SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2002
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19879
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BIOSPECIFICS TECHNOLOGIES CORP.
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(Name of small business issuer in its charter)
Delaware 11-3054851
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
35 Wilbur Street, Lynbrook, New York 11563
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (516) 593-7000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were approximately
$8,210,000. The aggregate market value of common voting stock held by
non-affiliates of the Issuer was approximately $3,500,000 computed by reference
to the last sale price at which the stock was sold on April 25, 2002 as reported
by Nasdaq. As of April 25, 2002, 4,550,836 shares of common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III by Items 9, 10, 11, and 12
is incorporated by reference to the Registrant's proxy statement in connection
with the 2002 annual meeting of shareholders, which will be filed by the
Registrant within 120 days after the close of its fiscal year.
PART I
ITEM 1. BUSINESS OF BIOSPECIFICS
The entire discussion in this report, as well as any other management discussion
of the Company's goals and expectations, contains Forward-Looking statements
that are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected. The words believe, expect,
intend, anticipate, variations of such words and similar expressions identify
Forward-Looking statements, but their absence does not mean that the statement
is not Forward-Looking. These statements are not guaranties of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this Item 1
Business of BioSpecifics, including without limitation, Risk Factors, and Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as those discussed in any documents incorporated by
reference herein. Readers are cautioned not to place undue reliance on these
Forward-Looking statements, which speak only as of the date of this report.
BioSpecifics undertakes no obligation to update any Forward-Looking statement to
reflect new information, events or circumstances after the date of this report
or to reflect the occurrence of unanticipated events. When used in this annual
report, the terms BioSpecifics, Company, we, our, ours and us refer to
BioSpecifics Technologies Corp. and its consolidated subsidiaries.
OVERVIEW
We are engaged in the business of producing and licensing for sale a
fermentation derived enzyme named Collagenase ABC, approved by the U.S. Food and
Drug Administration ("FDA") for debriding chronic dermal ulcers and severely
burned areas. We are also researching and developing additional products derived
from this enzyme for potential use as pharmaceuticals.
We derive substantially all of our revenues through an exclusive license
agreement with a pharmaceutical company in the United States, Abbott
Laboratories, which in March 2001 acquired Knoll Pharmaceutical Company ("KPC",
collectively, "Abbott"), the Company's original licensee. Revenues are derived
from two sources i.) sales of Collagenase ABC enzyme in powder form (the
"product" or the "enzyme") to Abbott and to a lesser extent foreign
pharmaceutical companies, and ii.) royalties paid by Abbott on U.S. sales of
Collagenase Santyl(R) Ointment, which contains the product, to distributors.
Since 1972, we have sold Collagenase ABC, our only commercial product to date,
principally in the United States through exclusive license agreements with
Abbott.
In January 2000, KPC, prior to its being acquired by Abbott, sublicensed its
exclusive marketing rights to Smith & Nephew, Inc. ("S&N") with our permission.
See "Sale and Distribution of Collagenase ABC".
THE COMPANY'S PRODUCT AND MARKETS
Collagenase ABC
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Our principal drug product, Collagenase ABC, is an enzyme that digests collagen,
the body's principal connective tissue. The drug is approved by the FDA for
topical enzymatic debridement of dermal ulcers (wounds), such as pressure ulcers
(also known as "bed sores") and second and third degree burns.
In general, necrotic (i.e., dead or devitalized) tissue must be debrided
(removed) from a dermal ulcer either surgically, by enzyme, or by autolysis (the
much slower natural process) before proper healing can take
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place. Necrotic tissue is anchored to dermal ulcers by strands of collagen. The
unique ability of collagenase to digest collagen in necrotic tissue and thereby
effect the debridement of necrotic tissue in a wound is an important part of the
healing process associated with dermal ulcers and helps provide a healthy base
for the growth of new tissue. Collagenase ABC does not attack collagen in
healthy tissue or in newly formed granulation tissue.
Sale and Distribution of Collagenase ABC
----------------------------------------
Collagenase ABC enzyme powder (the "product" or the "enzyme") is the active
pharmaceutical ingredient of a topical ointment. We do not directly market the
product to end-users. We supply the product in powder form, primarily to Abbott
and to a lesser extent pharmaceutical companies in Brazil and India, which
compound the product into ointment that is then marketed to end-users. Our
production of the product was voluntarily suspended in March 2000 due to an
upgrade program at our manufacturing facilities in Curacao and Lynbrook to
address various FDA concerns. The physical upgrades at the Curacao and Lynbrook
facilities have been completed and subsequent validation substantially
completed. The upgraded Curacao facility commenced limited production during the
fiscal year ended January 31, 2002. However, it must still be inspected and
approved by the FDA before we can supply Abbott with the product being produced
there. Since March 2000, we supplied Abbott with the product from an inventory
built up in anticipation of the upgrade. See "Manufacturing" and "Government
Regulation." Pursuant to the agreement with Abbott, the Company supplies Abbott
with the product and monitors the production by Abbott of an ointment containing
the product. KPC marketed this ointment under its registered trademark,
Collagenase Santyl(R), in the United States from 1972 to January 2000, and in
Canada from 1994 to January 2000. Commencing February 2000, S&N began marketing
the product under the sublicensing agreement with Abbott.
Abbott Agreement and Sublicense
-------------------------------
We have an agreement with Abbott (the "Abbott Agreement"), which runs through
August 2003 and automatically renews for an additional 10-year period unless
Abbott notifies us, at least 6 months prior to the renewal date, of its
intention to terminate at the conclusion of the initial term. The Abbott
Agreement provides that Abbott is our exclusive licensee to market Collagenase
Santyl(R) ("Santyl(R)") in the United States and Canada so long as Abbott uses
its best efforts to increase sales. Abbott pays us for the product, at a price
that is subject to annual adjustment based upon increases in our actual
manufacturing costs, not to exceed increases in the consumer price index for
certain items. Abbott also pays us a royalty based upon net Santyl(R) sales.
Royalties for fiscal 2002 and 2001 were approximately $2,269,000 and $2,095,000,
respectively. As part of the Abbott Agreement, KPC and its U.S. affiliates, and
its successor Abbott, (i) agreed not to seek or become a party to any license or
other agreement for the production or purchase of collagenase powder or
collagenase ointment from any source other than us, (ii) will make no efforts to
achieve registration with the FDA for collagenase powder manufactured by parties
other than us, and (iii) will not collaborate with any third party attempting to
achieve a registration.
In January 2000, pursuant to a sublicense and assignment agreement (the
"Sublicense Agreement"), to which we are not a party, KPC (acquired by Abbott in
March 2001) sublicensed its exclusive marketing rights to S&N with our consent.
Under the sublicense, Abbott continues to purchase the product from us and
contract manufacture Santyl(R). S&N markets Santyl(R) and sells it to
distributors. In connection with the sublicense, we entered into several
agreements with Abbott and S&N. These included an agreement allocating
responsibility under the Abbott Agreement among us, Abbott, and S&N for both the
sublicense and license period. Another agreement imposes certain obligations on
us to address the FDA issues concerning the Curacao and Lynbrook manufacturing
facilities. Abbott will assign its license rights (as opposed to the current
sublicense arrangement) in the Abbott Agreement to S&N in the event of FDA
approval of a
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compliance program being undertaken by ABC. See "Government Regulation". If the
license rights are assigned to S&N, the Abbott agreement will be extended at
that time until 2013, and automatically renew for an additional 10-year term
unless S&N notifies us, at least 6 months prior to the renewal date, of its
intention to terminate at the conclusion of the 2013 term.
Abbott accounted for approximately $7,177,000 and $4,970,000 in product sales
and royalties of the Company for the fiscal years ended January 31, 2002 and
2001, respectively. These amounts were approximately 87% and 90% of the
Company's revenues during the fiscal years ended January 31, 2002 and 2001,
respectively. As of January 31, 2002, we had approximately $700,000 of firm
booked orders with Abbott for the product, which represents the value of all
inventory available for sale to Abbott as of January 31, 2002, compared to
approximately $2.2 million of firm booked orders with Abbott as of January 31,
2001. The Company's product is approved in two other countries, Brazil and
India, and sold to commercial customers in those countries, who compound the
product into ointment. In fiscal 2002 and 2001, sales to the customers in Brazil
and India represented approximately 12% and 10% of total revenues, respectively.
The Company has a license agreement with the customer in India. There is no
license and supply agreement with the customer in Brazil. The product and
purified collagenase are also sold for non-sponsored research purposes.
Other Agreements for the distribution of Collagenase ABC
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In 1996, we entered into an agreement to license the product for sale as an
ointment in Germany to the German subsidiary of an international pharmaceutical
company. The agreement calls for an initial payment on signing and further
payments if and when the German health authority grants marketing approval of
Collagenase ABC ointment. During fiscal 1997, we recognized $20,000 in license
fees and deferred revenue of $45,000 from this agreement. Our German subsidiary
(see "Marketing") submitted collagenase ointment to the German health authority
for marketing approval in 1997, whose final decision is pending.
In 1994, we entered into a license and supply agreement with a Swiss
pharmaceutical company to market an ointment containing the product in two
European countries and several Middle Eastern countries. The agreement runs for
ten years from first market introduction of the product in each country. We
recognized no revenue from this agreement in fiscal years ended January 31, 2002
and 2001.
In June 1994, we entered into a multi-year license with an Italian
pharmaceutical company that has agreed to market an ointment containing the
product in Italy subject to the receipt of requisite Italian governmental
approval. The licensee has agreed to purchase the product in agreed minimum
amounts increasing in each of the three years following such approval. For the
fiscal years ended January 31, 2002 and 2001, we recognized no revenues from
this contract.
PROPOSED PRODUCTS AND USES FOR PRODUCTS
Injectable Collagenase ABC
We have developed a non-patented, proprietary process to further purify
Collagenase ABC. We have investigated using this purified form of collagenase as
an injectable to remove collagen tissue that interferes with normal bodily
functioning or is unsightly. We, our affiliates, and individual investigators
are clinically testing in the United States injectable collagenase for treatment
of Dupuytren's disease, Peyronie's disease, frozen shoulder, and lipolysis. See
"Investigational New Drug Applications ("IND's") for Injectable Collagenase
ABC". We produced purified collagenase for injection at our facility in New York
that is being used in U.S. clinical trials. We have renovated the pilot facility
in Lynbrook for manufacture of purified
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injectable collagenase in order to support plans for Phase 3 trials for
Dupuytren's disease. We sell small amounts of purified collagenase for non-human
research in the United States and other countries.
Investigational New Drug Applications ("INDs") for Injectable Collagenase ABC
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We, our affiliates, or individual investigators have filed INDs with the FDA and
are in the clinical testing process for additional products using injectable
Collagenase ABC. The INDs permit testing our drug candidates on humans. None of
these products has completed testing.
Dupuytren's Disease
-------------------
Dupuytren's disease is a deforming condition of the hand in which one or more
fingers, usually the ring and little fingers, contract toward the palm, often
resulting in functional disability. We were granted a United States patent for
the use of its collagenase enzyme to treat this condition in July 2000. The use
of collagenase for the treatment of Dupuytren's disease has received "orphan
drug" designation from the FDA. Orphan drug designation is based on the
provisions of the Orphan Drug Act. The designation is given to products used to
treat a specified rare disease or condition defined as affecting fewer than
200,000 people in the United States. Orphan drug designation imparts certain
benefits including a seven year period of exclusivity after approval for
marketing, the ability to apply for clinical research grant funds, tax credits
for costs of clinical trials performed in the U.S., assistance from FDA in
protocol development, and possible waivers from "user fees" charged by FDA after
drug approval. A dose response study was successfully completed at Stanford
University and at State University at Stony Brook Hospital and Medical Center
("Stony Brook") and the results were submitted to FDA in support of concluding
Phase 2. An end of Phase 2 meeting was held with FDA to discuss how to proceed
with Phase 3 studies. The investigators at Stony Brook received a grant from the
FDA to conduct Phase 3 clinical trials to determine safety and efficacy of
collagenase for this use.
Frozen Shoulder
A double randomized placebo controlled dose response study is being conducted at
Stony Brook using collagenase injection for treatment of adhesive capsulitis,
better known as "frozen shoulder". Frozen shoulder is a clinical syndrome of
pain and severely decreased motion in the shoulder joint. This syndrome afflicts
up to 2 million patients annually.
Lipolysis
A clinical investigation is currently being performed with collagenase injection
in the treatment of skin lipomas. Lipomas are benign fatty tumors that occur as
bulges under the skin. The concept of using collagenase for removal of fat is
discussed in a European Patent Application we filed. Dr Anne Marie covered the
story for ABC News in June 2001 and discussed the potential for "chemical
liposuction."
Peyronie's Disease
We are developing a product for the treatment of Peyronie's disease, a condition
in which collagen plaques form on the shaft of the penis and interfere with
erection and sexual intercourse. Initial tests on approximately 200 men have
shown favorable results in dissolving the plaques by injecting purified
collagenase directly into such plaques. We were awarded a patent for this use in
March 2000 and received "orphan drug" designation from the FDA in March 1996. We
believe that no other pharmaceutical treatment for this condition has been
proven to be effective. A study to optimize this treatment was completed at
Devine-Tidewater Urology, Norfolk, Virginia, the largest United States center
for the study and treatment of
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Peyronie's disease. In August 1999, the trial's investigator reported on 27
patients who were treated in an open label trial. The investigator reported
encouraging results and additional trials are planned.
OTHER PROPOSED PRODUCTS AND USES
Treatment of Burns
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Collagenase Santyl(R) has FDA approval for the treatment of burns. A number of
studies have been conducted which compared the efficacy of Collagenase Santyl(R)
to standard treatment (silver sulfadiazine) for deep second degree burns. The
results of these studies have been favorable showing faster cleaning and
healing, as well as economic benefits. We are considering the development of
other dosage forms for the treatment of burns.
Collagenase for Wound Healing
-----------------------------
In vitro studies conducted at Tufts University Medical School showed that
collagenase treatment of skin cells significantly enhances cell migration and
growth after injury. Clinical and laboratory investigations further profiling
the potential role of collagenase and its pharmacological activity in wound
healing are being pursued. We have been assigned two patents awarded to Tufts
University relating to this discovery. We are collaborating with S&N in this
area. Preclinical experiments are being conducted and clinical experiments to
confirm the observations made at Tufts are being planned.
Glaucoma and Treatment of Other Eye Disorders
---------------------------------------------
We collaborated with Bausch & Lomb in a clinical investigation to confirm
previous studies on the use of our collagenase to treat glaucoma. The
collagenase treatment reduced IOP (intraocular pressure) in open angle glaucoma
patients for at least three months post treatment with no vision-threatening
complications. The results of the clinical investigation have been accepted for
publication in 2002 by the Archives of Ophthamology.
We explored the possible use of purified injectable Collagenase ABC for the
treatment of opaque scar tissue in the vitreous humor of the eye. Its use may
assist in the surgical removal of scar tissue without tearing the retina to
which the tissue is attached. If effective, this use may be beneficial in the
treatment of blindness resulting from diabetes and certain other causes. Prior
to 2000, approximately 20 persons have been treated with this product on an
experimental basis. We are currently seeking a marketing partner in an effort to
explore this potential use.
PRODUCT LIABILITY
The sale of the product, as well as the development of any additional products
of ours, exposes us to potential product liability claims both directly from
patients using the product or potential products, as well as from our agreement
to indemnify certain distributors of the products for claims made against such
distributors. We have limited product liability insurance for the use of
Collagenase Santyl(R) and clinical experiments in the United States for its
additional product candidates. To date, no product liability claims have been
made against us.
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MANUFACTURING
We produce Collagenase ABC, the active ingredient of a topical ointment, and
supply it in powder form to pharmaceutical companies that compound it into the
ointment and market the ointment to end-users. Our production of the product was
voluntarily suspended in March 2000 due to renovation at the manufacturing
facilities in Curacao and Lynbrook to address various FDA concerns, although
final stage testing continues at the Lynbrook facility. We completed the upgrade
renovation at the Curacao and Lynbrook facilities and have substantially
completed validating the enzyme production process at the upgraded facilities.
(In this context, the words "validating" or "validation" means demonstrating
that the production process is reliably performing as intended. Such
demonstration must be documented with data, process capability studies, and
other appropriate means. The concept of validation is a requirement to
demonstrate that what is being employed (e.g. a production process) has been
investigated and proven to be reliable.) Once the validations are completed, FDA
approval will be required before enzyme produced at the facilities can be sold
to Abbott. Until FDA approval of the facility we will supply customers with the
product from our inventory. See "Government Regulation". Pursuant to the
agreements with Abbott and S&N, we supply Abbott with the product and monitor
the production by Abbott of Santyl(R), which since February 2000 has been
marketed by S&N.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving technology and
intense competition. Many companies of all sizes, including major pharmaceutical
companies and specialized biotechnology companies, are engaged in activities
similar to those of ours. Many of our competitors have substantially greater
financial and other resources, larger research and development staffs, and
significantly greater experience in regulatory approval procedures. We do not
have comparable resources and do not intend to compete with major pharmaceutical
companies in drug marketing except in possible niche marketing for one or more
of the products, if feasible.
Our debriding ointment product, Collagenase Santyl(R), competes primarily with
other available enzymatic debridement products in the United States. Those
currently available are manufactured or marketed by Healthpoint Ltd and the Dow
B. Hickam division of Marion Labs. A potential debridement agent was known to be
under development by Genzyme Tissue Repair Division, and other large drug
companies may also have debridement products under development. Debriding
products also compete with surgical debridement and mechanical debridement using
hydrotherapy. We believe enzymatic debridement is superior to surgical and
mechanical debridement, because those procedures are painful, labor intensive,
and remove viable tissue along with necrotic tissue.
In December 1994, the Federal Agency for Health Care Policy and Research
("AHCPR") issued Clinical Practice Guideline Number 15 entitled "Treatment of
Pressure Ulcers". Collagenase is the only product suggested for enzymatic
treatment of pressure ulcers by the guideline. Unlike the other available
enzymatic debriding products, ours is collagen specific. Approximately 75% of
skin is collagen, making this enzyme particularly appropriate for the
debridement of necrotic tissue.
In Europe, Knoll AG ("KAG") marketed an ointment substantially similar to our
Collagenase Santyl(R) Ointment under the trade name "Iruxol(R)". In January
2000, Smith & Nephew plc acquired worldwide marketing rights to Iruxol(R)
excluding the United States and Canada, as that ointment is not FDA approved for
sale in the United States. KAG, which as part of the global pharmaceutical
business of BASF, was acquired by Abbott in March 2001. We, through our foreign
licensees for topical collagenase, will compete with Smith & Nephew plc in
Europe if and when the licensees receive marketing and pricing approval from
their respective health agencies. (See "Collagenase ABC - Agreements for the
Distribution of Collagenase ABC").
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Colleges, universities, governmental agencies and other public and private
research organizations continue to conduct research and are becoming more active
in seeking patent protection and licensing arrangements to collect royalties for
use of technology that they have developed, some of which may be directly
competitive with that of ours. We expect competition to intensify as
technological advances occur in the area of the development of pharmaceutical
products of biologic origin.
MARKETING
We do not have our own sales staff and instead rely on licensees who have
recognition and acceptance in the marketplace. By licensing those companies,
which already have a strong marketing and sales force dedicated to specialties,
we have very limited selling costs, while the licensee enhances the efficacy of
its sales and marketing staff by adding additional products.
In the United States, we are gaining recognition as the manufacturer of
Collagenase Santyl(R) as our name and that of our U.S. subsidiary are required
to appear on the end-use package sold by Smith & Nephew.
The European Union ("EU") is the second largest pharmaceutical market in the
world. We are seeking approval in certain countries within the EU through
European licensees.
In November 1995, we established a German subsidiary, Biospecifics Pharma GmbH.
Its purpose is to identify additional licensees, assist us in achieving the
clinical and scientific data necessary to obtain product approvals in the EU,
and assist licensees in registration of products. See "Employees".
We may decide to directly market certain products under development,
particularly if the market is well defined, the number of specialists who
address the targeted indication is small, and we have the financial resources at
that time to engage in those activities.
RESEARCH AND DEVELOPMENT
Since inception (1957 and 1976 for the New York and Curacao subsidiaries,
respectively), we have expended over $24.4 million in research on collagenase
and other products. We incurred approximately $1,067,000 and $1,313,000 in
research and development activities during its fiscal years ended January 31,
2002 and 2001, respectively.
GOVERNMENT REGULATION
Regulation in the United States
-------------------------------
All pharmaceutical manufacturers in the U.S. are subject to extensive regulation
by the federal government, principally the FDA, and, to a lesser extent, by
state governments. The Federal Food, Drug, and Cosmetic Act, the Public Health
Service Act, and other federal statutes and regulations govern or influence the
testing, approval, manufacture, safety, labeling, storage, record keeping,
advertising, promotion, sale and distribution of products. Non-compliance with
applicable requirements can result in fines, recall or seizure of products,
total or partial suspension of production and/or distribution, refusal of the
government to enter into supply contracts or to approve new drug applications,
and criminal prosecution. The FDA also has the authority to revoke drug
approvals previously granted.
Our products in development will require regulatory clearance prior to
commercialization. The nature and extent of regulation may differ with respect
to different products. In order to test, produce and market
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certain therapeutic products in the United States, mandatory procedures and
safety standards, approval processes, and manufacturing and marketing practices
established by the FDA must be satisfied. Obtaining FDA approval has
historically been a costly and time-consuming process.
We are also licensed by, registered with, and subject to periodic inspection and
regulation by, the New York State Department of Health and the New York State
Board of Pharmacy, pursuant to federal and state legislation relating to drugs
and narcotics.
Our manufacturing facilities in New York and Curacao are registered with, and
licensed by, the FDA. In March 2000, our production of the product was
voluntarily suspended due to upgrade renovation at our manufacturing facilities
in Curacao and Lynbrook to address various FDA concerns. During fiscal 2002, the
physical upgrade was completed and the Curacao facility went back into limited
production, however, none of that production can be sold to Abbott until FDA
approves the upgrade and any product already produced there for Abbott. Final
stage processing and testing of previously produced inventory continues at the
Lynbrook facility.
In January and March of 1999, we were issued a List of Inspectional Observations
on FDA Form 483 (the "Form 483") from FDA inspectors, citing numerous
inspectional observations relating to deficiencies in our compliance with FDA
regulations at our Lynbrook, New York and Curacao, Netherlands Antilles
facilities. In addition, on May 10, 1999, we received a letter from the FDA (the
"FDA Letter") citing certain inspectional observations relating to deficiencies
at its Lynbrook, New York facility, Curacao, Netherlands Antilles facility, and
contract manufacturing facility at Abbott. The FDA Letter advised us that the
FDA would institute formal proceedings to revoke our Product and Establishment
Licenses to manufacture Collagenase Santyl(R) Ointment unless we provided
satisfactory assurances to the FDA, including submitting to the FDA a
comprehensive plan of corrective action to address the observations listed in
the Form 483 and the FDA Letter, and otherwise demonstrate compliance with
applicable regulatory requirements. We provided the FDA with a plan of
corrective action and have had a number of meetings with the FDA to discuss the
plan of corrective action and the upgrade renovation of the Curacao production
facility. We submitted a number of periodic updates to the FDA on progress under
the plan, hired outside consultants and employed additional staff for our
Quality Unit.
We started renovating the Curacao facility in March 2000 and, as a result,
suspended production of enzyme at that location. We also voluntarily suspended
the production of enzyme at our Lynbrook facility, although final-stage testing
continues there. Although renovations at the Curacao and Lynbrook facilities
were substantially completed by March 2001, we cannot sell to Abbott enzyme now
being produced at the Curacao facility until the FDA approves a prior approval
supplement ("PAS") to our Establishment License. As part of the approval process
for the PAS, the FDA will review and inspect the modifications of the Curacao
facility. In anticipation of the renovations and suspension of manufacturing
operations, we accumulated an inventory of the product, on which we conduct
final stage testing at the Lynbrook facility, that we estimate Abbott can use to
compound Santyl(R) into the third quarter of calendar 2002. We estimate that
this would permit Abbott to supply S&N with Santyl(R) into the second quarter of
calendar 2003.
We have spent approximately $4.7 million in capital improvements to upgrade both
facilities and anticipate we may spend approximately $100,000 more to complete
the renovations. In addition, we incurred consulting fees and other expenses of
approximately $1.3 million since May 1999, including approximately $112,000
during the fiscal year ended January 31, 2002 and $215,000 during the fiscal
year ended January 31, 2001. We may incur additional consulting and other
expenses of approximately $100,000 during the fiscal year that will end January
31, 2003. During the fiscal years ended January 31, 2000, 2001, and 2002, we
estimate that our personnel costs dedicated to the upgrade and addressing the
FDA's observations were approximately $923,000, which were recorded in general
and administrative expenses. We believe that the plant upgrade program and
changes in our quality control policies and procedures outlined in the
corrective plan will adequately address the FDA's
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concerns, although there can be no assurances that additional expenditures and
time will not be required as a result of any FDA concerns. We believe the
capital-spending plan modernized our facilities and improved operational
efficiency.
While we believe that we have made considerable progress in addressing the FDA
concerns addressed in the Form 483 and the FDA Letter, if we are unable to
further address these matters in a timely manner, there may be delays in the
delivery of product produced in the renovated facilities to Abbott for use to
contract manufacture Collagenase Santyl(R) Ointment. Such delays could have a
material adverse effect on our future operating results.
Foreign Regulation of Pharmaceutical Products
---------------------------------------------
The marketing of pharmaceutical products outside the United States is subject to
the regulatory requirements of the country in which the product is marketed.
These requirements may vary widely from country to country. Approval in foreign
countries is required regardless of whether FDA approval has been obtained in
the United States. Nevertheless, the time required to obtain such approval may
be longer or shorter than required to obtain FDA approval, and there can be no
guarantees that such approvals will be granted.
Our subsidiary in Curacao has produced the pharmaceutical substance "Collagenase
ABC (Sterile)" for incorporation into ointment. As this product is not a
pharmaceutical end product, it need not be officially registered with the Bureau
of Pharmaceutical Affairs of the Netherlands Antilles (the "Pharmaceutical
Bureau"). However, the plant in which the product has been produced and the
production process are subject to inspection by the Pharmaceutical Bureau under
the laws and regulations of the Netherlands Antilles. Production was suspended
during the upgrade, as discussed above in "Regulation in the United States".
PATENT AND TRADEMARK PROTECTION
Patents
We are the assignee or licensee of eleven U.S. patents. We are not able to
ascertain whether these patents will provide any value either prior to their
expirations or at any time thereafter. We are the assignee of additional U.S.
patent rights that have expired as well as certain foreign patent rights
corresponding to certain of the foregoing patents. We have other patents under
active preparation for filing. There can be no assurances when, if ever, such
patents will be issued, or that such patents, if issued, will be of any value to
us. We are obligated to engage in research and development of certain products
or uses underlying the patent rights licensed or assigned to us.
Trademarks
We have registered the name Salutyl(R) for our collagenase ointment in a number
of countries other than the United States. Trademarks for other countries are
protected for varying periods of time. We use the trademarked name "Cordase" for
the injectable collagenase being developed for the treatment of Dupuytren's
disease.
EMPLOYEES
We have 42 full-time employees, of which 28 are located at the Lynbrook
facility, 13 are at the Curacao facility, and 1 is in Germany. There are also 6
part-time employees in Lynbrook and 2 in Curacao. None of
10
these employees are represented by a union. We consider our relationship with
our employees to be excellent.
We have entered into confidentiality agreements with most of our employees,
other than executive officers. Pursuant to such agreements, each employee in New
York agrees to keep all of our proprietary and other information secret and
confidential and to return the same to us upon termination. These employees
further agree not to divulge any trade secrets during their respective terms of
employment and thereafter without our prior written consent and further to
assign to us all inventions, discoveries, and improvements which they make
during the term of employment, within one year thereafter, or utilizing any of
our trade secrets. The agreement executed by Curacao employees provides that
they will not divulge any data connected with the production process in Curacao.
There can be no assurance that any particular court would enforce any or all of
the terms of any of such agreements.
Our subsidiary in Germany, Bio Pharma, is managed by Rainer Friedel, MD., Ph.D.
Dr. Friedel is a member of our board of directors. Dr. Friedel and the Company
have executed an employment agreement, as mandated by German law.
Consulting Agreement
During the fiscal years ended January 31, 2002 and 2001, we incurred consulting
fees in the amount of $0 and $35,000, respectively, for services provided by a
son of a former director.
RISK FACTORS RELATED TO OUR BUSINESS
Reliance on a Single Product for Revenues
Collagenase ABC enzyme is our sole source of revenues.
Uncertainty of Government Regulatory Requirements and Future Production of the
Enzyme
------------------------------------------------------------------------------
The production and marketing of Collagenase ABC enzyme is subject to regulation
in the United States by the federal government, principally the FDA. As
previously discussed, we stopped production of the enzyme and began upgrading
the Curacao facility in March 2000. In May 2001 we completed the upgrade and
went back into limited production. In April 2002 we filed with the FDA a "Prior
Approval Supplement" ("PAS") for the Curacao facility upgrade. Although it is
difficult to predict with any certainty the time at which the PAS approval can
be obtained, we believe the following could happen by the end of the fiscal year
that will end January 31, 2003:
[ ] FDA comments on PAS
[ ] FDA inspects Curacao facility
[ ] FDA comments on inspection of Curacao facility
[ ] BioSpecifics responds to FDA comments
[ ] FDA approves PAS for Curacao facility
While we are producing enzyme at the upgraded Curacao facility, the enzyme being
produced for Abbott must be held in quarantine and can only be sold to Abbott if
and when the FDA approves the PAS and any enzyme already produced at the
facility for Abbott. There can be no assurance when the FDA will approve our
PAS, if at all.
11
Expected Operating Losses for the Fiscal Year Ended January 31, 2003
--------------------------------------------------------------------
Since we began upgrading the Curacao facility in March 2000, we have not
produced any new enzyme that we can currently sell to Abbott. The enzyme we
processed and sold to Abbott in fiscal 2001 and fiscal 2002, which it used to
make Collagenase Santyl(R) Ointment ("Santyl(R)"), was from an inventory of
enzyme we built up at the Curacao facility prior to the start of the upgrade.
This inventory will be depleted during the first half of fiscal 2003. Revenues
from this inventory and royalties on sales of Santyl(R) will be insufficient to
cover our operating expenses, resulting in an operating loss for the fiscal year
that will end January 31, 2003.
Need for Additional Capital
---------------------------
We expect to have cash to fund operations during the fiscal year ended January
31, 2003 from royalties from sales of Santyl(R), the sale of the remaining
enzyme inventory to Abbott, the production and sale of enzyme to foreign
customers, and cash currently on hand. We estimate that Abbott can supply S&N
with Santyl(R) through March 2003, based on its inventory of enzyme it has
already purchased from us, our remaining inventory of enzyme, and S&N's rate of
Santyl(R) sales. If we are able to get approval of the PAS by the end of the
fiscal year ended January 31, 2003, we may also be able to sell quarantine
enzyme already produced and planned to be produced for Abbott. However, if
approval is significantly delayed and we cannot sell quarantine product, we will
be unable to fund operations beyond the first quarter of calendar 2003 unless we
are able to raise additional capital. In addition, we need funds to continue
development of our proposed products.
Dependence on Abbott Laboratories and Smith & Nephew Inc.
---------------------------------------------------------
We are dependent on Abbott to buy enzyme, contract manufacture Santyl(R) and
provide it to S&N ready for distribution. We are dependent on S&N for the
distribution of Santyl(R), which provides us with royalty revenue. Abbott and
S&N have a Sublicense and Assignment agreement whereby Abbott will assign to S&N
its rights in our exclusive license agreement by December 31, 2002. S&N has the
option to terminate its agreement with Abbott if the Curacao facility PAS is not
approved by the FDA by December 31, 2002. There can be no assurance that S&N
will not terminate its agreement with Abbott if the PAS for Curacao is not
received by December 31, 2002. In the event S&N terminates, our exclusive
license agreement with Abbott automatically extends for 10 more years in August
2003, unless Abbott exercises its right not to extend our exclusive license
agreement. In that event, Abbott would have to notify us six months in advance,
or February 2003.
We are not aware of either party's current intentions. If S&N were to terminate,
and Abbott exercises its right, we would have to find another licensee with a
sufficient sales force. We would also have to use another trade name for
ointment containing our Collagenase ABC, as the trade name Santyl(R) is owned by
Abbott. There can be no assurance that we would be successful in finding another
licensee or that a new licensee could achieve S&N's current level of sales.
ITEM 2. DESCRIPTION OF PROPERTY.
We lease two facilities, one in Lynbrook, New York and one in Curacao,
Netherlands Antilles. The New York facility, also our administrative
headquarters, contains 3,500 square feet of office space and 10,500 square feet
of laboratory, production, and storage facilities. We lease this facility from
the Wilbur Street Corporation ("WSC"), which is owned by The S.J. Wegman
Company, the principal stockholder of the Company and an affiliate of Edwin H.
Wegman, President of the Company. On January 30, 1998, WSC and the Company
entered into a triple net lease agreement, which provides for an annual rent
starting at
12
$125,000, which can increase annually by the amount of annual increase in the
Consumer Price Index for the greater New York metropolitan region. The lease
term is 7 years, expiring January 31, 2005. During each of the fiscal years
ended January 31, 2002 and 2001, the Company paid rent of $125,000 and real
estate taxes of approximately $36,000 relating to this lease agreement. The
Company believes that the terms of this lease are reasonable and the rent
charged is no greater than that which would be charged by an unaffiliated
landlord for comparable facilities, based on appraisals of the property.
We also lease a building in Brievengat, Curacao, Netherlands Antilles from a
company wholly-owned by the Insular Territory of Curacao. This building is our
principal manufacturing facility, and is licensed by the FDA to produce
Collagenase ABC. The facility has approximately 15,750 square feet of usable
space. The lease, which was originally entered into with the Insular Territory
of Curacao on January 1, 1977, is automatically renewable upon the same terms
every five years, unless either party gives notice of termination three months
prior to the expiration of the five-year period. The lessor is entitled to
revalue the rent for each successive five-year period, and the lease has been
automatically renewed through March 1, 2006. The current rent is approximately
$30,000 per year.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our Common Stock trades on The Nasdaq SmallCap Market tier of the Nasdaq Stock
Market ("Nasdaq") under the Symbol "BSTC". On April 25, 2002, the closing price
for our Common Stock was $2.10. The table below sets forth the high and low sale
prices for our Common Stock for the period February 1, 2000 through January 31,
2002, as reported by Nasdaq.
QUARTER ENDED HIGH LOW
---------------- ----- -----
April 30, 2000 $8.75 $2.08
July 31, 2000 $3.69 $2.03
October 31, 2000 $4.06 $1.06
January 31, 2001 $2.72 $0.81
April 30, 2001 $1.75 $0.75
July 31, 2001 $3.50 $0.94
October 31, 2001 $2.92 $2.00
January 31, 2002 $2.55 $1.50
On April 25, 2002, there were 110 stockholders of record of our Common Stock. We
believe we have approximately 1,000 beneficial owners of our Common Stock.
Trading in our securities was transferred to The Nasdaq SmallCap Market on May
25, 2001 from The Nasdaq National Market because we no longer satisfied the
requirements for listing on that market.
13
It is our current policy to retain earnings to finance the growth and
development of our business and not pay dividends. Any payment of cash dividends
in the future will depend upon our financial condition, capital requirements and
earnings as well as such other factors as the Board of Directors may deem
relevant. Our Board of Directors authorized two buyback programs for the
repurchase of a total of 600,000 shares of common stock. Through July 1999, a
total of 361,380 shares were repurchased at an average price of $5.29 per share.
We have not repurchased shares since that time and have suspended the buyback
for the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
--------------------------------------------------------------------------------
Information provided by us or statements contained in this report or made by our
employees, if not historical, are forward looking information, which involve
uncertainties and risks.
We caution readers that important factors may affect our actual results and
could cause such results to differ materially from forward-looking statements
made by us or on our behalf. Such factors include, but are not limited to,
government regulation, our ability to obtain the approval of our production
facilities, our estimate that our inventory of product for Abbott is sufficient
until the product being produced at the upgraded facilities is approved and can
be sold to Abbott, changing market conditions, the impact of competitive
products and pricing, the timely development and approval by the FDA and foreign
health authorities of potential products, market acceptance of our potential
products, and other risks detailed herein and in other filings we make with the
Securities and Exchange Commission. Further, any forward looking statement or
statements speak only as of the date on which such statements were made, and we
undertake no obligation to update any forward looking statement or statements to
reflect events or circumstances after the date on which such statement or
statements were made.
CRITICAL ACCOUNTING POLICIES
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts in the financial statements
and the accompanying notes. Actual results could differ from those estimates. We
believe the following accounting policies are the most critical to BioSpecifics.
Revenue Recognition
Net sales include the sales of Collagenase ABC enzyme, which are recognized at
the time the enzyme is shipped to Abbott and foreign customers. Net sales also
include testing fees we charge Abbott for testing Collagenase Santyl(R) Ointment
contract manufactured by Abbott. Net sales from testing fees are recognized when
Santyl(R) is released for distribution. We earn royalties on Santyl(R)
distributed in the United States by S&N. Royalties are recognized when S&N
delivers Santyl(R) to distributors in the United States, as reported and paid to
us by Abbott.
Research and Development
Research and development expenses ("R&D") include internal costs, such as
salaries and benefits, costs of materials, and facility costs. R&D also consists
of third party costs, such as medical professional fees,
14
contract manufacturing costs for material used in clinical trials, and costs
associated with clinical study R&D arrangements. We 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.
At the initiation of clinical study R&D contracts, we make an estimate of the
duration and expected completion date of the contract, which may require a
change due to accelerations, delays or other adjustments to the contract period
or work performed. Changes in these estimates could have a significant effect on
the amount of R&D costs in a specific period.
RESULTS OF OPERATIONS
Net product sales were $5,940,637 and $3,437,083 for the fiscal years ended
January 31, 2002 and 2001, respectively, an increase in fiscal 2002 of
$2,503,554 or 73% from fiscal 2001. Sales of the product, Collagenase ABC, to
Abbott increased by approximately $2 million, or 72%, and sales to the Company's
customers in Brazil and India increased by approximately $400,000 or 76%. The
increase in sales to Abbott was due to availability of the inventory and
therefore timing of deliveries. Since the start of the Curacao facility upgrade,
Abbott instructed us to deliver any and all product as it became available. The
bulk of our inventory accumulated prior to the renovation became available
during fiscal 2002 and was therefore delivered to Abbott. The increase is also
due to a significant price increase that Abbott agreed to at the start of fiscal
2002. The increase in sales to our foreign customers was due to sale of product
produced during the fiscal year at the upgraded Curacao facility. At January 31,
2001 we had approximately $2.2 million of deliveries in arrears due to the
product not being ready for delivery, which was part of the fiscal 2002
deliveries. Net sales includes testing of Collagenase Santyl(R) Ointment
compounded by Abbott during both periods presented.
Royalties earned on Collagenase Santyl(R) Ointment sales by S&N were $2,269,048
and $2,094,622 for the fiscal years ended January 31, 2002 and 2001,
respectively, representing an increase in fiscal 2002 of $174,426 or 8%. S&N
achieved higher sales in the second year of marketing the ointment over the
first as it has developed its marketing program.
Cost of sales was $5,106,234 and $2,503,906 respectively, in fiscal 2002 and
2001, an increase in fiscal 2002 of $2,602,328 or 104% from fiscal 2001. The
gross profit percentage decreased by 13 percentage points in fiscal 2002 (14%)
versus fiscal 2001 (27%) because our production continued to be limited due to
the recent completion of the Curacao facility upgrade.
General and administrative expenses ("G&A") were $2,319,853 and $2,659,621
respectively, in fiscal 2002 and 2001, a decrease in fiscal 2002 of $339,768, or
13% from fiscal 2001. Since May 1999, we have engaged consultants to assist in
responding to FDA observations from FDA inspectors made on FDA's Form 483
("483's), the cost of which is included in SG&A, though such costs were lower in
fiscal 2002 versus fiscal 2001. We do anticipate that we will continue to incur
considerable consultation costs and the involvement of laboratory personnel in
responding to the 483's through the foreseeable future, although such
involvement is expected to continue to gradually decline in future periods. See
"Liquidity, Capital Resources, and Changes in Financial Condition".
Research and development expenses ("R&D") were $1,067,450 and $1,313,099
respectively, in fiscal 2002 and 2001, a decrease in fiscal 2002 of $245,649 or
19%. In fiscal 2001, we sponsored two Phase 2 clinical trials of injectable
collagenase for Dupuytren's disease, which were completed early in Fiscal 2002.
Most of the expenses relating to these trials were incurred in fiscal 2001. In
fiscal 2001 we also sponsored a Phase 1 trial for Peyronie's disease. Both
indications have been granted Orphan Drug status by the FDA. Internal
15
R&D costs have declined as development moves to clinics. For the fiscal year
that will end January 31, 2003, we expect R&D expenditures to approximate $1
million.
Other income (expense), net was $8,636 and ($278,865) respectively, in fiscal
2002 and 2001, an increase in other income net in fiscal 2002 of $287,501. In
fiscal 2001, we recorded the decrease in the market value of our investments in
equity securities held as trading securities during that year. For all of fiscal
2002, we no longer had significant investments in equity securities, and
therefore no material gains or losses. Interest expense increased due to the
take down of the two-year, non-amortizing loan of $455,000 at 6.5% interest from
Korpodeko, a Curacao development corporation established to develop industry on
the island of Curacao, during the fourth quarter of fiscal 2002.
The (provision) benefit for income taxes was $17,130 and $(276,695) respectively
in fiscal 2002 and 2001. The benefit in fiscal 2002 relates to orphan drug tax
credits. The fiscal 2001 provision represents an increase in our deferred tax
valuation allowance recognized in the fourth quarter of fiscal 2001 due to the
uncertainty with respect to the timing of future utilization of Orphan Drug tax
credits and other tax benefits. The principal reason for the difference between
the United States Federal statutory tax rate of 34% and the effective tax rate
in fiscal 2002 is due to the tax effect of foreign sourced losses for which no
benefit can be taken. The principal reason for the difference between the United
States Federal statutory tax rate of 34% and the effective tax rate in fiscal
2001 is due to the above-mentioned increase in the deferred tax valuation
allowance. Since 1976, our Curacao subsidiary has had a 2% profit tax rate
granted to it by the Curacao government (the "2% tax holiday"). In November
2000, the Curacao government retroactively extended the 2% tax holiday for
another 15 years.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Our primary source of working capital is from operations, which includes sales
of product, royalties, and periodic license fees. At January 31, 2002, we had
working capital of approximately $2.4 million, which includes cash and cash
equivalents, and marketable securities of approximately $693,000. The principal
use of cash in fiscal 2002 was approximately $607,000 used to purchase plant,
property and equipment for the upgraded Curacao and Lynbrook facilities. These
uses were offset by the loan from Korpodeko, and cash provided by operating
activities.
As discussed in the section titled "Risk Factors Related to our Business" in
section in Item 1 of this report, Collagenase ABC enzyme is our only product and
sole source of revenues. The production and marketing of Collagenase ABC enzyme
is subject to regulation in the United States by the federal government,
principally the FDA. We stopped production of the enzyme and began upgrading the
Curacao facility in March 2000. In May 2001 we completed the upgrade and went
back into limited production. In April 2002 we filed with the FDA a "Prior
Approval Supplement" ("PAS") for the Curacao facility upgrade. Although it is
difficult to predict with any certainty the time at which the PAS approval can
be obtained, we believe the following could happen by the end of the fiscal year
that will end January 31, 2003:
[ ] FDA comments on PAS
[ ] FDA inspects Curacao facility
[ ] FDA comments on inspection of Curacao facility
[ ] BioSpecifics responds to FDA comments
[ ] FDA approves PAS for Curacao facility
While we are producing enzyme at the upgraded Curacao facility, the new enzyme
production for Abbott must be held in quarantine and can only be sold to Abbott
if and when the FDA approves the PAS and any
16
enzyme already produced at the facility for Abbott. There can be no assurance if
or when the FDA will approve our PAS according to our schedule, if at all.
Since we began upgrading the Curacao facility in March 2000, we have not
produced any new enzyme that we can currently sell to Abbott. The enzyme we
processed and sold to Abbott in fiscal 2001 and fiscal 2002, which it used to
make Collagenase Santyl(R) Ointment ("Santyl(R)"), was from an inventory of
enzyme we built up at the Curacao facility prior to the start of the upgrade.
This inventory will be depleted during the first half of fiscal 2003. Revenues
from this inventory and royalties on sales of ointment will be insufficient to
cover our operating expenses, resulting in an operating loss for the fiscal year
that will end January 31, 2003.
We expect to have cash to fund operations during the fiscal year ended January
31, 2003 from royalties from sales of Santyl(R), the sale of the remaining
enzyme inventory to Abbott, the production and sale of enzyme to foreign
customers, and cash currently on hand. We estimate that Abbott can supply S&N
with Santyl(R) through March 2003, based on its inventory of enzyme it has
already purchased from us, our remaining inventory of enzyme, and S&N's rate of
Santyl(R) sales. If we are able to get approval of the PAS by the end of the
fiscal year ended January 31, 2003, we may also be able to sell quarantined
enzyme already produced and planned to be produced. However, if approval is
significantly delayed and we cannot sell quarantined product, we will be unable
to fund operations beyond the first quarter of calendar 2003 unless we are able
to raise additional capital.
We are dependent on Abbott to buy enzyme, contract manufacture Santyl(R) and
provide it to S&N ready for distribution. We are dependent on S&N for the
distribution of Santyl(R), which provides us with royalty revenue. Abbott and
S&N have a Sublicense and Assignment agreement whereby Abbott will assign to S&N
its rights in our exclusive license agreement by December 31, 2002. S&N has the
option to terminate its agreement with Abbott if the FDA approval of the Curacao
facility PAS is not received by December 31, 2002. There can be no assurance
that S&N will not terminate its agreement with Abbott if the PAS is not approved
by December 31, 2002. In the event S&N terminates, our exclusive license
agreement with Abbott automatically extends for 10 more years in August 2003,
unless Abbott exercises its right not to extend our exclusive license agreement,
in which event it would have to notify us six months in advance, or February
2003.
If S&N were to terminate, and Abbott exercise its right, we would have to find
another licensee for Santyl(R) with a sufficient sales force. We might also have
to use another trade name for ointment containing our Collagenase ABC, as the
trade name Santyl(R) is owned by Abbott. There can be no assurance that we would
be successful in finding another licensee or that a new licensee could achieve
S&N's current level of sales.
While we believe we have made considerable progress in addressing the FDA
concerns addressed in the Form 483 and the FDA Letter, if we are unable to
further address these matters in a timely manner, there may be delays in the
delivery of the product produced in the renovated facilities to Abbott for use
to contract manufacture Collagenase Santyl(R) Ointment. Such delays could have a
material adverse effect on our future operating results.
In connection with the Korpodeko loan, our subsidiary AB-Curacao agreed to
pledge as collateral substantially all of our production assets located in
Curacao, with a book value of approximately $4.5 million. BioSpecifics has also
guaranteed the Korpodeko loan. We drew down this loan in November 2001. Through
our subsidiary ABC-Curacao, we also maintain a line of credit with a Netherlands
Antilles bank under which the bank will lend up to $110,000 to ABC-Curacao, with
interest at the bank's prime lending rate (12% at January 31, 2002). Drawings
under the line of credit would be secured by investment assets
17
and cash on deposit at the bank, is payable on demand, and is guaranteed by
another of our subsidiaries, ABC-New York.
We believe that our capital resources, together with anticipated proceeds from
the fiscal 2003 sales of available inventory, related royalty income from
Abbott, and sales to foreign customers of inventory that will be produced are
adequate to sustain the business at least through January 31, 2003 and complete
the steps necessary to obtain FDA approval of our upgraded production facilities
by that date. We believe we have made substantial progress in addressing the
FDA's inspectional observations and that we may be able to resume normal
operations by January 31, 2003. However, we are dependent on the FDA's approval
of the upgraded plant in Curacao for the resumption of normal operations.
Although we believe our capital resources are adequate and that we have made
substantial progress toward addressing the FDA's concerns, there can be no
assurance that unforeseen circumstances will not have a material adverse effect
on our financial condition and that the time required to get FDA approval of the
upgraded Lynbrook and Curacao plants will not exceed our estimates. There can be
no assurance that the FDA will not have additional inspectional observations
that could result in delaying its approval of the PAS for the Curacao facility
an or that the FDA will approve the upgraded facility and permit us to resume
our normal operations at all.
In addition to obligations previously discussed, long-term capital requirements
at January 31, 2002 include a non-amortizing loan of $455,000 at 6.5% interest
due in November 2003. The Company also has operating leases of approximately
$191,000 annually through fiscal 2006.
ITEM 7. FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants ..........................F-1
Report of Independent Certified Public Accountants ..........................F-2
Consolidated Balance Sheet as of January 31, 2002 ...........................F-3
Consolidated Statements of Operations for Years ended
January 31, 2002 and 2001 ...................................................F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for Years ended
January 31, 2002 and 2001 ...................................................F-5
Consolidated Statements of Cash Flows for Years ended
January 31, 2002 and 2001. ..................................................F-6
Notes to Consolidated Financial Statements ..................................F-7
18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In December 2001, with Board approval, the Company decided to change
accountants. There were no disagreements with the previous accountant on any
matter of accounting principal or practices, financial statement disclosure, or
auditing scope or procedures. Information in response to this item has been
reported on the Company's Current Report of Form 8-K dated December 12, 2001.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by Item 9 as to directors is incorporated by reference
to the information captioned "Election of Directors" to be included in the
Registrant's definitive proxy statement in connection with the 2002 meeting of
shareholders. The information regarding compliance with Section 16 of the
Securities Exchange Act of 1934 and the Rules promulgated thereunder is
incorporated by reference therein to the Company's definitive proxy statement in
connection with the 2002 meeting of shareholders.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 is incorporated by reference to the
information captioned "Remuneration and Other Transactions with Management" to
be included in the Registrant's definitive proxy statement in connection with
the 2002 meeting of shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 is incorporated by reference to the
information captioned "Voting Securities" to be included in the Registrant's
definitive proxy statement in connection with the 2002 meeting of shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 is incorporated by reference to the
information captioned "Remuneration and Other Transactions with Management" to
be included in the Registrant's definitive proxy statement in connection with
the 2002 meeting of shareholders.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(A) EXHIBITS FILED
Exhibit 3.1 Certificate of Amendment of Certificate of Incorporation of
Registrant, as amended. (Previously filed with Registrant's
Registration Statement on Form S-18 "Registration Statement"
and incorporated herein by reference.)
19
Exhibit 3.2 Registrant's by-laws as amended. (Previously filed as Exhibit
3.2 and 3.2(a) to Registrant's Registration Statement and
incorporated herein by reference.)
Exhibit 4.1 Copy of Promissory Note executed by Edwin H. Wegman in favor
of Advance Biofactures Corporation. (Previously filed as
Exhibit 28.1 to Registrant's Registration Statement and
incorporated herein by reference.)
Exhibit 4.2 Copy of Promissory Note executed by Advance Biofactures
Corporation in favor of Sherman C. Vogel and Clarification of
Loan executed by Advance Biofactures Corporation and Sherman
C. Vogel, and. (Previously filed as Exhibit 28.2 to
Registrant's Registration Statement and incorporated herein by
reference.)
Exhibit 4.3 Copy of Promissory Note executed by Advance Biofactures
Corporation in favor of Myron E. Wegman. (Previously filed as
Exhibit 28.3 to Registrant's Registration Statement and
incorporated herein by reference.)
Exhibit 10.1 Form of 1991 Stock Option Plan of the Registrant. (Previously
filed as Exhibit 10.1 to Registrant's Registration Statement
and incorporated herein by reference.)
Exhibit 10.2 Form of 1993 Stock Option Plan of Registrant. (Previously
filed on the Registrant's Form S-8 Registration No. 33-95116
dated July 28, 1995 and incorporated herein by reference.)
Exhibit 10.3 Copy of Agreement between Advance Biofactures Corporation and
Knoll Pharmaceutical Company, without exhibits. (Previously
filed as exhibit 10.3 to Registrant's 10-KSB for the year
ended January 31, 1995 and incorporated herein by reference.)
Exhibit 10.4 Copy of Lease between Advance Biofactures Corporation and the
Wilbur Street Corporation. (Previously filed as exhibit 10.4
to Registrant's 10-KSB for the year ended January 31, 1998 and
incorporated herein by reference.)
Exhibit 10.5 Copy of Lease between the Curacao Industrial and International
Trade Development Company (Curinde) N.V. and Advance
Biofactures Corporation of Curacao, N.V. (English
translation). (Previously filed as Exhibit 10.5 to
Registrant's Registration Statement and incorporated herein by
reference.)
Exhibit 10.6 Copy of Agreement between Bio-Specifics N.V. (a wholly-owned
subsidiary of Advance Biofactures of Curacao, N.V.) and
Sheldon R. Pinnell, MD. (Previously filed as Exhibit 10.17 to
Registrant's Registration Statement and incorporated herein by
reference.)
Exhibit 10.7 Copy of Employment Agreement with Dr. Rainer Friedel (English
summary attached). (Previously filed as exhibit 10.18 to
Registrant's 10-KSB for the year ended January 31, 1996 and
incorporated herein by reference.)
Exhibit 10.8 Copy of Collagenase ABC license agreement between Advance
Biofactures of Curacao, N.V. and a Swiss company, without
exhibits. (Previously filed as exhibit 29.2 to Registrant's
10-KSB for the year ended January 31, 1995 and incorporated
herein by reference.)
20
Exhibit 10.9 Form of 1997 Stock Option Plan of Registrant. (Previously
filed on the Registrant's Form S-8 Registration No. 333-36485
dated September 26, 1997 and incorporated herein by
reference.)
Exhibit 10.10 Regulatory Compliance Agreement between Advance Biofactures
Corp., Knoll Pharmaceutical Company, and Smith and Nephew,
Inc. (Previously filed on the Registrant's Form 8-K dated
March 3, 2000 and incorporated herein by reference.)
Exhibit 10.11 Allocation of Responsibilities Agreement between Advance
Biofactures Corp., Knoll Pharmaceutical Company, and Smith and
Nephew, Inc. (Previously filed on the Registrant's Form 8-K
dated March 3, 2000 and incorporated herein by reference.)
Exhibit 10.12 Adverse Event ("AE") Agreement between Advance Biofactures
Corp., Knoll Pharmaceutical Company, and Smith and Nephew,
Inc. (Previously filed on the Registrant's Form 8-K dated
March 3, 2000 and incorporated herein by reference.)
Exhibit 10.13 Recourse Secured Demand Note between BioSpecifics Technologies
Corp. and Edwin H. Wegman
Exhibit 10.14 Stock Pledge Agreement between BioSpecifics Technologies Corp.
and Edwin H. Wegman
Exhibit 10.15 Form of 2001 Stock Option Plan of Registrant
Exhibit 10.16 Loan agreement between Advance Biofactures of Curacao, NV and
Korpodeko Curacao Development Corporation dated August 6, 2001
and Letter of Intent dated May 15, 2001.*
Exhibit 22 Subsidiaries of the Registrant. (Previously filed as exhibit
22 to Registrant's 10-KSB for the year ended January 31, 1996
and incorporated herein by reference.)
Exhibit 23.1 Consent of BDO Seidman LLP.*
Exhibit 23.2 Consent of Grant Thornton, LLP.*
-----------------------------
* Filed herewith
(B) REPORTS ON FORM 8-K
In an 8-K report dated December 10, 2001, the Company reported a change
in certifying accountant from Grant Thornton LLP to BDO Seidman LLP.
21
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BIOSPECIFICS TECHNOLOGIES CORP.
---------------------------------------
(Registrant)
Date: May 13, 2002 By: Edwin H. Wegman
---------------------------------------
Edwin H. Wegman, Chairman and President
In accordance with the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Edwin H. Wegman Chairman of the Board, President and May 13, 2002
--------------- Director (Principal Executive Officer)
Edwin H. Wegman
Albert Horcher Secretary, Treasurer, Principal Financial May 13, 2002
--------------- and Chief Accounting Officer
Albert Horcher
Thomas L. Wegman Executive Vice President and Director May 13, 2002
----------------
Thomas L. Wegman
Paul A. Gitman, M.D. Director May 13, 2002
--------------------
Paul A. Gitman, M.D.
Henry Morgan Director May 13, 2002
------------
Henry Morgan
Louis Lasagna, M.D. Director May 13, 2002
-------------------
Louis Lasagna, M.D.
Rainer Friedel, M.D. Director May 13, 2002
-------------------
Rainer Friedel, M.D.
John T. Lane Director May 13, 2002
------------
John T. Lane
22
Report of Independent Certified Public Accountants
Board of Directors and Stockholders of BioSpecifics Technologies Corp.
We have audited the accompanying consolidated balance sheet of BioSpecifics
Technologies Corp. and subsidiaries as of January 31, 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss) and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BioSpecifics
Technologies Corp. and subsidiaries at January 31, 2002, and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
--------------------
Melville, New York
April 5, 2002
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Biospecifics Technologies Corp.
and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Biospecifics Technologies Corp. and
Subsidiaries for the year ended January 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
statements of operations, stockholders' equity and cash flows are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of operations,
stockholders' equity and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the results of operations. We believe
that our audit of the consolidated statements of operations, stockholders'
equity and cash flows provides a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations, stockholders' equity
and cash flows referred to above present fairly, in all material respects, the
consolidated results of operations of Biospecifics Technologies Corp. and
Subsidiaries for the year ended January 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
------------------------
Melville, New York
April 23, 2001
F-2
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheet
January 31, 2002
Assets
------
Current assets:
Cash and cash equivalents $ 693,215
Marketable securities 3,026
Accounts receivable, net 2,606,412
Inventories, net 784,164
Prepaid expenses and other current assets 12,878
-----------
Total current assets 4,099,695
Property, plant and equipment, net 5,063,313
Deferred income taxes 164,536
-----------
$ 9,327,544
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,680,629
Notes payable to related parties 14,010
Deferred revenue 45,000
-----------
Total current liabilities 1,739,639
Long-term debt 455,000
Minority interest in subsidiaries 238,678
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; 4,912,216 shares issued 4,912
Additional paid-in capital 3,800,104
Retained earnings 6,101,015
Accumulated other comprehensive income 15,811
Treasury stock, 361,380 shares at cost (1,911,237)
Notes receivable from chairman and other related party (1,116,378)
-----------
Total stockholders' equity 6,894,227
-----------
$ 9,327,544
See accompanying notes to consolidated financial statements.
F-3
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended January 31,
2002 2001
----------- -----------
Revenues:
Net sales $ 5,940,637 3,437,083
Royalties 2,269,048 2,094,622
----------- -----------
8,209,685 5,531,705
Costs and expenses:
Cost of sales 5,106,234 2,503,906
General and administrative 2,319,853 2,659,621
Research and development 1,067,450 1,313,099
----------- -----------
8,493,537 6,476,626
Loss from operations (283,852) (944,921)
----------- -----------
Other income (expense):
Investment income (expense) 21,551 (272,971)
Interest expense (12,915) (5,894)
----------- -----------
8,636 (278,865)
Loss before benefit (provision) for
income taxes and minority interest (275,216) (1,223,786)
Income tax benefit (provision) 17,130 (276,695)
----------- -----------
Loss before minority interest (258,086) (1,500,481)
Minority interest in loss of subsidiaries 770 32,000
----------- -----------
Net loss $ (257,316) (1,468,481)
=========== ===========
Basic and diluted net loss per share $ (.06) $ (.32)
=========== ===========
Weighted-average common shares outstanding 4,539,325 4,529,766
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
BIOSPECIFICS TECHNOLOGIES CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Accumulated Notes
other receivable
compre- from chairman
Common Stock Additional hensive and other
------------------------ Paid in Retained Income Treasury Related
Shares Amount Capital earnings (loss) stock Party Total
---------- ----------- ----------- ---------- ------- ----------- ------------- -----------
Balance at January 31, 2000 4,891,146 $ 4,891 $ 3,734,375 $7,826,812 $ 7,412 $(1,911,237) $ (750,815) $ 8,911,438
Stock options granted
for services 14,000 14,000
Change in cumulative
translation adjustment 10,739 10,739
Notes receivable from
chairman
(404,227) (404,227)
Net loss (1,468,481) (1,468,481)
---------- ----------- ----------- ---------- ------- ----------- ----------- -----------
Balance at January 31, 2001 4,891,146 4,891 3,748,375 6,358,331 18,151 (1,911,237) (1,155,042) 7,063,469
========== =========== =========== ========== ======= =========== =========== ===========
Stock option exercises 6,750 7 6,743 6,750
Stock options granted
for services 5,000 5,000
Stock granted for services 14,320 14 39,986 40,000
Change in cumulative
translation adjustment (2,340) (2,340)
Net paydown of notes
receivable from chairman
and other related party 156,916 156,916
Reclassification of Due
from related party (note 15) (118,252) (118,252)
Net loss (257,316) (257,316) (257,316)
----------- -----------
Balance at January 31, 2002 4,912,216 $ 4,912 $ 3,800,104 $6,101,015 $15,811 $(1,911,237) $(1,116,378) $ 6,894,227
========== =========== =========== ========== ======= =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
BIOSPECIFICS TECHNOLOGIES CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended January 31,
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $ (257,316) (1,468,481)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 437,350 150,735
Options issued for services 5,000 14,000
Issuance of stock for services 40,000 --
Realized and unrealized loss on marketable securities, net 1,320 473,973
Minority interest in loss of subsidiaries (770) (32,000)
Provision (benefit) for deferred taxes (28,330) 350,000
Changes in operating assets and liabilities:
Accounts receivable (1,440,480) 318,395
Inventories 1,145,880 (150,513)
Prepaid expenses and other current assets 15,065 135,951
Other assets 28,812 --
Net change in trading securities 109,841 363,238
Accounts payable and accrued expenses (101,683) 465,402
Income taxes 150,000 (48,923)
----------- -----------
Net cash provided by operating activities 104,689 571,777
----------- -----------
Cash flows from investing activities:
Due from related party 10,028 (8,500)
Net paydown of notes receivable from chairman and other related party 156,916 (404,227)
Expenditures for property, plant and equipment (607,498) (3,822,566)
----------- -----------
Net cash used in investing activities (440,554) (4,235,293)
----------- -----------
Cash flows from financing activities:
Increase in notes payable to related parties 500 500
Exercise of stock options 6,750 --
Increase in long-term debt 455,000 --
----------- -----------
Net cash provided by financing activities 462,250 500
----------- -----------
Effect of exchange rates on cash and equivalents (2,340) 10,739
Increase (decrease) in cash and cash equivalents 124,045 (3,652,277)
Cash and cash equivalents at beginning of year 569,170 4,221,447
----------- -----------
Cash and cash equivalents at end of year $ 693,215 569,170
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 12,915 5,894
=========== ===========
Income taxes $ 1,188 9,414
=========== ===========
See accompanying notes to consolidated financial statements.
F-6
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2002 and 2001
1. Organization and Description of Business
BioSpecifics Technologies Corp. ("the Company") was incorporated under the laws
of the State of Delaware in 1990. The Company produces a fermentation-derived
enzyme named Collagenase ABC (the "product" or "enzyme") which is licensed by
the U.S. Food and Drug Administration (the "FDA"). The Company operates
production facilities in Lynbrook, New York (the "Lynbrook Plant or Facility")
and in Curacao, Netherlands Antilles (the "Curacao Plant or Facility"). The
Company is also researching and developing additional products derived from this
enzyme for potential use as pharmaceuticals.
For the fiscal years ended January 31, 2002 and 2001, 87% and 90%, respectively,
of the Company's revenues were from one customer in the United States, Abbott
Laboratories ("Abbott") who, pursuant to an exclusive licensing agreement,
compounds the product into Collagenase Santyl(R) Ointment ("Santyl(R)" or
"Ointment"), a prescription drug used to treat a variety of skin wounds. The
Company also earns royalties on the sale of Santyl(R) to distributors by Smith &
Nephew, Inc. ("S&N") (Note 10).
2. Liquidity and Financial Condition
In 1999, the Company was issued a list of inspectional observations made by the
FDA in Form 483 citing numerous deficiencies in the Company's compliance with
FDA regulations at its production plants in Lynbrook and Curacao and at Abbott's
contract manufacturing facility. The FDA advised the Company that they would
revoke the Company's license to produce the enzyme and ointment unless the
Company could immediately provide satisfactory assurance to the FDA (including
submitting a comprehensive plan of corrective action) addressing the FDA's
observations and demonstrate compliance with the applicable regulations. The
Company responded to the FDA by submitting a comprehensive plan of corrective
action providing for (i) the renovation of the Lynbrook and Curacao production
plants, (ii) the reorganization of the Company's quality control and quality
assurance departments, (iii) an upgrade of quality control standards and
procedures and (iv) the hiring of additional personnel in the quality control
and quality assurance departments. The Company has retained an outside
consulting firm with expertise in FDA regulatory compliance matters to assist in
developing and implementing the corrective action plan.
The Company started renovating the Curacao plant in March 2000 and as a result
suspended the production of enzyme at that location. The Company completed the
renovation at the Curacao and Lynbrook facilities in March 2001 and has
substantially validated the facilities. In April 2002, the Company filed with
the FDA a "Prior Approval Supplement ("PAS") for the Curacao facility upgrade.
FDA inspection and approval of the Curacao facility will be required before
enzyme produced at the facilities can be sold to Abbott. In anticipation of the
renovations and suspension of production operations, the Company accumulated an
inventory of the product, which it continues to process at the Lynbrook facility
and currently sells to Abbott when processing is completed. The Company
estimates that its inventory on hand at January 31, 2002 and Abbott's inventory
on hand at January 31, 2002 can be used by Abbott to contract manufacture
Santyl(R) into the third quarter of calendar 2002. The Company estimates that
this inventory is sufficient to enable Abbott to supply S&N with Santyl(R) into
the second quarter of calendar 2003.
The Company has invested approximately $4.7 million in plant, property and
equipment to upgrade both plants and anticipates it will spend approximately
$100,000 more to completion. In addition, the Company incurred consulting fees
and other expenses of approximately $1.3 million since May 1999 including
$112,000 during the fiscal year ended January 31, 2002, and believes it will
incur additional expenses of approximately $100,000 during the fiscal year that
will end January 31, 2003. During the fiscal years ended January 31, 2000, 2001,
and 2002, we estimate that our personnel costs dedicated to the upgrade and
addressing the FDA's observations were approximately $923,000, which were
recorded in general and administrative expenses. The Company believes that the
plant upgrades and changes in the Company quality control policies and
procedures outlined in the corrective plan will adequately address the FDA's
concerns, although there can be no assurances that additional expenditures and
time will not be
F-7
required as a result of any FDA concerns. Management also believes that the
capital-spending plan modernized the Company's facilities and improved
operational efficiency.
While the Company believes that it has made considerable progress in addressing
the FDA concerns addressed in the Form 483 and the FDA Letter, if the Company is
unable to further address these matters in a timely manner, there may be delays
in the approval of the PAS and delivery of product produced in the upgraded
facilities to Abbott for use to contract manufacture Collagenase Santyl(R)
Ointment. Such delays could have a material adverse effect on the Company's
future operating results. The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the incurrence of liabilities in the normal course of business.
For the year ended January 31, 2002, the Company incurred a net loss of
approximately $257,000, generated operating cash flow of $104,689, raised
approximately $455,000 by financing activities, primarily from long-term debt
borrowings, and incurred $607,498 of expenditures relating to the facility
upgrades. At January 31, 2002 the Company has approximately $2.4 million of
working capital available, including approximately $784,000 of available
inventory, which would generate proceeds from net sales, and royalty revenue to
fund its operations and continue to address FDA concerns through January 31,
2003. The Company borrowed $455,000 from an industrial development agency in
Curacao (Note 9) in fiscal 2002, and has a $110,000 line of credit with the
Company's bank in Curacao.
The Company believes that its capital resources, together with anticipated
proceeds from the sales of available inventory and related royalty income from
Abbott, and sales to foreign customers of inventory that will be produced will
be adequate to sustain the business at least through January 31, 2003 and
complete the approval of the PAS for its production facilities by that date. The
Company believes it has made substantial progress in addressing the FDA's
inspectional observations and that it will be able to resume normal operations
by January 31, 2003. However, the Company is dependent on the FDA's approval of
its PAS for the upgraded plant in Curacao for the resumption of normal
operations and the sale to Abbott of Collagenase ABC enzyme produced there.
Although management believes that the Company's capital resources are adequate
and that it has made satisfactory progress toward addressing the FDA's concerns,
there can be no assurance that unforeseen circumstances will not have a material
adverse effect on the Company's financial condition and that the cost of
completing the upgrade of the Lynbrook and Curacao plants will not exceed
management's estimates. There can be no assurance that the FDA will not have
additional inspectional observations that could result in the delay of approval
of the PAS for the upgraded plants and permit the Company to resume its normal
operations at all.
3. Summary of Significant Accounting Policies
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries, Advance Biofactures Corp. ("ABC - New York")
and Advance Biofactures of Curacao N.V. ("ABC - Curacao") and its wholly owned
subsidiary, Biospecifics Pharma GmbH ("Bio Pharma") of Germany. All significant
intercompany transactions and balances have been eliminated in consolidation.
F-8
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Company considers all temporary
investments and time deposits with original maturities of three months or less
to be cash equivalents.
Marketable Securities
---------------------
Marketable securities principally consist of investments in common and preferred
stocks. These investments are classified as trading securities and are adjusted
to market value at the end of each accounting period. Unrealized holding gains
and losses on trading securities are included in investment and other income in
the accompanying consolidated statements of operations.
Inventories
-----------
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost, less accumulated depreciation.
Machinery and equipment, furniture and fixtures, and autos are depreciated on
the straight-line basis over their estimated useful lives of 5 to 10 years.
Leasehold improvements are being amortized over their estimated useful lives of
8 to 10 years.
Impairment of Long-Lived Assets
-------------------------------
The Company evaluates the net realizable value of its property and equipment and
other assets in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of"
("SFAS 121"), relying on a number of factors including operating results,
business plans, economic projections and anticipated future cash flows. SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the estimated future undiscounted cash flows
attributable to such assets or the business to which such intangible assets
relate. Impairment losses have not been incurred for the years ended January 31,
2002 and 2001.
Income Taxes
------------
The Company uses the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes". Under this method, deferred income taxes, when
required, are provided on the basis of the difference between the financial
reporting and income tax bases of assets and liabilities at the statutory rates
enacted for future periods.
Cumulative Translation Adjustment
---------------------------------
The functional currency of Bio Pharma GmbH is the Euro and its assets and
liabilities are translated into the U.S. dollar at year-end exchange rates and
income and expense items are translated at average exchange rates for the
period. Gains and losses resulting from translation are included in
stockholders' equity as accumulated other comprehensive income (loss). The
assets and liabilities of ABC Curacao are denominated in U.S. dollars.
ABC-Curacao conducts local transactions in local currency and translates them at
average exchange rates for the period.
F-9
Revenue Recognition
-------------------
Net sales include the sales of Collagenase ABC enzyme that are recognized at the
time the product is shipped to customers. Net sales also include fees the
Company charges Abbott for testing Ointment contract manufactured by Abbott. Net
sales from testing are recognized when the ointment is released for
distribution. The Company also earns royalties on Santyl(R) sales in the United
States pursuant to its licensing agreement with Abbott. Royalties are recognized
during the period in which the Ointment is delivered to distributors in the
United States, as reported to the Company by Abbott.
From time to time, the Company enters into licensing agreements with
pharmaceutical companies regarding the sale of the Company's approved product
and potential products. License fees for potential products are recognized as
income in the year agreements are entered into if related license fees are
non-refundable. License fees attributable to agreements that contain refund
provisions are deferred until all provisions of the agreements are fulfilled.
The Company did not recognize any license fee revenue during the periods ended
January 31, 2002 and 2001.
Research and Development
------------------------
The Company conducts various research and development activities for the
approved product and for potential products. Research and development costs are
charged to expense when incurred. These costs amounted to $1,067,450 and
$1,313,099 in 2002 and 2001, respectively.
Net Loss Per Share
------------------
Net loss per share is presented under SFAS No. 128 "Earnings per Share". In
accordance with SFAS No. 128, basic net loss and basic and diluted net loss per
share have been calculated by dividing net loss available to common stockholders
by the weighted-average number of common shares outstanding during the period.
Diluted net income per share reflects the potential dilution that would occur if
common stock equivalents were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. Potentially dilutive securities have been excluded from the computation
for the years ended January 31, 2002 and 2001, as their effect is antidilutive.
If the Company had reported net income for the year ended January 31, 2002,
diluted earnings per share for the period would have included the number of
shares used in the computation of basic net loss per share, plus common
equivalent shares that would relate to 1,100,500 options outstanding at January
31, 2002. For the year ended January 31, 2001, the number of options outstanding
was 721,300.
Stock Based Compensation
------------------------
The Company has adopted the disclosure provisions of SFAS No. 123 "Accounting
for Stock-Based Compensation", and therefore applies the intrinsic value method
of accounting for employee stock options as prescribed under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25"). Under APB 25, when the exercise price of an employee stock option granted
by the Company is equal to or greater than the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The Company
discloses pro forma net loss and net loss per share for the years ended January
31, 2002 and 2001 as if the fair value method had been applied.
F-10
Compensation is recognized on options issued to nonemployees based on the fair
value of the consideration received or the fair value of the option, whichever
is more readily measurable.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions in determining the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts reported in the balance sheet for cash, accounts payable,
and accrued expenses approximate fair value based on the short-term maturity of
these instruments. The fair value of notes receivable due from the chairman and
other related party, and notes payable to related parties, approximate their
carrying values based upon their stated interest rates and the underlying
collateral pledged.
Concentration of credit risk
----------------------------
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash and cash equivalents with high quality
credit institutions. At times, such investments may be in excess of the FDIC or
SIPC insurance limit. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risks.
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of trade accounts receivable, as the Company
does not require collateral or other securities to support customer receivables.
(see Note 10.)
Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years
beginning after December 15, 2001. Under the new standards, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests. Other intangible assets will
continue to be amortized over their useful lives. The Company does not expect
the adoption of SFAS No. 141 and 142 to have a material impact on its financial
position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". The new guidance resolves significant
implementation issues related to SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144
supersedes SFAS No. 121, but it retains its fundamental provisions. SFAS No. 144
retains the requirements of SFAS No. 121 to recognize an impairment loss only if
the carrying amount of a long-lived asset within the scope of SFAS No. 144 is
not recoverable from its undiscounted cash flows and exceeds its fair value. It
also amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to eliminate the exception to consolidate a subsidiary for which
control is likely to be temporary. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company plans to adopt its provisions in
the Company's fiscal year
F-11
ending January 31, 2003. The Company does not expect the adoption of SFAS No.
144 to have a material impact on its financial position and results of
operations.
4. Marketable Securities
---------------------
Marketable securities at January 31, 2002 consist of common and preferred stock,
with a cost basis of $256,953 unrealized holding losses of $253,927, and fair
market value of $3,026. Fair values are based upon quoted market prices.
5. Inventories
-----------
Inventories at January 31, 2002 consist of:
Raw materials $101,573
Work-in-process 682,591
--------
$784,164
========
6. Property, Plant and Equipment, net
----------------------------------
Property, plant and equipment at January 31, 2002 consist of:
Machinery and equipment $2,381,845
Furniture and fixtures 362,435
Leasehold improvements 4,027,760
Automobiles 11,743
-----------
6,783,783
Less accumulated depreciation and amortization (1,720,470)
-----------
$5,063,313
The Company placed production equipment and related leasehold improvements at
the upgraded Curacao and Lynbrook facilities into service during the year ended
January 31, 2002. Depreciation and amortization expense amounted to $437,350 and
$150,735 for the years ended January 31, 2002 and 2001, respectively.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
Trade accounts payable and accrued expenses $ 829,763
Accrued legal and other professional fees 411,183
Accrued payroll and related costs 439,683
----------
$1,680,629
F-12
8. Income Taxes
The (provision) benefit for income taxes consists of the following:
2002 2001
--------- ---------
Current:
Federal $ (8,700) $ 82,995
State (2,500) (9,690)
Foreign -- --
--------- ---------
(11,200) 73,305
--------- ---------
Deferred:
Federal 25,620 (317,000)
State 2,710 (33,000)
--------- ---------
28,330 (350,000)
--------- ---------
$ 17,130 $(276,695)
========= =========
The effective income tax rate of the Company differs from the federal statutory
tax rate of 34% in fiscal 2002 and 2001 as a result of the effect of the
following items:
2002 2001
---- ----
Computed tax benefit at statutory rate $93,310 $409,000
Tax effect of foreign sourced loss, net of foreign taxes (172,650) (98,000)
State income taxes, net of federal benefit 130 27,705
Non-deductible expenses (13,660) (26,100)
Orphan drug and other tax credits 110,000 162,700
Increase in valuation allowance - (752,000)
--------- ----------
$17,130 $(276,695)
========= ==========
The components of the Company's deferred tax assets, pursuant to SFAS No. 109,
are summarized as follows:
2002 2001
--------- ---------
Orphan Drug Credit $742,000 $632,000
Inventory 84,000 76,000
Accrued expenses 193,000 194,000
Depreciation and amortization 25,000 21,000
Capital loss carryforward 54,000 79,000
Other 18,536 86,206
--------- ---------
Net deferred tax assets before valuation allowance 1,116,536 1,088,206
Valuation allowance (952,000) (952,000)
--------- ---------
Net deferred tax asset $164,536 $136,206
========= =========
SFAS No. 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets may not be realized. The Company increased the
valuation allowance by $752,000 during the fourth quarter of the year ended
January 31, 2001. The valuation allowance at January 31, 2002 and 2001 primarily
pertains to uncertainties with respect to the timing of future utilization of
Orphan Drug Credits and other tax benefits. The Company believes it will utilize
the benefit of net deferred tax assets based on recognition of future income.
The Company has reinvested the accumulated earnings of its foreign subsidiaries,
mostly in the form of plant, property and equipment, and therefore does not plan
to repatriate the balance of such earnings (approximately $4.7 million as of
January 31, 2002) to the United States.
F-13
In November 2000, the Curacao government extended the 2% profit tax holiday
enjoyed by AB-Curacao for an additional 15 years. The statutory rate is 30%.
9. Credit Facilities
-----------------
The Company, through its subsidiary ABC-Curacao, drew down in November 2001 a
two-year, non-amortizing loan of $455,000 at 6.5% interest from Korpodeko, a
Curacao development corporation established to develop industry on the island of
Curacao. The entire principal is due November 2003. The Company, also through
its subsidiary, ABC-Curacao, has a $110,000 line of credit with a Netherlands
Antilles bank, with interest at the bank's prime lending rate (12% at January
31, 2002). Substantially all of the Company's fixed assets located in Curacao,
with a book value of $4.3 million, are pledged as collateral for these
obligations. The Company has also guaranteed the Korpodeko loan.
10. Major Customer and Royalty and License Agreements
-------------------------------------------------
The Company's primary royalty and license agreements are for its FDA approved
product, Collagenase ABC.
In the fiscal years ended January 31, 2002 and 2001, the Company derived 83% of
its net sales of product and 100% of its royalties from an exclusive license
agreement with Abbott Laboratories ("Abbott", which acquired Knoll
Pharmaceutical Company ("KPC"), the Company's original licensee, in March 2001).
Abbott acts as the Company's contract manufacturer by compounding the product
into Collagenase Santyl(R) ("Santyl(R)"), an ointment used to treat various
types of skin wounds, particularly chronic dermal ulcers and severely burned
areas. The exclusive licensing agreement provides Abbott with exclusive rights
to market Santyl(R) ointment in North America in exchange for purchases of the
product and royalties on Santyl(R) sales to distributors by Smith & Nephew Inc.
("S&N"). The license agreement, with an expiration date of August 2003, has an
automatic ten-year renewal clause unless Abbott elects not to renew the
agreement. The rest of the Company's revenues come from product sales to
pharmaceutical companies in Brazil and India.
In January 2000, pursuant to a sublicense and assignment agreement, to which the
Company is not a party, KPC sublicensed its rights to Smith & Nephew, Inc.
("S&N") with the consent of the Company. Under the sublicense, Abbott continues
to purchase the product from the Company and manufacture the ointment. S&N
markets the ointment and sells it to distributors. In connection with the
sublicense, the Company entered into several agreements with Abbott and S&N.
These include an agreement allocating responsibility under the Abbott Agreement
among the Company, Abbott, and S&N for both the sublicense and license period.
Another agreement imposes certain obligations upon the Company to address the
FDA issues concerning the Curacao and Lynbrook production facilities. Abbott
will assign its license rights (as opposed to the current sublicense agreement)
in the Abbott Agreement to S&N in the event of FDA approval of a compliance
program being undertaken by the Company, including the upgrade of its production
facilities. If the license rights are assigned to S&N, the Abbott agreement will
be automatically extended at that time until 2013, and automatically renew for
an additional 10-year term unless S&N notifies the Company, at least 6 months
prior to the renewal date, of its intention to terminate at the conclusion of
the 2013 term.
The minimum annual royalty is $60,000 per year. Royalties from Abbott were
$2,269,048 and $2,094,622 in fiscal 2002 and 2001, respectively.
F-14
In fiscal 1997, the Company entered into an agreement to license Collagenase ABC
for sale in Germany to the German subsidiary of an international pharmaceutical
company. The agreement calls for an initial payment on signing and further
payments if and when the German health authority grants marketing approval of
Collagenase ABC ointment. Accordingly, deferred revenue at January 31, 2002 is
$45,000 from this agreement. The deferred revenue is refundable if approval in
Germany is not obtained.
11. Stockholders' Equity
--------------------
Stock Option Plans
------------------
In April 1991, the Company established a stock option plan (the "1991 plan") for
eligible key employees, directors, independent agents, and consultants who make
a significant contribution toward the Company's success and development and to
attract and retain qualified employees. Under the 1991 plan, qualified incentive
stock options and non-qualified stock options may be granted to purchase up to
an aggregate of 220,000 shares of the Company's common stock, subject to certain
anti-dilution provisions. The exercise price per share of common stock may not
be less than 100% (110% for qualified incentive stock options granted to
stockholders owning at least 10% of common shares) of the fair market value of
the Company's common stock on the date of grant. In general, the options vest
and become exercisable in four equal annual installments following the date of
grant, although the Board of Directors, at its discretion, may provide for
different vesting schedules, and expire ten years (five years for qualified
incentive stock options granted to stockholders owning at least 10% of common
shares) after such date. In accordance with terms of the 1991 plan, no option
shall be granted under the plan subsequent to ten years after its effective
date, or November 2001.
In July 1994, the Company's stockholders approved a stock option plan (the "1993
plan") with terms identical to the 1991 plan. The 1993 plan authorizes the
granting of awards of up to an aggregate of 200,000 shares of the Company's
common stock, subject to certain anti-dilution provisions.
In July 1997, the Company's stockholders approved a stock option plan (the "1997
plan") with terms identical to the 1991 and 1993 plans. The 1997 plan authorizes
the granting of awards of up to an aggregate of 500,000 shares of the Company's
common stock, subject to certain anti-dilution provisions.
In August 2001, the Company's stockholders approved a stock option plan (the
"2001 plan"), with terms similar to the 1997 plan. The 2001 plan authorizes the
granting of awards of up to an aggregate of 750,000 shares of the Company's
common stock, subject to certain anti-dilution provisions.
The Company has adopted the disclosure provisions of SFAS No. 123 "Accounting
for Stock Based Compensation" ("SFAS 123"). It applies APB 25 and related
interpretations in accounting for its plans and does not recognize compensation
expense since its plans provide for the granting of options with prices equal to
or greater than the fair market value of the Company's common stock at the date
of grant. Had compensation cost been recognized consistent with SFAS 123, the
Company's consolidated net loss in fiscal 2002 would have increased by $271,160
to a loss of ($528,476) and consolidated net loss in fiscal 2001 would have
increased by $185,678 to a loss of ($1,654,159). Basic and diluted loss per
share in fiscal 2002 and 2001 would have been increased to a loss of ($0.12) per
share and ($0.37) per share, respectively.
The per share weighted average fair value of stock options issued to employees
by the Company during fiscal 2002 and 2001 was $0.64 and $0.91, respectively, on
the date of grant. In fiscal 2002 and 2001, the assumptions of no dividends,
expected volatility of approximately 60%, and an average expected life of 5
years were used by
F-15
the Company in determining the fair value of the stock options granted using the
Black Scholes option pricing model. In addition, the calculations assumed a
risk-free interest rate of 5.0% in fiscal 2002 and 2001.
The summary of the stock options activity is as follows:
Fiscal 2002 Fiscal 2001
-------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- -------- --------
Outstanding at beginning of year 721,300 $3.41 552,800 $4.29
Options granted 430,250 1.03 215,050 1.41
Options exercised (6,750) 1.00 - -
Options canceled or expired (44,300) 3.11 (46,550) 4.70
--------- --------
Outstanding at end of year 1,100,500 2.64 721,300 3.41
--------- --------
Options exercisable at year end 986,500 2.66 677,900 3.35
Shares available for future grant 434,050 - 115,500 -
During fiscal 2002 and 2001, the Company granted 5,000 and 10,000 options,
respectively, to medical consultants at an exercise price of $1.25 and $2.875
per share, respectively. These options vest at the rate of 25% per year. In
connection with these options, the Company recorded in fiscal 2002 and 2001 an
expense of $5,000 and $14,000, respectively, representing the estimated fair
value of the options. During fiscal 2002 and 2001, the Company granted 425,250
and 205,050 options, respectively, to employees of the Company at prices ranging
from $1.00 to $3.00.
The following table summarizes information relating to stock options by exercise
price as at January 31, 2002:
Outstanding Exercisable
Weighted Average Weighted Average
Option Life Exercise Option
exercise price Shares (years) price Shares exercise price
-------------- --------- ------- ----- ------- ---------------
$1.00-1.10 587,200 9.8 $1.02 483,200 $1.00
1.88 125,450 8.0 1.88 125,450 1.88
2.00-2.88 66,950 8.8 2.57 63,950 2.57
3.00-3.88 44,200 6.5 3.33 44,200 3.33
4.00-4.63 105,500 5.4 4.36 98,500 4.36
5.81-7.25 115,500 2.4 6.13 115,500 6.13
8.00 5,700 3.0 8.00 5,700 8.00
9.13 50,000 2.5 9.13 50,000 9.13
--------- --- ----- ------- -----
1,100,500 7.7 $2.64 986,500 $2.66
--------- ----- ------- -----
12. Net Loss Per Share
------------------
Net loss per share for the years ended January 31, 2002 and 2001 is presented in
the accompanying statement of operations. Diluted loss per share is the same as
basic loss per share for the years ended January 31, 2002 and 2001, as the
effect of dilutive securities would be anti-dilutive.
F-16
13. Commitments and Contingencies
--- -----------------------------
(a) Lease Agreements
----------------
The Company's operations are principally conducted in leased premises. Future
minimum annual rental payments required under noncancellable operating leases
are approximated as follows:
Year ending January 31,
2003 191,000
2004 191,000
2005 191,000
2006 30,000
Rent expense under all operating leases amounted to approximately $191,000 in
both fiscal 2002 and 2001, respectively. The S.J. Wegman Company, which is owned
by the Company's President and certain of his relatives, is the 100% shareholder
of the Wilbur Street Corporation ("WSC"), which owns and leases a facility to
ABC-New York.
In January 1998, WSC and the Company entered into a triple net lease agreement
that provides for an annual rent starting at $125,000, which can increase
annually by the amount of the annual increase in the consumer price index for
the greater New York metropolitan region. The lease term is 7 years, expiring
January 31, 2005. The Company paid approximately $161,000 representing rent and
real estate taxes to WSC in each of fiscal 2002 and 2001.
ABC-Curacao leases a building in Brievengat, Curacao, Netherlands Antilles from
a company wholly owned by the Insular Territory of Curacao. The lease term,
which originally commenced on January 1, 1977, is automatically renewed upon the
same terms every five years, unless either party gives three months notice prior
to the expiration of the five-year period. The lessor is entitled to revalue the
rent for each successive five-year period. The lease has been renewed through
March 1, 2006. Rent expense amounted to approximately $30,000 in fiscal 2002 and
2001.
(b) Scientific Advisory Board
-------------------------
The Company has an eight member Scientific Advisory Board ("the Board") that
provides research and consultation services to the Company. In each of fiscal
2002 and 2001, the Company recorded approximately $24,000 for payments to Board
members under these agreements. The Company has oral agreements with two of the
eight members of the Board and a written agreement with two other members
providing for honoraria of approximately $6,000 each, terminable at the option
of the Company.
(c) Potential Product Liability
---------------------------
The sale of Collagenase ABC, as well as the development and marketing of any
potential products of the Company, expose the Company to potential product
liability claims both directly from patients using the product or products in
development, as well as from the Company's agreement to indemnify certain
distributors of the product for claims made by others. The Company has product
liability insurance which covers the use of the
F-17
licensed product, Collagenase Santyl(R), and clinical experiments of potential
products in the United States. No known claims are pending against the Company
at the current time.
(d) Employment Agreement
--------------------
The Company has an employment agreement with the managing director of its German
subsidiary, Bio Pharma. The Company or the managing director upon one year's
written notice can terminate the contract. The agreement provides for an annual
salary, currently $195,000, and a like severance payment if the agreement is
terminated by the Company without cause.
14. Segment Information
-------------------
The Company is engaged in one segment, specifically research, development,
production and distribution of pharmaceutical products. Operations in this
business segment are summarized below by geographic area. All unaffiliated
revenues from South America are generated by ABC-Curacao and primarily represent
export sales made to Brazil and India ("S.A.").
North
Year ended January 31, 2002: America S.A. and Europe Eliminations Consolidated
---------------------------- ------- --------------- ------------ ------------
Revenues from
unaffiliated customers $7,248,547 $961,138 $8,209,685
Intercompany revenue between
geographic regions 395,780 (395,780)
Income (loss) from operations 218,335 (502,187) (283,852)
Income (loss) before taxes 233,344 (507,790) (274,446)
Identifiable assets 4,024,090 5,414,197 (110,743) 9,327,544
Capital expenditures 187,952 419,546 607,498
Depreciation and amortization 160,405 276,945 437,350
North
Year ended January 31, 2001: America S.A. and Europe Eliminations Consolidated
---------------------------- ------- --------------- ------------ ------------
Revenues from
unaffiliated customers $4,986,194 $545,511 $5,531,705
Intercompany revenue between
geographic regions 1,088,508 (1,088,508)
Loss from operations (779,039) (165,882) (944,921)
Loss before taxes (947,439) (244,347) (1,191,786)
Identifiable assets 4,840,975 4,823,570 (520,801) 9,143,744
Capital expenditures 464,216 3,358,350 3,822,566
Depreciation and amortization 114,480 36,255 150,735
F-18
The information presented above may not be indicative of results if the
geographic areas were independent organizations. Intercompany transactions are
made at transfer prices which management believes to be equivalent to those made
at arms-length.
15. Related Party Transactions
--------------------------
The Company has two loans to the Company's chairman. One loan, whose principal
balance at January 31, 2002 is $941,306 is a demand promissory note, bears
interest at 9% per annum, is collateralized by approximately 1,800,000 shares of
the Company's stock. Another loan, whose principal balance at January 31, 2002
is $56,820 is a demand promissory note, bears interest at 9% per annum, an is
uncollateralized. The Company also has two loans with Wilbur St. Corporation
("WSC"), an affiliate of the chairman. One loan is a non-amortizing mortgage
from WSC in the amount of $82,606 and bears interest at 9% per annum; the other
is for advances to WSC which amount to $35,646. For financial statement
purposes, all these loans, which aggregate $1,116,378 are classified as
components of stockholders' equity in the balance sheet and appear as "Notes due
from chairman and other related party". Interest income accrued for these loans
but not recognized for financial statement purposes aggregated approximately
$105,000 and $72,000 for the years ended January 31, 2002 and 2001,
respectively.
ABC-New York has notes payable to a former director of the Company and to a
partner of the S.J. Wegman Company, an affiliate, amounting to $14,010 at
January 31, 2002. The notes, which bear interest at 9% per annum, are payable on
demand.
During the fiscal years ended January 31, 2002 and 2001 the Company incurred
consulting fees in the amount of $0 and $35,000 for services provided by a son
of a former director. During the fiscal year ended January 31, 2001, the Company
paid $92,650 for the use of an entertainment facility formerly owned by an
affiliate of the Company's chairman and chief executive officer.
16. Employee Benefit Plan
---------------------
ABC-New York has a 401(k) Profit Sharing Plan for employees who meet minimum age
and service requirements. Contributions to the plan by ABC - New York are
discretionary and subject to certain vesting provisions. The Company made no
contributions to this plan for the years ended January 31, 2002 and 2001.
F-19
EXHIBIT INDEX
EXHIBIT
Exhibit 10.16 Loan agreement between Advance Biofactures of Curacao, NV and
Korpodeko Curacao Development Corporation dated August 6, 2001
and Letter of Intent dated May 15, 2001.
Exhibit 23.1 Consent of BDO Seidman LLP
Exhibit 23.2 Consent of Grant Thornton, LLP