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, 2019

☐ 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 of Incorporation or Organization)		(I.R.S. Employer 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	BSTC	The Nasdaq Capital Market

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 every Interactive Data File required to be submitted 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 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 ☐	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 ☒

As of November 11, 2019, there were 7,339,370 shares of Common Stock, par value $0.001 per share, outstanding.

BIOSPECIFICS TECHNOLOGIES CORP.

TABLE OF CONTENTS

		Page
	PART I – FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Income Statements	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	24
ITEM 4.	Controls and Procedures	24

	PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings	25
ITEM 1A.	Risk Factors	25
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
ITEM 5.	Other Information	25
ITEM 6.	Exhibits	26
	Signatures	27

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Introductory Comments – Terminology

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

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

Introductory Comments – Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of, and made pursuant to the safe harbor provisions of, the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, expected revenue growth, and the assumptions underlying or relating to such statements, are “forward-looking statements.” The forward-looking statements in this Quarterly Report on Form 10-Q include statements concerning, among other things, (i) the opportunity for minimally invasive non-surgical treatment XIAFLEX® in several potential pipeline indications; (ii) whether and when the Company will receive from Endo the results of their full commercial assessment and analysis regarding XIAFLEX® research and development (R&D) pipeline; (iii) the Company’s ability to achieve its future growth initiatives with regard to Dupuytren’s Contracture and Peyronie’s disease; (iv) the expansion of the market for XIAFLEX® through future growth initiatives; (v) whether treating uterine fibroids with XIAFLEX® will achieve the advantages over major surgery identified by the Company; (vi) Endo’s interest in currently unlicensed indications, including capsular contracture of the breast, Dercum’s disease, knee arthrofibrosis, urethral strictures, hypertrophic scars and keloids; (vii) whether XIAFLEX® will be the only U.S. Food and Drug Administration (FDA) approved nonsurgical therapy for frozen shoulder (adhesive capsulitis); (viii) the projected receipt of payments from Endo and sublicense income payments based on Endo’s partnerships; and (ix) and the strength of the Company’s IP portfolio.

In some cases, these statements can be identified by forward-looking words such as “expect,” “plan,” “anticipate,” “potential,” “estimate,” “can,” “will,” “continue,” 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, which will determine the amount of milestone, royalty, mark-up on cost of goods sold, license and sublicense income that BioSpecifics may receive; the potential of XIAFLEX® to be used in additional indications; Endo modifying its objectives or allocating resources other than to XIAFLEX®; and other risk factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Annual Report) and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019, specifically in Part I, Item IA under the heading “Risk Factors” and under the section “Management’s Discussion and Analysis.” All forward-looking statements included in this Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2019 are made as of the date hereof, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and, except as may be required by law, we assume no obligation to update these forward-looking statements.

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PART I – FINANCIAL INFORMATION

Item 1:

Condensed Consolidated Financial Statements

BioSpecifics Technologies Corp.

Condensed Consolidated Balance Sheets

	September 30, 2019			December 31, 2018
	(unaudited)			(audited)
Assets
Current assets:
Cash and cash equivalents	$	12,769,293		$	13,176,452
Short term investments		69,089,724			67,707,143
Accounts receivable		17,768,757			16,518,687
Deferred royalty buy-down		-			184,931
Prepaid expenses and other current assets		836,708			646,749
Prepaid income taxes		951,776
Total current assets		101,416,258			98,233,962

Long-term investments		16,492,528			1,099,834
Deferred tax assets, net		-			313,768
Patent costs, net		562,503			444,478

Total assets	$	118,471,289		$	100,092,042

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	877,228		$	1,798,588
Income tax payable		-			704,934
Total current liabilities		877,228			2,503,522
Deferred tax liability, net		593,059			-
Commitments and Contingencies
Stockholders’ equity:
Series A Preferred stock, $.50 par value, 700,000 shares authorized; none outstanding		-			-
Common stock, $.001 par value; 10,000,000 shares authorized 7,811,230 and 7,738,167 shares issued, 7,342,756 and 7,275,902 shares outstanding as of September 30, 2019 and December 31, 2018, respectively		7,811			7,738
Additional paid-in capital		38,956,156			36,302,446
Retained earnings		89,292,707			72,176,719
Treasury stock, 468,474 and 462,265 shares at cost as of September 30, 2019 and December 31, 2018, respectively		(11,255,672	)		(10,898,383	)
Total stockholders’ equity		117,001,002			97,588,520

Total liabilities and stockholders’ equity	$	118,471,289		$	100,092,042

See accompanying notes to condensed consolidated financial statements.

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BioSpecifics Technologies Corp.

Condensed Consolidated Income Statements

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues:
Royalties	$	9,442,253		$	8,168,081		$	26,424,380		$	23,068,585
Licensing revenues		-			-			-			39,679
Total Revenues		9,442,253			8,168,081			26,424,380			23,108,264

Costs and expenses:
Research and development		143,185			162,625			454,042			569,648
General and administrative		1,978,078			2,232,077			6,613,362			6,345,662
Total Cost and Expenses		2,121,263			2,394,702			7,067,404			6,915,310

Operating income		7,320,990			5,773,379			19,356,976			16,192,954

Other income:
Interest income		504,909			359,637			1,471,489			851,334
Other income		-			-			-			96,663
		504,909			359,637			1,471,489			947,997

Income before income tax expense		7,825,899			6,133,016			20,828,465			17,140,951
Provision for income tax expense		(1,552,966	)		(1,089,966	)		(3,712,477	)		(3,271,366	)

Net income	$	6,272,933		$	5,043,050		$	17,115,988		$	13,869,585


Basic net income per share	$	0.86		$	0.69		$	2.34		$	1.92
Diluted net income per share	$	0.85		$	0.69		$	2.33		$	1.89

Shares used in computation of basic net income per share		7,334,212			7,281,388			7,306,665			7,230,106
Shares used in computation of diluted net income per share		7,359,034			7,356,885			7,347,701			7,327,029

See accompanying notes to condensed consolidated financial statements.

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BioSpecifics Technologies Corp.

Condensed Consolidated Statements of Stockholders’ Equity

	Common Stock
	Shares	Amount		Additional Paid in Capital		Retained Earnings		Treasury Stock			Stockholders’ Equity Total
Balances - December 31, 2018	7,738,167	$	7,738	$	36,302,446	$	72,176,719	$	(10,898,383	)	$	97,588,520
Issuance of common stock upon stock option exercise	73,063		73	$	2,133,323		-		-			2,133,396
Stock compensation expense	-		-	$	520,387		-		-			520,387
Repurchases of common stock	-		-		-		-		(357,289	)		(357,289	)
Net income	-		-		-		17,115,988		-			17,115,988
Balances – September 30, 2019	7,811,230	$	7,811	$	38,956,156	$	89,292,707	$	(11,255,672	)	$	117,001,002

	Common Stock
	Shares		Amount		Additional Paid in Capital		Retained Earnings		Treasury Stock			Stockholders’ Equity Total
Balances – June 30, 2019		7,796,230	$	7,796	$	38,299,800	$	83,019,774	$	(11,016,949	)	$	110,310,421
Issuance of common stock upon stock option exercise		15,000		15		396,435		-		-			396,450
Stock compensation expense		-		-		259,921		-		-			259,921
Repurchases of common stock		-		-		-		-		(238,723	)		(238,723	)
Net income		-		-		-		6,272,933		-			6,272,933
Balances – September 30, 2019		7,811,230	$	7,811	$	38,956,156	$	89,292,707	$	(11,255,672	)	$	117,001,002

	Common Stock
	Shares		Amount		Additional Paid in Capital		Retained Earnings		Treasury Stock			Stockholders’ Equity Total
Balances - December 31, 2017		7,600,167	$	7,600	$	33,468,323	$	41,939,115	$	(7,898,200	)	$	67,516,838
Adjustment due to adoption of ASC606		-		-		-		10,184,335		-			10,184,335
Issuance of common stock upon stock option exercise		138,000		138		2,570,692		-		-			2,570,830
Stock compensation expense		-		-		159,883		-		-			159,883
Repurchases of common stock		-		-		-		-		(2,559,050	)		(2,559,050	)
Net income		-		-		-		13,869,585		-			13,869,585
Balances – September 30, 2018		7,738,167	$	7,738	$	36,198,898	$	65,993,035		(10,457,250	)	$	91,742,421

	Common Stock
	Shares		Amount		Additional Paid in Capital		Retained Earnings		Treasury Stock			Stockholders’ Equity Total
Balances – June 30, 2018		7,655,167	$	7,655	$	34,424,632	$	60,949,985	$	(7,898,200	)	$	87,484,072
Issuance of common stock upon stock option exercise		83,000		83		1,710,697		-		-			1,710,780
Stock compensation expense		-		-		63,569		-		-			63,569
Repurchases of common stock		-		-		-		-		(2,559,050	)		(2,559,050	)
Net income		-		-		-		5,043,050		-			5,043,050
Balances – September 30, 2018		7,738,167	$	7,738	$	36,198,898	$	65,993,035	$	(10,457,250	)	$	91,742,421

See accompanying notes to condensed consolidated financial statements.

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BioSpecifics Technologies Corp.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended September 30,
Cash flows from operating activities:	2019			2018
Net income	$	17,115,988		$	13,869,585
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization		202,875			1,984,577
Stock-based compensation expense		520,387			159,883
Deferred tax expense		199,908			128,418
Extinguishment of accrued liabilities		-			(78,138	)
Changes in operating assets and liabilities:
Accounts receivable		(1,250,070	)		(2,245,522	)
Income tax payable / receivable		(949,791	)		(774,624	)
Prepaid expenses and other current assets		(189,959	)		(178,453	)
Patent costs		(189,704	)		(95,399	)
Accounts payable and accrued expenses		(921,360	)		(356,548	)
Deferred revenue		-			(139,680	)
Net cash provided by operating activities		14,538,274			12,274,099

Cash flows from investing activities:
Maturity of marketable investments		76,636,059			58,380,000
Purchases of marketable investments		(93,357,599	)		(64,618,676	)
Net cash used in investing activities		(16,721,540	)		(6,238,676	)

Cash flows from financing activities:
Proceeds from stock option exercises		2,133,396			2,570,830
Payments for repurchase of common stock		(357,289	)		(2,559,050	)
Net cash provided by financing activities		1,776,107			11,780

Increase (decrease) in cash and cash equivalents		(407,159	)		6,047,203
Cash and cash equivalents at beginning of year		13,176,452			7,333,810
Cash and cash equivalents at end of period	$	12,769,293		$	13,381,013

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		-			-
Taxes	$	4,462,362		$	3,917,572

See accompanying notes to condensed consolidated financial statements.

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BIOSPECIFICS TECHNOLOGIES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

We are a biopharmaceutical company involved in the development of an injectable collagenase clostridium histolyticum (CCH) for multiple indications. We maintain intellectual property with respect to injectable CCH that treats, among other indications, Dupuytren’s contracture (DC), Peyronie’s disease (PD), frozen shoulder, cellulite, and uterine fibroids. Injectable CCH currently is approved and marketed in the U.S. under the trademark XIAFLEX^® for the treatment of both DC and PD. XIAFLEX® also is commercialized in Japan, Europe (where it is marketed as Xiapex®), Canada, and Australia for DC, and for PD in Canada, Europe and Australia. We generate revenue primarily from our license agreement with Endo, under which we receive license and sublicense income, royalties, milestones and mark-up on cost of goods sold payments related to the sale, regulatory submissions and approval of XIAFLEX®.

On August 31, 2011, we entered into the Second Amended and Restated Development and License Agreement (as amended, the “License Agreement”) with Auxilium Pharmaceuticals, Inc. (“Auxilium”), an entity that was acquired by Endo in 2015. The License Agreement originally was entered into in June 2004 to obtain exclusive worldwide rights to develop, market, and sell certain products containing our enzyme CCH, which Endo markets for approved indications under the trademark XIAFLEX®. Endo’s licensed rights concern the development and commercialization of products, other than dermal formulations labeled for topical administration. Currently, Endo’s licensed rights cover the indications of DC, Dupuytren’s nodules, PD, frozen shoulder, cellulite, canine and human lipomas, plantar fibromatosis, lateral hip fat, and other potential aesthetic indications. We and Endo may further expand the License Agreement to cover other indications as they are developed.

Pursuant to the License Agreement, Endo currently is selling XIAFLEX® in the U.S. for the treatment of DC and PD and is distributing XIAFLEX® in Canada through its operating company, Paladin Labs Inc. Additionally, Endo has entered into several non-affiliated sublicensee agreements (as permitted by the License Agreement), including the following:

•

An agreement with Swedish Orphan Biovitrum AB (“Sobi”), pursuant to which Sobi has marketing rights for Xiapex® for the treatment of DC and PD in Europe and certain Eurasian countries;

•

An agreement with Asahi Kasei Pharma Corporation (“Asahi”), pursuant to which Asahi has the right to commercialize XIAFLEX® for the treatment of DC and PD in Japan; and

•

An agreement with Actelion Pharmaceuticals Ltd. (“Actelion”), pursuant to which Actelion obtained marketing and commercial rights for XIAFLEX® in Australia and New Zealand.

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

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

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On February 26, 2019, we and Endo entered into the Second Amendment to the License Agreement (the “Second Amendment”) to amend certain provisions of the License Agreement. The Second Amendment has an effective date of January 1, 2019. Pursuant to the terms of the Second Amendment, we have consented to the assignment of the License Agreement by Endo Global Ventures to Endo Global Aesthetics Limited, an Irish private company and an affiliate of Endo Global Ventures that is indirectly wholly-owned by Endo. In addition, the Second Amendment amends certain provisions of the License Agreement to require Endo to provide timely estimates of royalties to assist us in complying with our financial reporting obligations.

The two marketed indications involving our injectable collagenase are DC and PD. In addition to DC and PD, Endo has opted-in to the following indications: frozen shoulder, cellulite, canine lipoma, lateral hip fat, plantar fibromatosis and human lipoma. Endo exercised, with our consent, an early opt-in for lateral hip fat and plantar fibromatosis in November 2015. Endo opted-in for human lipoma in July 2016. We manage the development of XIAFLEX® for uterine fibroids and initiate the development of XIAFLEX® in new potential indications, not licensed by Endo.

Endo presented positive results from two Phase 3 studies, RELEASE-1 and RELEASE-2, of CCH for the treatment of cellulite. Subjects receiving CCH showed highly statistically significant levels of improvement in the appearance of cellulite with treatment, as measured by the trial’s primary endpoint (RELEASE-1, p=0.006 & RELEASE-2, p=0.002), which was at least a 2-level composite improvement in cellulite severity at Day 71 as compared to subjects receiving placebo. Statistically significant improvements with CCH versus placebo were observed for 8 of 8 (RELEASE-1) and 7 of 8 (RELEASE-2) secondary endpoints, in addition to patient-centric endpoints. These data were presented at 2019 American Academy of Dermatology Annual Meeting on March 2, 2019. On May 17, 2019, Endo announced that clinical data from a Phase 3 investigational study of CCH for the treatment of cellulite was presented at the annual meeting of the American Society for Aesthetic Plastic Surgery. On September 6, 2019, Endo announced that it had submitted a Biologics License Application (BLA) to the U.S. Food and Drug Administration (FDA) for CCH for the treatment of cellulite in the buttocks with an expected commercial launch in the second half of 2020 upon approval.

We presented data from a Phase 1 clinical trial of CCH for the treatment of uterine fibroids at the 66^th Annual Meeting of the Society of Reproductive Investigation (SRI) on March 14, 2019 in Paris, France. In addition, on October 16, 2019, we presented data on patient-reported outcomes of a Phase 1 clinical trial of CCH for the treatment of uterine fibroids at the American Society for Reproductive Medicine conference in Philadelphia, Pennsylvania. The presentations follow positive top-line results announced in October 2018 demonstrating that CCH significantly reduced collagen content in uterine fibroids. BioSpecifics and its clinical partners continue to analyze the full Phase 1 data to guide the design of a Phase 2 study of CCH for the treatment of uterine fibroids.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2019, as compared to the significant accounting policies disclosed in Note 2 of the Consolidated Financial Statements in the Company’s 2018 Annual Report.

Basis of Presentation

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

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the risk factors discussed in Part I, Item 1A. Risk Factors in our 2018 Annual Report, filed with the SEC on April 2, 2019.

Principles of Consolidation

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

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Critical Accounting Policies, Estimates and Assumptions

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the use of management’s estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company makes certain assumptions and estimates for its revenues, income taxes and third party royalties. We base our estimates on historical experience, and other relevant data including interim data provided by Endo and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and the amount of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions. For further details, see notes “Revenue Recognition.”, “Provision for Income Taxes” and “Third-Party Royalties.” Actual results may differ from those estimates.

Revenue Recognition

Beginning in 2014, Financial Accounting Standards Board (“FASB”) issued several Accounting Standards Updates establishing Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). ASC 606 requires retrospective implementation, and replaces most industry-specific revenue recognition guidance in U.S. GAAP with a new principles-based, five-step revenue recognition model. The Company adopted ASC 606 effective January 1, 2018. Under ASC 606, we recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation(s).

Revenues, and their respective treatment for financial reporting purposes under ASC 606 and our license agreement with Endo, are as follows:

Royalty / Mark-Up on Cost of Goods Sold

We receive royalty revenues on net sales and mark-up on cost of goods sold revenue in the U.S. under our License Agreement with Endo. These are presented in “Royalties” in our condensed consolidated statements of income. We do not have future performance obligations under this revenue stream. In accordance with ASC 606, we record these revenues based on estimates of the net sales that occurred during the relevant period. The relevant period estimates of these royalties are based on interim data provided by Endo and analysis of historical royalties and mark-up on cost of goods sold revenue that have been paid to us, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known. The royalties payable by Endo to us are subject to set-off for certain patent costs.

Licensing Revenue

We include revenue recognized from upfront licensing, sublicensing and milestone payments in “License Revenues” in our condensed consolidated statements of income.

The Company recognizes licensing revenues generated through development and/or commercialization agreements. The terms of these agreements typically include payment to the Company of one or more of the following: nonrefundable, upfront license fees; sublicensing; development and commercial milestone payments; development activities; and royalties on net sales of licensed products. Each of these types of payments results in licensing revenues except for revenues from royalties on net sales of licensed products and the mark-up of cost of goods sold revenues which are classified as royalty revenues. Revenue is recognized upon satisfaction of a performance obligation by transferring control of a good or service to the customer.

For each development and/or commercialization agreement that result in revenues, the Company identifies all performance obligations, aside from those that are immaterial, which may include a license to intellectual property and know-how, development activities and/or transition activities. In order to determine the transaction price, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.

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If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront license fees based on the relative standalone selling price prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Development and Regulatory Milestone Payments

Depending on facts and circumstances, the Company may conclude that it is appropriate to include the milestone, representing variable consideration, in the estimated total transaction price, or that it is appropriate to fully constrain the milestone. The Company may include revenues from certain milestones in the total transaction price in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company records a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period. The Company adjusts its estimate of the total transaction price, including the amount of revenue that it has recorded, if necessary.

RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Adopted

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

Accounting Pronouncements Not Yet Adopted

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2023. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.

Cash, Cash Equivalents and Investments

Cash equivalents include only securities having a maturity of 90 days or less at the time of purchase. Investments are stated on an amortized cost basis. The Company limits its credit risk associated with cash, cash equivalents and investments by placing its investments with banks it believes are highly creditworthy and with highly rated money market funds, certificates of deposit, U.S. government agency bonds, municipal bonds and corporate bonds. All investments are classified as held to maturity. As of September 30, 2019 and December 31, 2018, the amortized cost of these investments was $85.6 million and $68.8 million, respectively. No unrealized gains or losses were recorded in either period.

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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 duration of those instruments. As of September 30, 2019 and December 31, 2018, there were no recorded unrealized gains or losses on our investments as they are classified as held to maturity. As of September 30, 2019 and December 31, 2018, amortized cost basis of the investments approximated their fair value. Interest income for the three and nine months ended September 30, 2019 was $0.5 million and $1.5 million, respectively as compared to $0.4 million and $0.9 million in the 2018 periods. For the nine months ended September 30, 2019 and 2018, the amortized net premium / (net discount) included in interest income was approximately $56,000 and ($361,000), respectively. At September 30, 2019 and December 31, 2018, the remaining unamortized net premium / (net discount) was approximately $198,000 and ($121,000), respectively.

The following table presents the Company’s schedule of maturities at September 30, 2019 and December 31, 2018:

	Maturities as of September 30, 2019				Maturities as of December 31, 2018
	1 Year or Less		Greater than 1 Year		1 Year or Less		Greater than 1 Year
U.S Government agency	$	4,234,076	$	6,228,685	$	-	$	-
Municipal bonds		6,593,224		545,265		1,295,350		-
Corporate bonds		56,061,185		5,948,250		61,321,162		1,099,834
Certificates of deposit		2,201,239		3,770,328		5,090,631		-
Total	$	69,089,724	$	16,492,528	$	67,707,143	$	1,099,834

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

As of September 30, 2019, 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, 2019 and December 31, 2018:

September 30, 2019	Type of Instrument	Fair Value		Level 1		Level 2		Level 3
Cash equivalents	Institutional Money Market	$	2,433,542	$	2,433,542	$	-	$	-
Cash equivalents	U.S. Government Agency	$	3,995,097	$	3,995,097
Investments	U.S. Government Agency		10,462,761		-		10,462,761		-
Investments	Municipal Bonds		7,138,489		-		7,138,489		-
Investments	Corporate Bonds		62,009,435		-		62,009,435		-
Investments	Certificates of Deposit		5,971,567		5,971,567		-		-

December 31, 2018	Type of Instrument	Fair Value		Level 1		Level 2		Level 3
Cash equivalents	Institutional Money Market	$	6,078,025	$	6,078,025	$	-	$	-
Investments	Municipal Bonds		1,295,350		-		1,295,350		-
Investments	Corporate Bonds		62,420,996		-		62,420,996		-
Investments	Certificates of Deposit		5,090,631		5,090,631		-		-

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Concentration of Credit Risk and Major Customers

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

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

The Company is currently dependent on one customer, Endo, which generates almost all of the Company’s revenues. For the three and nine months ended September 30, 2019, licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately $9.4 million and $26.4 million, respectively and for the three and nine months ended September 30, 2018, licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately $8.2 million and $23.1 million, respectively.

At September 30, 2019 and December 31, 2018, our accounts receivable balances from Endo were $17.8 million and $16.5 million, respectively.

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, 2019 there were 6,209 shares repurchased at an average price of $57.54 compared to 43,705 shares at an average price of $58.55 in the 2018 comparable period.

Stock Repurchase Plan

On May 23, 2019, the Company announced the authorization of a new stock repurchase program under which we can repurchase up to $4 million of our outstanding common stock. Pursuant to the repurchase program, from time to time we repurchase stock through a broker in the open market, provided that the timing, actual number and price per share of the common stock to be purchased will be subject to market conditions, applicable legal requirements, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and various other factors.

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 and therefore no allowance is recorded. If the financial condition of our customer were to deteriorate, adversely affecting its ability to make payments, additional allowances would be required. We may provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At September 30, 2019 and December 31, 2018 our accounts receivable balance was $17.8 million and $16.5 million, respectively, and was from one customer, Endo.

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 expense others. As of September 30, 2019 and December 31, 2018, our net reimbursable third party patent expense was $25,000 and $40,000, respectively, which was recorded as a reduction to our accounts receivable balance.

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Third-Party Royalties

We have entered into licensing and royalty agreements with third parties and agreed to pay certain royalties on net sales of products for specific indications. The royalty rates differ from agreement to agreement and, in certain cases, have been redacted with the permission of the SEC. No assumptions should be made that any disclosed royalty rate payable to a particular third party is the same or similar with respect to any royalty rate payable to any other third parties. We accrue third-party royalty expenses on net sales reported to us by Endo. Third-party royalty costs are expensed under general and administrative in the quarter that the net sales have occurred. For the three and nine month periods ended September 30, 2019 and 2018, third-party royalty expenses were $0.2 million and $0.7 million, respectively. For the three and nine month periods ended September 30, 2018, third-party royalty expenses were $0.6 million and $1.7 million, respectively. As of March 1, 2019, we have no further third party royalties in connection with PD as the agreement expired in February 2019.

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 PD. The amendment enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment of $1.5 million and five additional cash payments of $600,000, all of which have been paid as of January 1, 2018. In March 2019, royalty obligations were terminated, which was 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 PD 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, 2019, we amortized zero and approximately $0.2 million related to this agreement, respectively. For the three and nine months ended September 30, 2018 we amortized approximately $0.6 million and $1.6 million, respectively, related to this agreement. Royalty buy-down expenses are recorded as part of general and administrative expenses. As of September 30, 2019 and December 31, 2018, the remaining capitalized balances were zero and $0.2 million, respectively.

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 and 2019 Omnibus Incentive Compensation Plan

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

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On June 13, 2019, at the Company’s annual meeting, the Company’s stockholders approved the 2019 Omnibus Incentive Compensation Plan (the “2019 Plan”). Upon the 2019 Plan’s approval, approximately 1,248,848 shares of Company common stock were available for issuance thereunder, consisting of 1,100,000 shares authorized for issuance under the 2019 Plan and 148,848 shares then remaining available for issuance under the Company’s 2001 Stock Option Plan (the “2001 Plan”). The 2019 Plan replaced the 2001 Plan. No new awards will be granted under the 2001 Plan; however, awards outstanding under the 2001 Plan upon approval of the 2019 Plan remain subject to and will be settled under the applicable 2001 Plan.

Grants under the 2019 Plan may consist of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, or cash awards. Employees, key advisors or non-employee directors are eligible to participate in the 2019 Plan. Grants under the 2019 Plan vest over periods ranging from one to four years and expire ten years from date of grant.

2019 Omnibus Incentive Compensation Plan (2019 Plan)

Restricted Stock Awards

A summary of the restricted stock awards activity during the nine months ended September 30, 2019 is presented below:

	Restricted Stock	Weighted-Average Grant Date Fair Value Per Share
Nonvested at December 31, 2018	-	$	-
Issued	9,950		60.85
Vested	-		-
Forfeited	-		-
Nonvested at September 30, 2019	9,950	$	60.85

Stock-based compensation expense related to restricted stock awards recognized in general and administrative expense was approximately $146,000 for the three and nine months ended September 30, 2019.

As of September 30, 2019, there was approximately $460,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to restricted stock. This cost is expected to be recognized over the vesting periods of the restricted stock, with a weighted-average period of approximately 1.25 years.

Stock Option Activity under the 2001 Stock Option Plan (2001 Plan)

For the nine months ended September 30, 2019, we granted a total of 10,000 stock options from the 2001 Plan with a weighted average grant date fair value of $27.97 per share.

The assumptions used in the valuation of stock options granted during the nine months ended September 30, 2019 were as follows:

		Nine Months Ended September 30, 2019
Risk-free interest rate		2.18%
Expected term of option		6.25 years
Expected stock price volatility		39.5%
Expected dividend yield	$	0.0

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A summary of our stock option activity during the nine months ended September 30, 2019 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2018		175,500		$	37.73		6.33	$	4,014,235
Grants		10,000			66.40		-		-
Exercised		(73,063	)		29.20		-		2,229,195
Forfeitures		(11,250	)		41.82		-		-
Outstanding at September 30, 2019		101,187		$	46.26		7.63	$	1,061,135
Exercisable at September 30, 2019		28,812		$	21.74		3.96	$	915,593

During the nine months ended September 30, 2019 and 2018, the Company received approximately $2.1 million and $2.6 million, respectively, from stock options exercised by option holders.

Aggregate intrinsic value represents the total pre-tax intrinsic value based on the closing price of our common stock of $53.52 on September 30, 2019, which would have been received by the option holders had all option holders exercised their options as of that date. We have approximately $1.7 million in unrecognized compensation cost related to stock options outstanding as of September 30, 2019, which we expect to recognize over the next 3.06 years.

Stock-based compensation expense related to stock options recognized in general and administrative expenses was approximately $114,000 and $374,000 for the three and nine month periods ended September 30, 2019 and $64,000 and $160,000 for the three and nine month periods ended September 30, 2018, respectively.

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, 2019 and December 31, 2018, property and equipment were fully depreciated.

Comprehensive Income

For each of the three and nine month periods ended September 30, 2019 and 2018, we had no components of other comprehensive income other than net income itself.

Provision for Income Taxes

We use the asset and liability method of accounting for income taxes, as set forth in ASC 740-10-25-2. Under this method, deferred income taxes, when required, are provided on the basis of the difference between the financial reporting and income tax basis of assets and liabilities at the statutory rates enacted for future periods when the differences are expected to reverse. A valuation allowance is applied against any net deferred tax asset if, based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

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, 2019 and December 31, 2018, the Company has not recorded any unrecognized tax benefits. We classify interest associated with income taxes under interest expense and tax penalties under other.

Commitments and Contingencies

On November 6, 2019, the Company entered into an agreement with 35 Wilbur Street Associates, LLC (the “Landlord”) to extend the term of the lease to our corporate headquarters, which are currently located at 35 Wilbur St., Lynbrook, NY 11563, for an additional six month period (the “Extended Lease Agreement”). The six month extension will end on May 31, 2020. Pursuant to the Extended Lease Agreement, the base rent is $12,075 per month and the Company may cancel the lease with three months’ prior written notice to the Landlord at any time during the term.

Our rent expense amounted to approximately $34,000 and $101,000 for the three and nine months ended September 30, 2019, respectively, and $32,000 and $97,000 for the three and nine months in the 2018 periods, respectively.

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3. NET INCOME PER SHARE

In accordance with ASC 260, Earnings Per Share, basic net income per share amount is computed using the weighted-average number of shares of common stock outstanding during the periods presented, while diluted net income per share is computed using the sum of the weighted-average number of common and common equivalent shares outstanding. Common equivalent shares used in the computation of diluted earnings per share result from the assumed exercise of stock options and restricted stock using the treasury stock method. For the three and nine month periods ended September 30, 2019 there were 24,015 and 39,626, respectively, of common equivalent shares attributable to stock options and 807 and 1,410 attributable to restricted stock that were included in the calculation of diluted net income per share. There were 60,000 stock options in each period to purchase shares and 500 and zero restricted stock awards excluded from the calculation of diluted net income per share for the three and nine month periods ended September 30, 2019, respectively, because their effects are anti-dilutive.

For the three and nine month periods ended September 30, 2018 there were 75,497 and 96,923, respectively, of common equivalent shares attributable to stock options that were included in the calculation of diluted net income per share. There were zero stock options to purchase shares excluded from the calculation of diluted net income per share for the three and nine month periods ended September 30, 2018, respectively, because their effects are anti-dilutive.

4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

	September 30, 2019		December 31, 2018
Trade accounts payable	$	87,446	$	122,199
Accrued legal and other professional fees		450,300		308,725
Accrued payroll and related costs		94,205		173,123
Third party royalties		173,005		1,168,837
Other accruals		72,272		25,704
Total	$	877,228	$	1,798,588

5. PATENT COSTS

We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from two to ten years, and review for impairment on a quarterly basis and when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We analyze our intangible assets, specifically, capitalized patent costs, on an annual basis for any indicator that an impairment exists. As of September 30, 2019 and December 31, 2018, no impairment existed and no adjustments were warranted.

We capitalized approximately $97,000 and $190,000 of patent costs for the three and nine months ended September 30, 2019 as compared to approximately $16,000 and $95,000 for three and nine months ended September 30, 2018, respectively. Patent costs may be creditable against future royalty revenues. For each period presented below, net patent costs consisted of:

	September 30, 2019			December 31, 2018
Patents	$	1,235,919		$	1,046,216
Accumulated amortization		(673,416	)		(601,738	)
Total	$	562,503		$	444,478

The amortization expense for patents for the three and nine months ended September 30, 2019 was approximately $29,000 and $72,000, respectively, and for the three and nine months ended September 30, 2018 was approximately $19,000 and $54,000, respectively. The estimated aggregate amortization expense for the remaining three months of 2019 and each of the years below is approximately as follows:

October 1, 2019 – December 31, 2019	$	24,000
2020		78,000
2021		61,000
2022		61,000
2023		61,000
Thereafter		278,000
Total	$	563,000

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6. 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, revenue recognized and other items. For the three and nine months ended September 30, 2019, our provision for income taxes was $1.6 million and $3.7 million. Our net deferred tax liabilities as of September 30, 2019 was $0.6 million. The estimated effective tax rate for the three and nine months ended September 30, 2019 was approximately 20% and 18% of pre-tax income reported in the period, calculated based on the estimated annual effective tax rate anticipated for the year ending December 31, 2019 plus the effects of certain discrete items occurring in 2019 including the impact of U.S. Treasury guidance issued in 2019 on the application of certain provisions in the Tax Cuts and Jobs Act of 2017 (“TCJA”) allowing the Company to refine its calculations and current period stock option exercises.

For the three and nine months ended September 30, 2018, our provision for income taxes was $1.1 million and $3.3 million. Our deferred tax assets as of September 30, 2018 were $0.3 million. The estimated effective tax rate for the three and nine months ended September 30, 2018 was approximately 18% and 19% of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated for the year ending December 31, 2018 plus the effects of certain discrete items occurring in 2018. Our effective tax rate for the three and nine months ended September 30, 2018 was impacted primarily by the TCJA, which was enacted on December 22, 2017 and lowered the U.S. corporate tax rate from 35% to 21%, beginning in 2018. Our effective tax rate was also impacted by the discrete impact of current period stock option exercises which impacts the effective rate in the period in which it occurs.

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 CCH for multiple indications. We maintain intellectual property with respect to injectable CCH that treats, among other indications, Dupuytren’s contracture (DC), Peyronie’s disease (PD), frozen shoulder syndrome, and removal of adipose tissue. Injectable CCH currently is approved and marketed in the U.S. under the trademark XIAFLEX^® for the treatment of both DC and PD. XIAFLEX® also is commercialized in Japan, Europe (where it is marketed as Xiapex®), Canada, and Australia for DC, and for PD in Canada, Europe and Australia. We generate revenue primarily from our license agreement with Endo, under which we receive license, sublicense income, royalties, milestones and mark-up on cost of goods sold payments related to the sale, regulatory submissions and approval of XIAFLEX®.

•

An agreement with Swedish Orphan Biovitrum AB (“Sobi”), pursuant to which Sobi has marketing rights for Xiapex® for the treatment of DC and PD in Europe and certain Eurasian countries;

•

An agreement with Asahi Kasei Pharma Corporation (“Asahi”), pursuant to which Asahi has the right to commercialize XIAFLEX® for the treatment of DC and PD in Japan; and

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•

An agreement with Actelion Pharmaceuticals Ltd. (“Actelion”), pursuant to which Actelion obtained marketing and commercial rights for XIAFLEX® in Australia and New Zealand.

We presented data from the Phase 1 clinical trial of CCH for the treatment of uterine fibroids at the 66^th Annual Meeting of the Society of Reproductive Investigation (SRI) on March 14, 2019 in Paris, France. In addition, on October 16, 2019, we presented data on patient-reported outcomes of a Phase 1 clinical trial of CCH for the treatment of uterine fibroids at the American Society for Reproductive Medicine conference in Philadelphia, Pennsylvania. The presentations follows positive top-line results announced in October 2018 demonstrating that CCH significantly reduced collagen content in uterine fibroids. We intend to use the Phase 1 data to inform the development of future clinical studies. BioSpecifics and its clinical partners continue to analyze the full Phase 1 data to guide the design of a Phase 2 study of CCH for the treatment of uterine fibroids.

Operational Highlights

On October 10, 2019, we announced that J. Kevin Buchi has been named chief executive officer of the Company. He will also serve on the Company’s board of directors.

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On October 23, 2019, we announced that Jennifer Chao has been appointed chairperson of its board of directors, effective immediately. Ms. Chao has served on our board as an independent director since 2015, and also serves as chair of the compensation committee.

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.

Critical Accounting Policies, Estimates and Assumptions

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience, interim data provided by Endo and on various other assumptions that we believe are reasonable under the circumstances. The financial information at September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth herein. The December 31, 2018 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 2018 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, 2018 included in the Company’s 2018 Annual Report and with the unaudited condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q for the first and second quarters of 2019 filed with the SEC.

As described in Note 2 to our accompanying Condensed Consolidated Financial Statements, there have been no significant changes to our critical accounting policies for the three and nine months ended September 30, 2019, compared to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 Annual Report and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2018

Revenues

We generate revenue primarily from royalties under the License Agreement and, to a lesser degree, licensing fees, sublicensing fees, and milestones.

Royalties

Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the three month period ended September 30, 2019 were $9.4 million as compared to $8.2 million in the corresponding 2018 period, an increase of $1.2 million, or 15%. The increase in total revenues for the quarterly period was primarily due to royalties associated with higher net sales of XIAFLEX® in PD and DC.

Licensing Revenue

Licensing revenue consists of licensing fees, sublicensing fees and milestones. For the three month periods ended September 30, 2019 and 2018, we recognized zero revenue related to nonrefundable upfront product license fees for product candidates.

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, 2019 and 2018, R&D expenses were approximately $143,000 and $162,000, respectively and in each case, are primarily related to the development work associated with our clinical, preclinical and other R&D programs. The decrease in the 2019 period as compared to the 2018 period was mainly due to reduced cost associated with other R&D programs and lower clinical costs.

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We manage the development of XIAFLEX® for uterine fibroids and initiate the development of XIAFLEX® in new potential indications, not licensed by Endo. We presented data from the Phase 1 clinical trial of CCH for the treatment of uterine fibroids at the 66^th Annual Meeting of the Society of Reproductive Investigation on March 14, 2019 in Paris, France. In addition, on October 16, 2019, we presented data on patient-reported outcomes of a Phase 1 clinical trial of CCH for the treatment of uterine fibroids at the American Society for Reproductive Medicine conference in Philadelphia, Pennsylvania. The presentations follows positive top-line results announced in October 2018 demonstrating that CCH significantly reduced collagen content in uterine fibroids. We intend to use the Phase 1 data to inform the development of future clinical studies. BioSpecifics and its clinical partners continue to analyze the full Phase 1 data to guide the design of a Phase 2 study of CCH for the treatment of uterine fibroids.

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

	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018
Program
Uterine Fibroids	$	42,819	$	82,716
Pre-clinical/other research projects		100,366		79,909
Total R&D expenses	$	143,185	$	162,625

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

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

•

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

•

the anticipated completion dates for 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;

•

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

•

costs and/or risks relating to future product opportunities.

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, 2019 and 2018 were $2.0 million and $2.2 million, respectively. The decrease in general and administrative expenses was mainly due to lower third party royalties associated with XIAFLEX® and the amortization associated with deferred royalty buy-down related to PD, partially offset by legal fees, personnel expenses and stock compensation expense.

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Other Income

Other income for the three months ended September 30, 2019 was approximately $505,000 compared to $360,000 in the corresponding 2018 period. Other income consists of interest earned on our investments.

Provision for Income Taxes

Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business, R&D activities, vesting of nonqualified options, revenue recognized and other items. For the three month period ended September 30, 2019, our provision for income taxes was $1.6 million. Our net deferred tax liabilities as of September 30, 2019 was $0.6 million. The estimated effective tax rate for the three months ended September 30, 2019 was approximately 20% of pre-tax income reported in the period, calculated based on the estimated annual effective tax rate anticipated for the year ending December 31, 2019 plus the effects of certain discrete items occurring in 2019 including the impact of U.S. Treasury guidance issued in 2019 on the application of certain provisions in the Tax Cuts and Jobs Act of 2017 (“TCJA”) allowing the Company to refine its calculations and current period stock option exercises.

For the three month period ended September 30, 2018, our provision for income taxes was $1.1 million. Our deferred tax assets as of September 30, 2018 were $0.3 million. The estimated effective tax rate for the three months ended September 30, 2018 was approximately 18% of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated for the year ending December 31, 2018 plus the effects of certain discrete items occurring in 2018. Our effective tax rate for the three months ended September 30, 2018 was impacted primarily by the TCJA, which was enacted on December 22, 2017 and lowered the U.S. corporate tax rate from 35% to 21%, beginning in 2018. Our effective tax rate was also impacted by the discrete impact of current period stock option exercises which impacts the effective rate in the period in which it occurs.

Net Income

For the three months ended September 30, 2019, we recorded net income of $6.3 million, or $0.86 per basic common share and $0.85 per diluted common share, compared to a net income of $5.0 million, or $0.69 per basic common share and per diluted common share, for the same period in 2018.

NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2018

Revenues

Royalties

Total royalty and mark-up on cost of goods sold for the nine month period ended September 30, 2019 were $26.4 million as compared to $23.1 million in the corresponding 2018 period, an increase of $3.3 million, or 14%. The increase in total revenues for the quarterly period was primarily due to royalties associated with higher net sales of XIAFLEX® in PD and DC, and higher mark-up on cost of goods sold revenue.

Licensing Revenue

For the nine month periods ended September 30, 2019, we recognized zero revenue related to nonrefundable upfront product license fees for product candidates as compared to approximately $40,000 in the 2018 period.

Research and Development Activities and Expenses

For the nine month periods ended September 30, 2019 and 2018, R&D expenses were approximately $0.5 million and $0.6 million, respectively, and in each case, are primarily related to the development work associated with our clinical, preclinical and other R&D programs. The decrease in the 2019 period as compared to the 2018 period was mainly due to reduced cost associated with other R&D programs and lower clinical costs.

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The following table summarizes our R&D expenses related to our development programs during the nine months ended September 30, 2019 and September 30, 2018, respectively:

	Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Program
Uterine Fibroids	$	169,231	$	210,250
Pre-clinical/other research projects		284,811		359,398
Total R&D expenses	$	454,042	$	569,648

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2019 and 2018 were $6.6 million and $6.3 million, respectively. The increase in general and administrative expenses was mainly due to increased legal fees, personnel expenses, stock compensation expense and professional fees, partially offset by lower third party royalties associated with XIAFLEX® and the amortization associated with the deferred royalty buy-down related to PD.

Other Income

Other income for the nine months ended September 30, 2019 was approximately $1.5 million compared to $0.9 million in the corresponding 2018 period. Other income consists of interest earned on our investments and, in the 2018 period, limited product sales of collagenase for laboratory use.

Provision for Income Taxes

For the nine month period ended September 30, 2019, our provision for income taxes was $3.7 million. Our net deferred tax liabilities as of September 30, 2019 was $0.6 million. The estimated effective tax rate for the nine months ended September 30, 2019 was approximately 18% of pre-tax income reported in the period, calculated based on the estimated annual effective tax rate anticipated for the year ending December 31, 2019 plus the effects of certain discrete items occurring in 2019 including the impact of U.S. Treasury guidance issued in 2019 on the application of certain provisions in the TCJA allowing the Company to refine its calculations and current period stock option exercises.

For the nine month period ended September 30, 2018, our provision for income taxes was $3.3 million. Our deferred tax assets as of September 30, 2018 were $0.3 million. The estimated effective tax rate for the nine months ended September 30, 2018 was approximately 19% of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated for the year ending December 31, 2018 plus the effects of certain discrete items occurring in 2018. Our effective tax rate for the nine months ended June 30, 2018 was impacted primarily by the TCJA, which was enacted on December 22, 2017 and lowered the U.S. corporate tax rate from 35% to 21%, beginning in 2018. Our effective tax rate was also impacted by the discrete impact of current period stock option exercises which impacts the effective rate in the period in which it occurs.

Net Income

For the nine months ended September 30, 2019, we recorded net income of $17.1 million, or $2.34 per basic common share and $2.33 per diluted common share, compared to a net income of $13.9 million, or $1.92 per basic common share and $1.89 per diluted common share, for the same period in 2018.

Liquidity and Capital Resources

To date, we have financed our operations primarily through royalties under agreements with third parties, licensing revenues, limited product sales, and sales of our common stock. At September 30, 2019 and December 31, 2018, we had cash and cash equivalents and investments in the aggregate of approximately $98.4 million and $82.0 million, respectively. We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for at least the next 12 months from the date of this filing.

Net cash provided by operating activities for the nine months ended September 30, 2019 was $14.5 million as compared to $12.3 million in the 2018 period. Net cash provided by operating activities in the 2019 period was primarily attributable to our net income partially offset by a reduction in accounts payable, accrued expenses and income taxes payable of $1.9 million and an increase in prepaid expenses and other current assets of $0.2 million. Non-cash items used to reconcile net income to net cash provided by operating activities of $0.9 million included amortization of patent costs, bond premiums and discounts, stock-based compensation expense and deferred tax expense. Net cash provided by operating activities in the 2018 period was primarily attributable to our net income partially offset by an increase in accounts receivable of $2.2 million due to an increase in XIAFLEX® net sales and accrued tax liability of $0.8 million. Non-cash items included amortization, stock-based compensation expense, and deferred taxes which was reduced by adjustments to reconcile net income to net cash provided by operating activities of $2.2 million.

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Net cash used in investing activities for the nine months ended September 30, 2019 was $16.7 million as compared to $6.2 million for the corresponding 2018 period. The net cash used in investing activities in the 2019 period reflects the investment of $93.4 million and the maturing of $76.6 million in marketable securities. The net cash used in investing activities in the 2018 period reflects the investment of $64.6 million and the maturing of $58.4 million in marketable securities.

Net cash provided by financing activities for the nine months ended September 30, 2019 was approximately $1.8 million as compared to $12,000 in the corresponding 2018 period. In the 2019 period, net cash provided by financing activities was due to proceeds received from stock option exercises of approximately $2.1 million partially offset by the repurchase of approximately $0.4 million of our common stock under our stock repurchase program. In the 2018 period, net cash provided by financing activities of $2.6 million was due to proceeds received from stock option exercises offset by the repurchase of approximately $2.6 million of our common stock under our stock repurchase program.

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 are subject to market risks in the normal course of our business, including changes in interest rates. There have been no significant changes in our exposure to market risks since December 31, 2018.

Item 4:

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports 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 SEC’s rules and forms, and that such information is accumulated and communicated to the management of the Company (the “Management”), including our chief executive officer and principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

The Company, under the supervision and with the participation of our chief executive officer and principal executive officer and principal financial officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our chief executive officer and principal executive officer and principal financial officer concluded, as of the end of the period covered by this Quarterly Report, that the Company’s disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our chief executive officer and principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our chief executive officer and principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in our internal control over financial reporting (as defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) that occurred during the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

In addition to the other information contained elsewhere in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I, Item 1A. Risk Factors” in our 2018 Annual Report, 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, 2019, we did not issue any unregistered shares of securities.

Issuer Purchases of Equity Securities

The following table presents a summary of share repurchases made by us during the quarter ended September 30, 2019.

Period	Total Number of Shares Purchased⁽¹⁾		Average Price Paid Per Share⁽²⁾		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⁽³⁾
Remaining balance as of June 30, 2019							$	3,881,433
July 1, 2019 – July 30, 2019		1,033	$	60.27		3,081		3,819,170
August 1, 2019 – August 31, 2019		1,717		56.39		4,798		3,722,346
September 1, 2019 – September 30, 2019		1,411	$	56.44		6,209	$	3,642,711
Total		4,161

(1)	The purchases were made in open-market transactions in compliance with Exchange Act Rule 10b-18 or under the company’s 10b-18 plan.

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

(3)	On May 23, 2019, we announced that our Board of Directors had authorized the repurchase of up to $4.0 million of our common stock under the stock repurchase program, which program is not subject to an expiration date.

Item 5.

Other Information

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Item 6.

Exhibits

	10.1*+	Employment Agreement by and between BioSpecifics Technology Corp., Advance Biofactures Corporation, and J. Kevin Buchi
	10.2*+	Form of Non-Qualified Stock Option Award Agreement
	10.3*	Amended Agreement of Lease, dated as of November 6, 2019, among the Company, ABC-NY and 35 Wilbur Street Associates
	31.1**	Certification of Chief Executive Officer and Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2**	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1**	Certification of Chief Executive Officer and Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002

* filed herewith

** furnished herewith

+ Denotes management contracts and compensatory arrangements in which any director or any named executive officer participates.

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SIGNATURES

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

	BIOSPECIFICS TECHNOLOGIES CORP.
	(Registrant)

Date: November 12, 2019	/s/ J. Kevin Buchi
	J. Kevin Buchi
	Chief Executive Officer and Principal Executive Officer