agreement, the base rent is $11,165 per month and the Company may cancel the lease with three months’ prior written notice to the Landlord at any time during the term. The Extended Lease Agreement was filed with the SEC as Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q on November 9, 2017.

Adopted Accounting Standard

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

New Accounting Pronouncements

FASB, issued several accounting standards updates establishing ASC Topic 606, “Revenue from Contracts with Customers”.  ASC 606 requires retrospective implementation, and replaces most industry-specific revenue recognition guidance in U.S. GAAP with a new principles-based, five-step revenue recognition model. It also requires new disclosures, such as qualitative and quantitative information about revenue recognized from contracts with customers (including disaggregated revenue, contract balances, and performance obligations) and significant judgments and changes in judgments.  ASC 606 provides specific guidance for determining whether to recognize licensing revenue at a point in time or over time, and application of this guidance may result in a different pattern of recognition than under current us GAAP.  We plan to adopt this guidance effective January 1, 2018, as required. We understand that the adoption of ASC 606, and particularly the standards enhanced use of management estimates, has the potential to materially impact our revenue recognition process, opening balances and related disclosures. We are in the process of completing the analysis of ASC 606’s impact on our royalty and licensing revenue and expect to complete this process in the fourth quarter of 2017.

In January 2016, the FASB issued new guidance on recognition and measurement of financial assets and financial liabilities. The new guidance will impact the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for under the equity method of accounting) will generally be measured at fair value with changes in fair value recognized through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income (loss) for equity securities with readily determinable fair values). In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt securities. In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings. This guidance will be effective for us on January 1, 2018. We are currently evaluating the expected impact that the standard could have on our consolidated financial statements and related disclosure but we do not currently have any available-for-sale equity investments.
 
In February 2016, FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers . The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the expected impact that the standard could have on our consolidated financial statements and related disclosures.

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

3. NET INCOME PER SHARE

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

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Stock options
   
20,000
     
20,000
     
20,000
     
20,000
 

For the three and nine months ended September 30, 2017 and 2016, the Company had 20,000 options, which have an exercise price of $29.21, and will vest upon the achievement of certain performance criteria, which have not yet been met.  These options expire on December 2, 2019.  As of October 25, 2017, these 20,000 options have been cancelled due to a change in status of a certain consultant.
 
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

     
September 30,
2017
     
December 31,
2016
  
Trade accounts payable
 
$
218,020
   
$
505,098
 
Accrued legal and other professional fees
   
233,240
     
51,000
 
Accrued payroll and related costs
   
244,045
     
182,551
 
Other accruals
   
89,970
     
-
 
                 
Total
 
$
785,275
   
$
738,649
 

5. PATENT COSTS

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

For the nine months ended September 30, 2017, we did not increase our capitalized patent costs based on reports provided to us by Endo. Patent costs may be creditable against future royalty revenues. For each period presented below, net patent costs consisted of:

     
September 30,
2017
     
December 31,
2016
  
Patents
 
$
720,601
   
$
720,601
 
Accumulated amortization
   
(492,733
)
   
(462,246
)
   
$
227,868
   
$
258,355
 

The amortization expense for patents for the three and nine months ended September 30, 2017 was approximately $10,200 and $30,500, respectively and for the three and nine months ended September 30, 2016 was approximately $10,300 and $29,600, respectively.  The estimated aggregate amortization expense for the remaining three months of 2017 and each of the years below is approximately as follows:

October 1, 2017 - December 31, 2017
 
$
10,200
 
2018
   
40,600
 
2019
   
40,600
 
2020
   
28,600
 
2021
   
16,600
 
Thereafter
   
91,300
 

6. PROVISION FOR INCOME TAXES
 
In determining our provision for income taxes, we consider all available information, including operating results, ongoing tax planning, and forecasts of future taxable income.   The significant components of the Company’s deferred tax assets consist of stock-based compensation and deferred revenues. For the three and nine months ended September 30, 2017, the provision for income taxes was $1.5 million and $4.7 million, respectively. As of September 30, 2017 and December 31, 2016, our remaining deferred tax assets were approximately $3.0 million and $3.3 million, respectively.
 
For the three and nine months ended September 30, 2016, the provision for income taxes was $1.8 million and $4.5 million, respectively.
 
As of September 30, 2017, the Company believes that there are no significant uncertain tax positions and no amounts have been recorded for interest and penalties.
 
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

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

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

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

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

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

Endo is currently selling XIAFLEX in the U.S. for the treatment of Dupuytren ’ s contracture and Peyronie ’ s disease and has an agreement with Swedish Orphan Biovitrum AB ( “ Sobi ” ), pursuant to which Sobi has marketing rights for Xiapex for Dupuytren ’ s contracture and Peyronie ’ s disease in Europe and certain Eurasian countries. In addition, Endo has an agreement with Asahi Kasei Pharma Corporation ( “ Asahi ” ) pursuant to which Asahi has the right to commercialize XIAFLEX for the treatment of Dupuytren ’ s contracture and Peyronie ’ s disease in Japan. Endo is currently distributing XIAFLEX in Canada through Paladin Labs Inc, an operating company of Endo . In December 2016, Endo entered into a new out-licensing agreement with Actelion, pursuant to which Actelion obtained marketing and commercial rights for XIAFLEX in Australia and New Zealand.

Operational Highlights

Our Phase 1 clinical trial of XIAFLEX for the treatment of uterine fibroids is ongoing and we plan to announce the results in 2018. The study, being conducted at the Department of Gynecology & Obstetrics at Johns Hopkins University, is designed to enroll 15 female subjects treated prior to hysterectomy. The primary endpoint of the study will assess the safety and tolerability of a single injection of XIAFLEX directly into the uterine fibroids under transvaginal ultrasound guidance. The secondary endpoints will assess symptoms of pain and bleeding, quality of life throughout the study, shrinkage of XIAFLEX treated fibroids in size, increased rates of apoptosis in treated fibroids and a decrease in the collagen content of the treated fibroids.
 
Outlook

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

Significant Risks

We are dependent to a significant extent on third parties, and our principal licensee, Endo, may not be able to continue successfully commercializing XIAFLEX for Dupuytren’s contracture and Peyronie’s disease, successfully develop 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 FDIC insured certificates of deposits with several banks, municipal bonds and corporate bonds.

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

Critical Accounting Policies, Estimates and Assumptions

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

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

We enter into product development licenses and collaboration agreements that may contain multiple elements, such as upfront license and sublicense fees, milestones related to the achievement of particular stages in product development and royalties. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple-element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if deliverables should be treated as separate units, how the aggregate contract value should be allocated among the deliverable elements and when to recognize revenue for each element.
 
We recognize revenue for delivered elements only when the fair values of undelivered elements are known, when the associated earnings process is complete and, to the extent the milestone amount relates to our performance obligation, when our licensee confirms that we have met the requirements under the terms of the agreement, and when payment is reasonably assured. Changes in the allocation of the contract value between various deliverable elements might impact the timing of revenue recognition, but in any event, would not change the total revenue recognized on the contract. For example, nonrefundable upfront product license fees for product candidates for which we are providing continuing services related to product development are deferred and recognized as revenue over the development period.

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

We recognize revenues from product sales in other income when there is persuasive evidence that an arrangement exists, title passes, the price is fixed and determinable, and payment is reasonably assured.
 
Royalty / Mark-up on Cost of Goods Sold

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

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

Pursuant to the First Amendment with Endo, in exchange for a $8.25 million lump sum payment, we will not receive future additional mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S.; provided, however, that Endo will still be required to pay a mark-up on cost of goods sold for sales made in the “Endo Territory,” which includes sales made in the U.S. and sales made in any other country where Endo sells the product directly or through affiliated sublicensees. We received this $8.25 million lump sum payment in February 2016. We classified this payment as deferred revenue in our balance sheet and began recognizing this income over time in the second quarter of 2016 based on sales by non-affiliated sublicensees of Endo outside of the U.S. according to our revenue recognition policy. We recognized approximately $266,000 and $895,000 for the three and nine months ended September 30, 2017, respectively. We recognized approximately $274,000 and $546,000 for the three and nine months ended September 30, 2016, respectively.

Reimbursable Third-Party Patent Costs

We accrue patent costs that are reimbursable to Endo by us under the License Agreement. We capitalize certain patent costs related to patent prosecution and maintenance and expense others. As of September 30, 2017 and December 31, 2016, our net reimbursable third party patent expense was zero and $25,000, respectively.
 
Receivables

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

Deferred Revenue

Deferred revenue consists of the mark-up on cost of goods sold for sales by non-affiliated sublicensees and is being recognized as income over time based on sales by non-affiliated sublicensees of Endo outside of the U.S in accordance with our revenue recognition policy beginning in the second quarter of 2016. In addition, deferred revenue consists of licensing fees related to the cash payments received under the License Agreement in prior years and amortized over the expected development period of certain indications for XIAFLEX and a portion of a milestone payment withheld by Endo due to a foreign tax withholding which remains uncollected. As of September 30, 2017 and December 31, 2016, deferred revenue was approximately $6.7 million and $7.6 million, respectively.

Third-Party Royalties

We have entered into licensing and royalty agreements with third parties and agreed to pay certain royalties on net sales of products for specific indications. The royalty rates differ from agreement to agreement and, in certain cases, have been redacted with the permission of the SEC.  No assumptions should be made that any disclosed royalty rate payable to a particular third party is the same or similar with respect to any royalty rate payable to any other third parties.  We accrue third-party royalty expenses on net sales reported to us by Endo. Third-party royalty costs are generally expensed under general and administrative in the quarter that Endo provides the written reports and related information to us; that is, generally one quarter following the quarter in which the underlying sales by Endo occurred. For the three and nine month periods ended September 30, 2017, third-party royalty expenses were $0.4 million and $1.4 million, respectively. For the three and nine month periods ended September 30, 2016, third-party royalty expenses were $0.4 million and $1.2 million, respectively. Our third-party royalty expense under general and administrative expenses may increase if net sales by Endo and its partners for XIAFLEX and Xiapex increase and potential new indications for XIAFLEX and Xiapex are approved, marketed and sold.

Royalty Buy-Down

On March 31, 2012, we entered into an amendment to our existing agreement with Dr. Martin K. Gelbard, dated August 27, 2008, related to our future royalty obligations in connection with Peyronie’s disease. The amendment enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment of $1.5 million and five additional cash payments of $600,000, four of which have been paid as of September 30, 2017.  We are currently making the payments to buy down the future royalty obligations, which royalty obligations terminate five years after first commercial sale which occurred in January 2014. The Company amortizes long-term contracts with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. Dr. Gelbard’s agreement is amortized based on an income forecast method by estimating sales of XIAFLEX and Xiapex for Peyronie’s disease on an annual basis as measured by the proportion of the total estimated sales over the five year period. For the three and nine months ended September 30, 2017, we amortized approximately $0.4 million and $1.1 million related to this agreement, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017 and December 31, 2016, the remaining capitalized balances were approximately $2.3 million and $3.4 million, respectively. We perform an evaluation of the recoverability of the carrying value to determine if facts and circumstances indicate that the carrying value of the assets may be impaired and if any adjustment is warranted.  As of September 30, 2017, there was no indicator that an impairment existed.

Stock Based Compensation

Under ASC 718, we estimate the fair value of our employee stock option awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of an option award. Expected volatility is based on the historical volatility of our common stock. When establishing an estimate of the expected term of an option award, we consider the vesting period for the award, our historical experience of employee stock option exercises (including forfeitures) and the expected volatility of our common stock. We review our estimates at each grant date and, as a result, we are likely to change our valuation assumptions used to value future employee stock-based awards granted, to the extent any such awards are granted.
 
Further, ASC 718 requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line is estimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and are revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period.
 
RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2016

Revenues

Royalties

Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the three month period ended September 30, 2017 were $6.5 million as compared to $6.1 million in the corresponding 2016 period, an increase of $0.4 million or 7%. This increase in royalties and the mark-up on cost of goods sold was primarily due to the increase in sales of XIAFLEX for the treatment of Peyronie’s disease and Dupuytren’s contracture partially offset by lower mark-up on cost of goods sold revenue.

Licensing Revenue
 
Licensing revenue consists of licensing fees, sublicensing fees and milestones. We recognized certain licensing fees related to the cash payments received under the License Agreement in prior years and amortized them over the expected development period. For the three month periods ended September 30, 2017 and 2016, we recognized licensing revenue related to the development of injectable collagenase of $4,408 and $12,345 respectively. For the three months ended September 30, 2016, we recognized licensing fees related to the exercise of an opt-in right by Endo for the human lipoma indication of $750,000.
 
Milestone revenue recognized for the three months ended September 30, 2017 and 2016 was zero in each period.
 
Research and Development Activities and Expenses
 
R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expenses, facility costs and overhead. R&D expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. For the three month periods ended September 30, 2017 and 2016, R&D expenses were approximately $357,000 and $313,000, respectively and in each case, are primarily related to the development work associated with our clinical programs, preclinical and other R&D programs.

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

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

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

   
Three Months Ended
September 30, 2017
   
Three Months Ended
September 30, 2016
 
Program
           
Human Lipoma
 
$
-
   
$
100,973
 
Uterine Fibroids
   
129,276
     
18,762
 
Pre-clinical/other research projects
   
227,571
     
193,172
 
 
The successful development of drugs is inherently difficult and uncertain.  Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if the Company is able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability   and the ability of our partners, particularly with respect to XIAFLEX and Xiapex, to continue to commercialize these drug candidates.

There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:
 
·
the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects;
 
·
the anticipated completion dates for our drug candidate projects;
 
·
the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drug candidate projects;
 
·
the scope, rate of progress of our preclinical studies and other R&D activities related to our drug candidate projects;
 
·
clinical trial results for our drug candidate projects;
 
·
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidate projects;
 
·
the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drug candidate projects;
 
·
the cost and timing of regulatory approvals with respect to our drug candidate projects; and
 
·
the cost of establishing clinical supplies for our drug candidate projects.

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

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs for personnel, third-party royalty fees, amortization of deferred royalty buy-down, consultant costs, legal fees, investor relations, professional fees and overhead costs. General and administrative expenses for the three months ended September 30, 2017 and 2016 were $2.2 million and $1.8 million, respectively. The increase in general and administrative expenses was mainly due to the legal fees, amortization of the deferred royalty buy-down, consulting fees and third party royalties.

Other Income

Other income for the three months ended September 30, 2017 was approximately $208,000 compared to $87,000 in the corresponding 2016 period. Other income consists of interest earned on our investments and product sales of collagenase for laboratory use.

Provision for Income Taxes

Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business, R&D activities, vesting of nonqualified options, deferred revenues and other items. The provision for income taxes is based on an estimated effective tax rate derived from an estimate of condensed consolidated earnings before taxes, adjusted for nondeductible expenses and other permanent differences for the fiscal year. For the three month period ended September 30, 2017, our provision for income taxes was $1.5 million. Our deferred tax assets as of September 30, 2017 were $3.0 million. For the three month period ended September 30, 2016, the provision for income taxes was $1.8 million.
 
Net Income

For the three months ended September 30, 2017, we recorded net income of $2.7 million, or $0.38 per basic common share and $0.37 per diluted common share, compared to a net income of $3.1 million, or $0.43 per basic common share and $0.42 per diluted common share, for the same period in 2016.

NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2016

Revenues

Royalties

Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the nine month period ended September 30, 2017 were $20.7 million as compared to $18.8 million in the corresponding 2016 period, an increase of $1.9 million or 10%. This increase in royalties and the mark-up on cost of goods sold was primarily due to the increase in sales of XIAFLEX for the treatment of Peyronie’s disease and Dupuytren’s contracture.

Licensing Revenue
 
Licensing revenue consists of licensing fees, sublicensing fees and milestones. We recognized certain licensing fees related to the cash payments received under the License Agreement in prior years and amortized them over the expected development period. For the nine month periods ended September 30, 2017 and 2016, we recognized licensing revenue related to the development of injectable collagenase of $13,226 and $37,034, respectively. For the nine months ended September 30, 2016, we recognized a licensing fee related to the exercise of an opt-in right by Endo for the human lipoma indication of $750,000.
 
Milestone revenue recognized for the nine months ended September 30, 2017 and 2016 was zero in each period.
 
Research and Development Activities and Expenses
 
R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expenses, facility costs and overhead. R&D expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. For the nine month periods ended September 30, 2017 and 2016, R&D expenses were approximately $0.9 million and $1.0 million, respectively and in each case, are primarily related to the development work associated with our clinical programs, preclinical and other R&D programs.

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

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

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

   
Nine Months Ended
September 30, 2017
   
Nine Months Ended
September 30, 2016
 
Program
           
Human Lipoma
 
$
-
   
$
352,073
 
Uterine Fibroids
   
357,409
     
111,782
 
Pre-clinical/other research projects
   
591,950
     
542,029
 

The successful development of drugs is inherently difficult and uncertain.  Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if the Company is able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability   and the ability of our partners, particularly with respect to XIAFLEX and Xiapex, to continue to commercialize these drug candidates.
 
There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:
 
·
the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects;
 
·
the anticipated completion dates for our drug candidate projects;
 
·
the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drug candidate projects;
 
·
the scope, rate of progress of our preclinical studies and other R&D activities related to our drug candidate projects;
 
·
clinical trial results for our drug candidate projects;
 
·
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidate projects;
 
·
the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drug candidate projects;
 
·
the cost and timing of regulatory approvals with respect to our drug candidate projects; and
 
·
the cost of establishing clinical supplies for our drug candidate projects.

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

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs for personnel, third-party royalty fees, amortization of deferred royalty buy-down, consultant costs, legal fees, investor relations, professional fees and overhead costs. General and administrative expenses for the nine months ended September 30, 2017 and 2016 were $6.9 million and $5.9 million, respectively. The increase in general and administrative expenses was mainly due to the increased third party patent and legal fees, amortization of the deferred royalty buy-down, third party royalties, and consulting fees partially offset by lower investor relations.

Other Income

Other income for the nine months ended September 30, 2017 was approximately $477,000 compared to $238,000 in the corresponding 2016 period. Other income consists of interest earned on our investments and product sales of collagenase for laboratory use.

Provision for Income Taxes

Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business, R&D activities, vesting of nonqualified options, deferred revenues and other items. The provision for income taxes is based on an estimated effective tax rate derived from an estimate of condensed consolidated earnings before taxes, adjusted for nondeductible expenses and other permanent differences for the fiscal year. For the nine month period ended September 30, 2017, our provision for income taxes was $4.7 million. Our taxes payable as of September 30, 2017 were reduced by $28,000 due to the windfall associated with the disqualified sale of incentive stock options and the exercise of nonqualified options. Our deferred tax assets as of September 30, 2017 were $3.0 million. For the nine month period ended September 30, 2016, the provision for income taxes was $4.5 million.
 
Net Income

For the nine months ended September 30, 2017, we recorded net income of $8.7 million, or $1.21 per basic common share and $1.19 per diluted common share, compared to a net income of $8.5 million, or $1.20 per basic common share and $1.16 per diluted common share, for the same period in 2016.

Liquidity and Capital Resources

To date, we have financed our operations primarily through product sales, licensing revenues and royalties under agreements with third parties and sales of our common stock. At September 30, 2017 and December 31, 2016, we had cash and cash equivalents and investments in the aggregate of approximately $61.3 million and $52.8 million, respectively. We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for at least the next 12 months from this filing.

Net cash provided by operating activities for the nine months ended September 30, 2017 and 2016 was $9.4 million and $14.8 million, respectively. Net cash provided by operating activities in the 2017 period was primarily attributable to our net income of $8.7 million, an increase in operating assets and liabilities of $1.3 million of which $0.9 million was related to an increase in accounts receivable due to sales of XIAFLEX. Non-cash items included amortization, stock-based compensation expense, and deferred taxes which was reduced by adjustments to reconcile net income to net cash provided by operating activities of $2.0 million. Net cash provided by operating activities in the 2016 period was primarily attributable to our net income of $8.5 million, an increase in operating assets and liabilities of $7.8 million of which $7.7 million was related to the First Amendment with Endo for mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S. Non-cash items included amortization, stock-based compensation expense, and deferred taxes which was reduced by adjustments to reconcile net income to net cash provided by operating activities of $1.4 million.

Net cash used by investing activities for the nine months ended September 30, 2017 was $7.4 million as compared $15.0 million for the corresponding 2016 period. The net cash used in investing activities in the 2017 period reflects the maturing of $43.6 million and investment of $50.9 million in marketable securities. The net cash used in investing activities in the 2016 period reflects the maturing of $32.5 million and investment of $47.6 million in marketable securities.

Net cash used in financing activities for the nine months ended September 30, 2017 was approximately $358,000 as compared to approximately $145,000 in the corresponding 2016 period. In the 2017 period, net cash used in financing activities was mainly due to the repurchase of approximately $616,000 of our common stock under our stock repurchase program partially offset the proceeds received from stock option exercises of approximately $258,000. In the 2016 period, net cash used in financing activities was mainly due to the repurchase of $898,000 of our common stock under our stock repurchase program partially offset by proceeds received from stock option exercises of approximately $529,000 and the excess tax benefits related to share-based payments of $224,000.

Off-Balance Sheet Arrangements

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

Item 3:
Quantitative and Qualitative Disclosures About Market Risk

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

Our investment portfolio is subject to interest rate risk, although limited given the short term nature of the investments, and will fall in value in the event market interest rates increase. All of our cash and cash equivalents and investments at September 30, 2017, amounting to approximately $61.3 million, were maintained in bank demand accounts, money market accounts, certificates of deposit, corporate bonds and municipal bonds. We do not hedge our interest rate risks, as we believe reasonably possible near-term changes in interest rates would not materially affect our results of operations, financial position or cash flows.

We are subject to market risks in the normal course of our business, including changes in interest rates. There have been no significant changes in our exposure to market risks since September 30, 2017.
 
Item 4:
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

PART II:
OTHER INFORMATION

Item 1.
Legal Proceedings

None.

Item 1A.
Risk Factors

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

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
During the nine month period ended September 30, 2017, we did not issue any unregistered equity securities.
 
Issuer Purchases of Equity Securities

The following table presents a summary of share repurchases made by us during the quarter ended September 30, 2017 .
 
Period
 
Total Number of
Shares
Purchased (2)
   
Average
Price Paid
Per Share (3)
   
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plan
   
Maximum
Number (or
Dollar Value) of
Shares that may
yet be Purchased
under the Plan
 
                     
$
144,328
(1)  
July 1, 2017 – July 31, 2017
   
1,555
   
$
50.77
     
273,804
     
65,384
 
August 1, 2017 – August 31, 2017
   
1,210
     
48.59
     
275,014
     
6,950
 
September 1, 2017 – September 30, 2017
   
-
     
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(1)
On August 17, 2015, we announced that our Board of Directors had authorized the repurchase of up to $2.5 million of our common stock under the stock repurchase program.
(2)
The purchases were made under the company’s 10b-18 plan.
(3)
Includes commissions paid, if any, related to the stock repurchase transactions.
 
Item 6.
Exhibits
 
 
Amended Agreement of Lease, dated as of November 6, 2017, among the Company, ABC-NY and 35 Wilbur Street Associates.
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule13a-14(a)/15d-14(a).
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of   Sarbanes-Oxley Act of 2002.
 
101*
The following materials from BioSpecifics Technologies Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed   Consolidated Statements of Cash Flows, and (iii) the Notes to the   Condensed Consolidated Financial Statements.
 
*
filed herewith
**
furnished herewith
 
SIGNATURES

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

 
BIOSPECIFICS TECHNOLOGIES CORP.
 
(Registrant)
   
Date: November 9, 2017
/s/ Thomas L. Wegman
 
Thomas L. Wegman
 
President, Principal Executive Officer and
Principal Financial Officer
 
 
29
 
Exhibit 10.1
 
35 Wilbur Street Associates, LLC
19 Wilbur Street
Lynbrook, NY 11563

November 6, 2017

Mr. Thomas Wegman
Advance Biofactures Corp.
35 Wilbur Street
Lynbrook, NY 11563

Re:
Lease dated November 21, 2013 between 35 Wilbur Street Assoc., LLC and Advance Biofactures Corp., premises; 35 Wilbur Street, Lynbrook, NY 11563.

Dear Mr. Wegman:

It is our understanding that you would like to renew the lease. The current lease expires on November 30, 2017. We propose that the current terms of the lease remain in effect except where the following is concerned:
 
1)
The lease will be renewed for 1 (one) year at the rate of $133,975 annually. $11,164.58/month.
—
This will be less 14.89% of the utilities.
 
A current copy of the certificate of liability insurance is required.
 
Sincerely yours,
 
/s/ Valorie Mancuso
Valorie Mancuso
Controller

   
/s/ Valorie Mancuso
   
Valorie Mancuso/Controller
Thomas Wegman, President
 
Richard Arote Jr.
Advance Biofactures Corp.
 
35 Wilbur Street Assoc., LLC
     
/s/ Thomas Wegman   not present 11/06/2017.

State of New York
ss:
County of Nassau
 

On this 06 th   day of November, 20l7, before me personally came, Thomas Wegman   to me known, who, being by me duly sworn, did say that he is the President of Advance Biofactures Corp. and that he signed his name thereto by authority of the board of directors.
 
 
 
Exhibit 31

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
 PURSUANT TO RULES 13a-14(a) AND 15d-14(a) OF
 THE SECURITIES EXCHANGE ACT OF 1934

I, Thomas L. Wegman, certify that:

1.
I have reviewed this report on Form 10-Q for the quarterly period ended September 30, 2017 of BioSpecifics Technologies Corp.;

2.
Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:
November 9, 2017
 
/s/ Thomas L. Wegman
 Thomas L. Wegman
 President, Principal Executive Officer and Principal Financial Officer
 
 
Exhibit 32

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
 PURSUANT TO RULES 13a-14(b) AND 15d-14(b) OF
 THE SECURITIES EXCHANGE ACT OF 1934 AND
 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Thomas L. Wegman, the President, Principal Executive Officer and Principal Financial Officer of BioSpecifics Technologies Corp. (the “Company”), DOES HEREBY CERTIFY that:

1.
The Company’s report on Form 10-Q for the quarterly period ended September 30, 2017 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

IN WITNESS WHEREOF, the undersigned has executed this certification this 9th day of November 2017.
 
/s/ Thomas L. Wegman
 
Thomas L. Wegman
 
President, Principal Executive Officer and Principal Financial Officer
 
This certification shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to liability pursuant to that section. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.