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 December 31, 2003
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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______________
Commission file number 0-19879
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
incorporation or organization) Identification No.)
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
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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 [ ] No [X]
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
$3,240,000. The aggregate market value of common voting stock held by
non-affiliates of the Issuer was $5,264,510 computed by reference to the last
sale price at which the stock was sold on November 1, 2004 as reported by the
OTC Pink Sheets. As of November 1, 2004, 5,326,341 shares of common stock were
outstanding.
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 6
Management's Discussion and Analysis, 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
Biospecifics Technologies Corp., was incorporated in Delaware in 1990 Since that
time the Company and its subsidiaries have not entered into bankruptcy,
receivership, or any similar proceedings, and have not had any material
reclassifications, merger, consolidation or purchase or sale of a significant
amount of assets not in the ordinary course of business. We have been engaged in
the business of manufacturing and licensing for sale a fermentation derived
enzyme named Collagenase ABC (the "enzyme" or the "product"), approved by the
U.S. Food and Drug Administration ("FDA") for debriding chronic dermal ulcers
and severely burned areas. This product is by prescription only in the United
States and is applied topically. We are also developing additional products
derived from this enzyme for potential use as pharmaceuticals. On June 3, 2004
we signed a development and licensing agreement with Auxilium Pharmaceuticals,
Inc ("the Auxilium Agreement") that covers all potential uses of the enzyme in
an injectable form other than for wound healing (see subsequent events for more
detail).
We derive most of our net sales of the product, (historically, approximately
90%) and all royalty revenues, from one customer in the United States, Abbott
Laboratories and its subsidiaries ("Abbott") who, pursuant to an exclusive
licensing agreement (the "Agreement"), compounds the product into Collagenase
Santyl(R) Ointment ("Santyl(R)" or "ointment"), a topical prescription drug used
to treat dermal ulcers and burns. The royalty revenues from Abbott were earned
on North American sales of Santyl(R) to distributors by Smith & Nephew, Inc.
("S&N") through December 31, 2003. On June 30, 2003 a sub-license agreement
under which S&N marketed Santyl(R) ointment terminated. Effective January 1,
2004, the Ross Products Division of Abbott Laboratories Inc. assumed United
States marketing responsibility for Collagenase Santyl(R) Ointment. During 2003,
the Abbott Agreement automatically renewed for an additional 10-year period, to
August 2013. Collagenase Santyl(R) Ointment is sold primarily to long-term care
centers.
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In June 2004, we entered into a development and license agreement with Auxilium
Pharmaceuticals, Inc. ("the Auxilium Agreement"). Under the agreement, we have
granted Auxilium the rights to develop products containing our enzyme ("AA4500")
for the treatment of Peyronie's and Dupuytren's disease. We have granted
Auxilium the exclusive world-wide license to any products developed under the
agreement other than dermal formulations labeled for topcial administration. We
also granted Auxilium the option to develop and license the technology for use
in other indications other than dermal formulations labeled for topical
administration. The agreement extends, on a country-by-country and
product-by-product basis, for the longer of the patent life, the expiration of
any regulatory exclsivity period or 12 years. Auxilium may terminate the
agreement with 90 days written notice. Auxilium is obligated to pay all clinical
and regulatory development costs on an on-going basis, to purchase commercial
inventory from us and to pay royalties based on product sales. In addition,
Auxilium is obligated to make milestone payments for contract initiation,
receipt of technical data, manufacturing process development, the one-year
anniversary date, filing of regulatory applications and receipt of regulatory
approval.
In June 2004, we received an up-front payment under the agreement totalling
$2,500,000. In August 2004, we received an additional $2,500,000 for delivery of
all in-process research and development material product data relating to
Dupuytren's and Peyronie's disease. We may also receive up to $10,500,000 of
contingent milestone payments under this agreement if all existing conditions
are met. Additional milestone obligations may be due if Auxilium exercises an
option to develop and license our enzyme for additional medical indications.
Prior to the signing of the Auxilium Agreement, we funded operations by (1)
modification of the terms of two loans, principally, by deferring a balloon
payment of $364,000 due in November 2003 to November 2004; and deferring the
payment of $100,000 principal due on a promissory note from March 2004 to March
2005; (2) receiving a $250,000 advance of royalties from Abbott Laboratories,
our major customer, in January 2004 and a $500,000 royalty advance at the end of
March 2004, both of which are to be repaid from royalties to be earned from
distribution of Santyl(R) Ointment during 2004 (of which $94,000 and $130,000
were repaid from royalties earned during the respective quarters ended March 31,
2004 and June 30, 2004); (3) our chairman's deferred salary of $100,000 during
the three months ended June 2003 has been applied against the chairman note
receivable in March 2004 and (4) deferring or making partial payments to
creditors. Due to manufacturing problems encountered in 2003, we will be able to
supply Abbott with only limited quantities of our enzyme throughout 2004 and
will continue to incur significant operating losses exclusive of the income
received from the Auxilium Agreement. As a result of payments received under the
Auxilium Agreement, we generated positive cash flow during both the second and
third quarters of 2004.
In March 2003 we changed our fiscal year end from January 31 to December 31. Our
first fiscal year using this new basis is the twelve months ending December 31,
2003 similarly in this report we compare the twelve months ended December 31,
2003 ("calendar year 2003") to the twelve months ended January 31, 2003 ("fiscal
year 2003").
The year ended January 31, 2003 is not materially different to the eleven month
period, therefore the eleven months ended December 31, 2002 is not presented..
The eleven months period ended December 31, 2003 is also presented.
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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 place. Necrotic
tissue is largely collagen and 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 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.
Manufacture, Sale and Distribution of Collagenase ABC
-----------------------------------------------------
Our collagenase ABC enzyme powder is the active pharmaceutical ingredient of a
topical ointment, known as Collagenase Santyl(R) Ointment (Santyl(R)) in the
United States. We do not directly market the product to end-users. We
manufacture and 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.
In 1999, as a result of inspectional observations made by the FDA, on Form 483,
of deficiencies in our compliance with FDA good manufacturing practices and
policies ("GMP") regulations at our Lynbrook and Curacao facilities, and at
Abbott Laboratories, (hereinafter referred to as "our Subcontractor"), the FDA
advised us in a letter (the "FDA letter") that it would revoke our license to
manufacture the enzyme and ointment unless we 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 GMP regulations. We submitted such a plan in 1999.
Pursuant to this plan, we voluntarily suspended manufacture of the product in
March 2000 to allow for major renovations at our manufacturing facilities in
Curacao and Lynbrook. Beginning March 2000, we supplied Abbott with the product
from inventory built up in anticipation of the upgrade. This built up inventory
was depleted in July 2002.
The FDA notified us on July 28, 2003 that our request to supplement our
biologics license for collagenase ABC was approved ("FDA approval"). The
supplement included major renovations to the manufacturing facility, utility
systems, and process equipment at our Curacao facility. The FDA notification
acknowledged our written commitments to provide additional information regarding
ongoing studies and when to submit this information to our biologics license for
review. As a result of the FDA approval, enzyme product manufactured at the
Curacao facility is now being distributed to Abbott. Regardless of this FDA
approval, the FDA letter will remain in effect until we demonstrate compliance
with the applicable federal standards and regulations, which we understand to be
two "satisfactory annual GMP inspections" of our Lynbrook and Curacao
manufacturing facilities. We believe that we have made progress in complying
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with the applicable federal standards and regulations, although there can be no
assurances as to when the FDA letter will be rescinded, if at all. During the
quarter ended June 30, 2004, the FDA completed an inspection of our Lynbrook
facility. We are hopeful that after the next FDA inspection is completed at our
Lynbrook facility, we will be eligible to have the FDA letter rescinded. In May
2004, the FDA inspected the facility of our Subcontractor. To the best of our
knowledge, the FDA has not commented on the inspection, nor is the FDA obligated
to do so. The FDA has not conducted an inspection of our Curacao facility since
July 2002.
Prior to the FDA approval, the renovated Curacao facility went into limited
production of quarantine inventory during the fiscal year ended January 31,
2002. However, FDA approval was required before Santyl(R) could be made from
inventory manufactured at the renovated Curacao facility. With FDA approval,
deliveries of finished inventory of the product manufactured at the renovated
Curacao facility were subsequently resumed. There have been no studies made to
determine how substantial the impact of prior manufacturing delays have been on
the market for Santyl(R) Ointment.
Abbott Agreement and Sublicense
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In March 2001, Abbott Laboratories acquired Knoll Pharmaceutical Company ("KPC",
collectively, "Abbott"), our original licensee for product applications relating
to the treatment of skin ulcers and burns. Since 1972, we have sold Collagenase
ABC, our only commercial product to date, principally in the United States
through exclusive license agreements with Abbott, under which we supply Abbott
with the product, monitor the production of Santyl(R) by Abbott, and collect a
royalty on the distribution of Santyl(R) (the "Abbott Agreement" or the
"Agreement"). KPC marketed the 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
Collagenase Santyl(R) under a sublicensing agreement made with KPC, which Abbott
assumed. The January 2000 sub-license agreement under which S&N marketed
Santyl(R) ointment terminated on June 30, 2003 but S&N agreed to continue to
market Collagenase Santyl(R) through the end of 2003. The Ross Products Division
of Abbott Laboratories Inc. assumed United States marketing responsibility for
Collagenase Santyl(R) Ointment effective January 1, 2004. During calendar 2003,
the Abbott Agreement automatically renewed for an additional 10-year period, to
August 2013.
It is our belief that we will be able continue providing Abbott with quantities
of the enzyme they require on a going forward basis. 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 the
calendar year ended December 31, 2003 and the fiscal year ended January 31, 2003
were approximately $1,684,000 and $2,141,000, 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.
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Abbott accounted for approximately $3,093,000 and $3,196,000 of our product
sales and royalties for the calendar year 2003 and fiscal year 2003,
respectively. These amounts were approximately 95% and 78% of our revenues
during the calendar year 2003 and fiscal year 2003, respectively. At December
31, 2003, we had approximately $1.6 million of firm booked orders with Abbott
for the product. We will not be able to fulfill all these orders in a timely
manner due to the time required to manufacture our product. Both parties have
agreed on a manufacturing and delivery timetable for future deliveries of
product and manufacture of Santyl(R).
Our product is approved in two other countries, Brazil and India, and sold to
commercial customers in those countries, who compound the product into ointment.
During the calendar year ended December 31, 2003 and the fiscal year ended
January 31, 2003, sales to the customer in Brazil represented approximately 0%
and 19% of total revenues, respectively, and sales to the customer in India
represented approximately 5% and 3% of total revenues, respectively. We have a
license agreement with the customer in India. There is no license and supply
agreement with the customer in Brazil, and we will only make limited deliveries
of the product to either our Brazilian or Indian customers at least through
2004, as we are currently devoting all of our manufacturing to Abbott's
requirements. 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 1994, we entered into a 10-year 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. In June 1994, we
entered into a multi-year license with an Italian pharmaceutical company that
had agreed to market an ointment containing the product in Italy subject to the
receipt of requisite Italian governmental approval. The Company is no longer
pursuing these agreements as the enzyme has not received approval in any of
these countries.
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 called 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. We submitted
collagenase ointment to the German health authority for marketing aproval in
1997, whose final decision remains pending.
Proposed Products and Uses
--------------------------
We expect that a substantial portion of our business activities in the future
will be the research and development ("R&D"), followed by manufacturing and
licensing, of various proposed injectable Collagenase ABC products and their
uses. It is anticipated that the terms of the Auxilium Agreement will provide us
with sufficient funds to continue such research and development and provide us
with the necessary funding to set up a manufacturing facility for the
injectable.
Injectable Collagenase ABC
--------------------------
We have developed a proprietary process to further purify Collagenase ABC. We
have investigated using this purified form of collagenase as an injectable to
remove collagen that interferes with normal bodily functioning or is unsightly.
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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 Lynbrook, N.Y. that has
been, and will be, used in U.S. clinical trials. Effective with the signing of
the agreement with Auxilium, Auxilium will be responsible for completion of any
Phase 2 and Phase 3 clinical studies for all potential uses they elect to
pursue. We will still be responsible for all Phase 1 clinical studies. 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
-----------------------------------------------------------------------------
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 have completed testing.
Dupuytren's Disease
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Dupuytren's disease is a deforming condition of the hand in which one or more
fingers, commonly 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 our 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 the 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"). The results were submitted to the FDA in support of
concluding Phase 2. An end of Phase 2 meeting was held in August 2001 with the
FDA to discuss how to proceed with Phase 3 studies. The investigators at Stony
Brook received a grant from the FDA in September 2002 to conduct Phase 3
clinical trials to determine safety and efficacy of collagenase for this use.
The clinical trials on Dupuytren's disease are summarized in an article in the
September 2002 issue of the Journal of Hand Surgery. As part of the agreement
with Auxilium, Auxilium is responsible for all Phase 3 clinical trials, along
with the related expenses.
Peyronie's Disease
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We are seeking to develop 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 cannot assure you that this treatment
will be proven effective. We were awarded a patent for this use in March 2000
and received "orphan drug" designation from the FDA in March 1996. 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 22
patients who were treated in an open label trial. The investigator reported
encouraging results. A new clinical trial was initiated in January 2004 and the
study is continuing. As part of the agreement with Auxilium, Auxilium is
responsible for all further clinical trials with the related expenses.
Frozen Shoulder
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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. A
double blind 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. Positive clinical results were
presented at the March 2004 meeting of the Orthopaedic Research Society in San
Francisco.
Lipolysis
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Lipomas are benign fatty tumors that occur as bulges under the skin. A clinical
investigation is currently being performed with collagenase injection in the
treatment of skin lipomas. . The concept of using collagenase for removal of fat
is discussed in a European Patent Application issued June 2002.
OTHER PROPOSED PRODUCTS AND USES
Treatment of Burns
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Collagenase Santyl(R) has received 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. Pre-clinical experiments have been
conducted. Additionally, 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 were published in May
2002 in the Archives of Ophthalmology.
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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.
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 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. Since January 2004, S&N has been marketing a
non-collagenase enzymatic debriding ointment in the United States. 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") markets 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 or Canada. KAG, which, as part of the global
pharmaceutical business of BASF, was acquired by Abbott in March 2001.
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 our products. We expect competition to intensify as
technological advances occur in the development of pharmaceutical products of
biologic origin.
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MARKETING
We do not have our own sales staff and instead rely on licensees who have
recognition and acceptance in the marketplace. During the quarter ended December
31, 2003, we decided to liquidate our German subsidiary, Biospecifics Pharma
GmbH, which was established in November 1995. Its purpose was 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, which objectives were not realized. 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 $27.2 million in research on collagenase
and other products. We incurred approximately $885,000 and $1,069,000 in
research and development activities during calendar year 2003 and fiscal year
2003, 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 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,4 2 regulation and
periodic inspection 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.
In 1999, as a result of inspectional observations made by the FDA, on Form 483,
of deficiencies in our compliance with FDA good manufacturing practices and
policies ("GMP") regulations at our Lynbrook and Curacao facilities, and at
Abbott Laboratories, (hereinafter referred to as "our Subcontractor"), the FDA
advised us in a letter (the "FDA letter") that it would revoke our license to
manufacture the enzyme and ointment unless we 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 GMP regulations. We submitted such a plan in 1999.
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Pursuant to this plan, we voluntarily suspended manufacture of the product in
March 2000 to allow for major renovations at our manufacturing facilities in
Curacao and Lynbrook. Beginning March 2000, we supplied Abbott with the product
from inventory built up in anticipation of the upgrade. This built up inventory
was depleted in July 2002
The FDA notified us on July 28, 2003 that our request to supplement our
biologics license for collagenase ABC was approved ("FDA approval"). The
supplement included major renovations to the manufacturing facility, utility
systems, and process equipment at our Curacao facility. The FDA notification
acknowledged our written commitments to provide additional information regarding
ongoing studies and when to submit this information to our biologics license for
review. As a result of the FDA approval, enzyme product manufactured at the
Curacao facility is now being distributed to Abbott. Regardless of this FDA
approval, the FDA letter will remain in effect until we demonstrate compliance
with the applicable federal standards and regulations, which we understand to be
two "satisfactory annual GMP inspections" of our Lynbrook and Curacao
manufacturing facilities. We believe that we have made progress in complying
with the applicable federal standards and regulations, although there can be no
assurances as to when the FDA letter will be rescinded, if at all. During the
quarter ended June 30, 2004, the FDA completed an inspection of our Lynbrook
facility. We are hopeful that after the next FDA inspection is completed at our
Lynbrook facility, we will be eligible to have the FDA letter rescinded. In May
2004, the FDA inspected the facility of our Subcontractor. To the best of our
knowledge, the FDA has not commented on the inspection, nor is the FDA obligated
to do so. The FDA has yet to conduct an inspection of our Curacao facility.
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".
Production restarted during the third quarter of 2003.
PATENT AND TRADEMARK PROTECTION
Patents
-------
We are the assignee or licensee of nine U.S. and one European patent. We are not
able to ascertain whether these patents will provide any value. We are the
assignee of additional U.S. patent rights that have expired as well as certain
11
foreign patent rights corresponding to certain of the foregoing patents. We have
other patents under application. 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.
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 39 full-time employees, of which 23 are located at the Lynbrook facility
and 16 are at the Curacao facility. There are also 5 part-time employees in
Lynbrook and 1 in Curacao. None of these employees are represented by a union.
We consider our relationship with our employees to be good.
We have entered into confidentiality agreements with most of our employees.
Pursuant to such agreements, each employee in Lynbrook agrees to keep all of our
proprietary and other information secret and confidential and to return all
property 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 such
agreements.
We have ceased operations in Germany and are in the process of liquidating our
subsidiary in Germany, Bio Pharma, which was managed by Rainer Friedel, MD., and
Ph.D. Dr. Friedel was a member of our board of directors until his resignation
on April 30, 2004.
RISK FACTORS RELATED TO OUR BUSINESS
Substantial debt levels
-----------------------
In November 2001, ABC-Curacao borrowed a non-amortizing loan of $455,000 at 6.5%
interest due in November 2003 from Korpodeko, a Netherlands Antilles agency. In
connection with this loan, ABC-Curacao agreed to pledge as collateral
substantially all of the assets owned by ABC-Curacao, including the upgraded
facility's manufacturing assets with a book value of approximately $4.7 million
at December 31, 2003. BioSpecifics has also guaranteed the Korpodeko loan. In
September 2003, Korpodeko agreed to modify the terms of the loan. Korpodeko
permitted us to repay 20%, or $91,000 of the loan principal, which we did in
December 2003, and pay the remaining principal, or $364,000 in November 2004. In
return, we agreed to an interest rate increase from 6.5% to 7.5% from November
2003 to the new maturity in November 2004.
12
On March 11, 2003, we borrowed $100,000 from an unaffiliated individual lender,
evidenced by a one-year promissory note, bearing interest of 8% per annum. We
also granted to the lender warrants to purchase up to 10,000 common shares of
BioSpecifics at $1.18, the closing price on that day, until March 11, 2008. The
cost associated with these warrants, based on Black-Scholes methodology, is
$5,000 and was recorded as interest expense during the calendar year ended
December 31, 2003. Our chairman has personally guaranteed this loan. On March 8,
2004, the lender agreed to extend the promissory note for one year, or until
March 11, 2005.
On June 19, 2003, the Company entered into a financing transaction with Bio
Partners LP, a private investor group, pursuant to which the Company sold to Bio
Partners in a private placement (i) a $1.575 million convertible note, (the
"Note") issued at face value, and (ii) 295,312 shares of Company common stock,
issued at par value, or $.001 per share. The net proceeds to the Company were
approximately $890,000, after the payment of expenses and repayment of $500,000
previously advanced to the Company by a principal of Bio Partners.
The Note matures on June 19, 2005 and bears interest at a rate of 12% per annum
with an effective interest rate of 36%. Interest-only payments under the Note
are payable monthly in arrears and the entire principal amount is payable at
maturity. At the time the agreement was made, up to $1,141,875 aggregate
principal amount of the Note is convertible into the Company's common stock at
any time, at a conversion price of $2.50 per share, subject to customary
adjustments. The Note also contains restrictions on the Company's ability to
incur debt as long as the Note is outstanding. The Note is secured by a pledge
of substantially all of the assets of the Company and the Company's New York
subsidiary, Advance Biofactures Corporation ("ABC"). In addition, ABC has
guaranteed the obligations of the Company under the Note and our chairman, Edwin
H. Wegman, has personally guaranteed 50% of the obligations of the Company under
the Note. The loan discount of $281,000 and loan costs of $258,000 on the Note
are being amortized over two years, the expected life of the Note.
Reliance on a Single Product for Revenues
-----------------------------------------
Collagenase ABC enzyme is our sole source of revenues from the sale of product.
Commencing with the second quarter of 2004, we began receiving payments under
the terms of the Auxilium Agreement.
Uncertainty of Government Regulatory Requirements and Future Manufacture of the
-------------------------------------------------------------------------------
Enzyme
------
The manufacture 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 manufacturing the enzyme and began upgrading
the Curacao facility in March 2000. In May 2001 we completed the upgrade and
went back into limited manufacturing. In April 2002 we filed with the FDA a
"Prior Approval Supplement" ("PAS") for the Curacao facility upgrade. In July
2002, the FDA completed a Pre-Approval Inspection of this facility. At the
conclusion of the inspection, the FDA inspectors provided us with a list of
observations on FDA Form 483 and in August 2002, FDA issued a "Complete
Response" letter with respect to the Pre-Approval Inspection. We responded to
the FDA letter in November 2002 with a plan that is aimed at addressing issues
raised in the "Complete Response" letter.
The FDA notified us on July 28, 2003 that our request to supplement our
biologics license for collagenase ABC was approved ("FDA approval"). The
supplement included major renovations to the manufacturing facility, utility
systems, and process equipment at our Curacao facility. The FDA notification
acknowledged our written commitments to provide additional information regarding
ongoing studies and when to submit this information to our biologics license for
13
review. As a result of the FDA approval, enzyme product manufactured at the
Curacao facility is now being distributed to Abbott. Regardless of this FDA
approval, the FDA letter will remain in effect until we demonstrate compliance
with the applicable federal standards and regulations, which we understand to be
two "satisfactory annual GMP inspections" of our Lynbrook and Curacao
manufacturing facilities. We believe that we have made progress in complying
with the applicable federal standards and regulations, although there can be no
assurances as to when the FDA letter will be rescinded, if at all. During the
quarter ended June 30, 2004, the FDA completed an inspection of our Lynbrook
facility. We are hopeful that after the next FDA inspection is completed at our
Lynbrook facility, we will be eligible to have the FDA letter rescinded. In May
2004, the FDA inspected the facility of our subcontractor. The FDA has not
conducted an inspection of our Curacao facility since July 2002.
Dependence on Abbott Laboratories
---------------------------------
We derive most of our net sales and all of our royalty revenue from the topical
ointment business, through an exclusive license agreement, which expires in
August 2013, 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 its U.S. sales of
Collagenase Santyl(R) Ointment, which contains the product, to distributors.
Delisting of Common Stock from The Nasdaq Stock Market
------------------------------------------------------
In December 2003, Nasdaq had informed us that we were not in compliance with the
independent directors and audit committee composition requirements. Nasdaq
changed our symbol from "BSTC" to BSTCC" because of this noncompliance but
allowed us 90 days to comply with this requirement. In late February 2004, we
added Michael Schamroth to our board of directors, on a temporary basis, subject
to vote at the next shareholders meeting, and informed Nasdaq of this
appointment. By doing so, we satisfied the minimum requirement of three
independent directors. However, when we informed Nasdaq of the director
appointment, we also informed it that at December 31, 2003 we were no longer in
compliance with the $2.5 million minimum stockholders' equity requirement. On
March 3, 2004 Nasdaq invited us to make a written submission with respect to the
minimum stockholders' equity deficiency, which we submitted on March 10, 2004.
On March 22, 2004 the Nasdaq Listings Qualifications Panel (the "Panel")
informed us in writing of its determination to delist our common stock from The
NASDAQ SmallCap Market effective with the open of business on March 24, 2004.
The Nasdaq notice stated that the Panel's determination was based on our failure
to satisfy the $2.5 million shareholders' equity requirement as of December 31,
2003. Our common stock was immediately eligible for quotation on the OTC
Bulletin Board effective with the open of business on March 24, 2004. The OTC
Bulletin Board symbol assigned to us is BSTC. No application was required to be
filed for inclusion on the OTC Bulletin Board.
Our Common Stock traded on The NASDAQ SmallCap Market tier of the Nasdaq Stock
Market ("Nasdaq") under the symbol "BSTCC" until March 23, 2004. On March 24,
2004, our common stock began trading on the OTC Bulletin Board under the symbol
BSTC. Effective May 2004, our stock was moved from the OTC Bulletin Board to the
14
Pink Sheets due to our failure to file our financial reports on a timely basis
with the SEC.
SUBSEQUENT EVENTS
In June 2004, we entered into a development and license agreement with Auxilium
Pharmaceuticals, Inc. ("the Auxilium Agreement"). Under the agreement, we have
granted Auxilium the rights to develop products containing our enzyme ("AA4500")
for the treatment of Peyronie's and Dupuytren's disease. We have granted
Auxilium the exclusive world-wide license to any products developed under the
agreement other than dermal formulations labeled for topical administration. We
also granted Auxilium the option to develop and license the technology for use
in other indications other than dermal formulations labeled for topical
administration. The agreement extends, on a country-by-country and
product-by-product basis, for the longer of the patent life, the expiration of
any regulatory exclusivity period or 12 years. Auxilium may terminate the
agreement with 90 days written notice. Auxilium is obligated to pay all clinical
and regulatory development costs on an on-going basis, to purchase commercial
inventory from us and to pay royalties based on product sales. In addition,
Auxilium is obligated to make milestone payments for contract initiation,
receipt of technical data, manufacturing process development, the one-year
anniversary date, filing of regulatory applications and receipt of regulatory
approval.
In June 2004, we received an up-front payment under the agreement totalling
$2,500,000. In August 2004, we received an additional $2,500,000 for delivery of
all in-process research and development material product data relating to
Dupuytren's and Peyronie's disease. We may also receive up to $10,500,000 of
contingent milestone payments under this agreement if all existing conditions
are met. Additional milestone obligations may be due if Auxilium exercises an
option to develop and license our enzyme for additional medical indications.
On March 8, 2004, the holder of a one-year promissory note, bearing interest of
8% per annum which was due March 11, 2004 extended the note for one year.
In March 2004, our chairman's deferred salary of $100,000 has been applied
against the chairman note receivable.
On March 22, 2004 the Nasdaq Listings Qualifications Panel (the "Panel")
informed us in writing of its determination to delist our common stock from The
NASDAQ SmallCap Market effective with the open of business on March 24, 2004.
The Nasdaq notice stated that the Panel's determination was based on our failure
to satisfy the $2.5 million shareholders' equity requirement as of December 31,
2003. Our common stock was immediately eligible for quotation on the OTC
Bulletin Board effective with the open of business on March 24, 2004. The OTC
Bulletin Board symbol assigned to us is BSTC. No application was required to be
filed for inclusion on the OTC Bulletin Board.
Our Common Stock traded on The NASDAQ SmallCap Market tier of the Nasdaq Stock
Market ("Nasdaq") under the symbol "BSTCC" until March 23, 2004. On March 24,
2004, our common stock began trading on the OTC Bulletin Board under the symbol
BSTC. Effective May 2004, our stock was moved from the OTC Bulletin Board to the
Pink Sheets due to our failure to file our financial reports on a timely basis
with the SEC.
15
We have ceased operations in Germany and are in the process of liquidating our
subsidiary in Germany, Bio Pharma, which was managed by Rainer Friedel, MD., and
Ph.D. Dr. Friedel was a member of our board of directors until his resignation
on April 30, 2004.
Michael Schamroth became an interim director as of February 24, 2004 and was
elected by the Board of Directors in a special meeting. His term will expire at
the next annual meeting where he can stand for re-election to the Board.
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 11,500 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 $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 December 31, 2003 and January 31, 2003, we paid rent and real
estate taxes of $125,000 (approximately $8.33 per square foot) relating to this
lease agreement. We believe 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 an
unrelated 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 $37,000 per year.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None to date. The next annual meeting will include a vote to elect interim board
of director member Michael Schamroth as a full director of the Company
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
In December 2003, Nasdaq had informed us that we were not in compliance with the
independent directors and audit committee composition requirements. Nasdaq
changed our symbol from "BSTC" to BSTCC" because of this noncompliance but
allowed us 90 days to comply with this requirement. In late February 2004,
Michael Schamroth was added to our board of directors in a special meeting, on a
interim basis, subject to vote at the next shareholders meeting, and informed
Nasdaq of this appointment. By doing so, we satisfied the minimum requirement of
three independent directors. However, when we informed Nasdaq of the director
appointment, we also informed it that at December 31, 2003 we were no longer in
compliance with the $2.5 million minimum stockholders' equity requirement. On
March 3, 2004 Nasdaq invited us to make a written submission with respect to the
minimum stockholders' equity deficiency, which we submitted on March 10, 2004.
As described above, on March 24, 2004, our common stock began trading on the OTC
Bulletin Board under the symbol BSTC. Effective May 2004, our stock was moved
from the OTC Bulletin Board to the Pink Sheets due to our failure to file our
financial reports on a timely basis with the SEC.
As we currently meet the NASDAQ independent audit committee guidelines and
expect to meet the $2.5 million shareholders equity requirement, we anticipate
reapplying to the Nasdaq SmallCap Market upon filing all of our overdue
financial reports. However, there can be no assurance that we will be successful
in reapplying to the Nasdaq SmallCap Market.
On November 1, 2004, the closing price for our Common Stock was $2.00. The table
below sets forth the high and low sale prices for our Common Stock for the
period February 1, 2002 through December 31, 2003, as reported by Nasdaq.
QUARTER ENDED HIGH LOW
------------- ---- ---
December 31, 2003 $1.99 $1.05
September 30, 2003 $2.00 $0.79
June 30, 2003 $1.59 $0.60
March 31, 2003 $2.15 $1.06
January 31, 2003 $3.96 $0.66
October 31, 2002 $1.95 $0.60
July 31, 2002 $2.34 $1.13
April 30, 2002 $2.45 $1.56
On July 14, 2004, there were 113 stockholders of record of our Common Stock
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.
17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
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,
changing market conditions, the impact of competitive products and pricing, the
timely development and approval by the Food and Drug Administration ("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. Additionally there can be no
assurance that our agreement with Auxilium will provide us with new products in
the future. 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.
Summary
-------
We are a biopharmaceutical company focusing on wound healing and tissue
remodeling. We manufacture Collagenase ABC enzyme, (the "enzyme") which is the
active ingredient in the prescription drug Collagenase Santyl(R) Ointment sold
by Abbott Laboratories in the United States and indicated for debriding chronic
dermal ulcers and second and third degree burns. As previosuly mentioned, in
June 2004, we signed a development and license agreement with Auxilium
Pharmaceuticals to develop an injectable form of our enzyme (AA4500) for
treating Dupuytren's disease, Peyronie's disease, frozen shoulder, lipomas, and
other conditions, except for dermal formulations labeled for topical
administration. We have initiated Phase 3 clinical trials for Dupuytren's
disease. A clinical trial for Peyronie's disease began in January 2004. A Phase
2 trial for frozen shoulder is ongoing. Effective with the signing of the
Auxilium Agreement, they are now responsible for certain of these clinical
trials, including the trials already commenced for Dupuytren's and Peyronie's
disease.
We derive most of our sales revenues, (historically, approximately 90%) and all
of our royalty revenues, from one customer in the United States, Abbott
Laboratories ("Abbott") who, pursuant to an exclusive licensing agreement (the
"Agreement"), compounds the product into Collagenase Santyl(R) Ointment
("Santyl(R)" or "ointment"), a topical prescription drug used to treat dermal
ulcers and burns. The royalty revenues from Abbott were earned on North American
sales of Santyl(R) to distributors by Smith & Nephew, Inc. ("S&N") through
December 31, 2003. The January 2000 sub-license agreement under which S&N
marketed Santyl(R) ointment terminated on June 30, 2003 but it was agreed they
would continue to market through the end of 2003. The Ross Products Division of
Abbott Laboratories Inc. assumed United States marketing responsibility for
Collagenase Santyl(R) Ointment effective January 1, 2004. During 2003, the
Abbott Agreement automatically renewed for an additional 10-year period, to
August 2013. Collagenase Santyl(R) Ointment is sold primarily to long-term care
centers, where it is believed that Abbott's Ross Products Division has built a
strong market position and reputation.
18
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 us.
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, 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 that we realize in a specific period.
Accounting for the Impairment or Disposal of Long-Lived Assets.
---------------------------------------------------------------
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
requires judgments regarding future operating or disposition plans for
marginally performing assets. The application of both of these policies has
affected the amount and timing of charges to operating results that have been
significant in recent years. We evaluate our long-lived assets for impairment on
an annual basis, or whenever events and circumstances indicate that the carrying
amount may not be recoverable, including our business judgment of when to close
underperforming operations. These impairment evaluations require an estimation
of fair value based on recent negotiations to sell certain assets. Should the
carrying amount not be deemed to be recoverable, we write the assets down to
their fair value. For the year ended December 31,2003, we did not take any
impairment charges.
RESULTS OF OPERATIONS
In March 2003 we changed our fiscal year end from January 31 to December 31. Our
first fiscal year using this new basis is the twelve months ending December 31,
2003. In this report we compare the twelve months ended December 31, 2003
("calendar year 2003") to the twelve months ended January 31, 2003 ("fiscal year
2003") , because it is not practical to recast the prior comparative periods
ended December 31, 2002. The eleven months period ended December 31, 2003 is
also presented.
Net sales include the sales of Collagenase ABC enzyme recognized at the time it
is shipped to customers, primarily Abbott. Net sales also include fees we charge
Abbott for testing Collagenase Santyl(R) Ointment it contract manufactures with
the enzyme.
19
As a result of the FDA approval, we may now distribute to Abbott enzyme
manufactured at our renovated Curacao facility. In September 2003, we delivered
the first available enzyme manufactured at the renovated Curacao facility to
Abbott.
Net sales recorded for fiscal 2003 were from delivery of stockpiled enzyme
inventory to Abbott. We depleted that stockpiled enzyme inventory during fiscal
2003. During calendar 2003, we sold limited amounts of enzyme produced at the
renovated facility in Curacao to an international customer. International sales
have historically represented approximately 10% of total revenues; however, we
expect minimal sales to international customers at least through 2004.
Net sales were $1,555,625 and $1,938,706 for the calendar year 2003 and fiscal
year 2003, respectively, a decrease in calendar 2003 of $383,081 or 20% from
fiscal 2003. Enzyme shipments to Abbott in calendar 2003 were from enzyme
manufactured at the renovated Curacao facility. Enzyme shipments to Abbott in
fiscal 2003 were from enzyme that had been stockpiled prior to the renovation,
which began in March 2000. We delivered less enzyme during calendar 2003 because
we did not achieve our 2002 and 2003 enzyme manufacturing and inventory level
goals due to delays caused by manufacturing and personnel issues associated with
the renovated plant. We believe we have solved most of the manufacturing and
personnel issues and have achieved increases in manufacturing in 2004. However,
due to thes problems encountered in calendar 2003, we will be able to supply
Abbott with only limited quantities of our enzyme throughout 2004 and will
continue to incur significant operating losses, exclusive of the revenue
received from the Auxilium Agreement.
Royalties earned on Collagenase Santyl(R) Ointment sales by S&N were $1,683,915
and $2,140,534 for the calendar year 2003 and fiscal year 2003, respectively,
representing a decrease in calendar 2003 of $456,619 or 21%. Santyl(R) sales
during calendar 2003 were significantly lower than fiscal 2003 levels because of
lack of sufficient enzyme available to manufacture Santyl(R). As previously
described, Abbott's inventory of Santyl(R) ointment, which it has supplied to
S&N for distribution and on which we earn royalties, was depleted by the end of
July 2003, and only replenished in November 2003, with the first delivery of
enzyme we made in September 2003. There was no distribution of Santyl during the
three months August through October 2003; therefore, no royalties were earned
during that period. We expect Santyl(R) sales to continue to be negatively
impacted in 2004, because we did not achieve our 2003 enzyme manufacturing and
inventory level goals. We are on target to meet our production objectives in
2004.
The sub-license agreement under which Smith & Nephew marketed Santyl(R) ointment
terminated on June 30, 2003 but they continued to market it through the end of
2003. The Ross Products Division of Abbott Laboratories Inc. assumed United
States marketing responsibility for Collagenase Santyl(R) Ointment effective
January 1, 2004.
Cost of sales was $2,843,921 and $3,205,235, respectively, during calendar year
2003 and fiscal year 2003, a decrease in calendar 2003 of $361,314 or 11%. We
had a negative gross profit margin in both calendar year 2003 and fiscal year
2003 due to delays and manufacturing and personnel issues associated with the
renovated plant.
General and administrative expenses ("G&A") were $2,615,007 and $3,045,319
respectively, during calendar year 2003 and fiscal year 2003, a decrease in
calendar 2003 of $430,312, or 14%. During fiscal 2003, our production and
regulatory personnel spent a significant portion of their time preparing for the
FDA inspection of the Curacao facility, which took place in July 2002, the cost
of which was allocated to G&A in fiscal 2003.
20
Research and development expenses ("R&D") were $884,685 and $1,069,045
respectively, during calendar year 2003 and fiscal year 2003, a decrease in
calendar 2003 of $184,360 or 17%. Development efforts have been curtailed in our
attempt to conserve cash.
Other expense, net was $184,940 and $23,094 respectively, during calendar year
2003 and fiscal year 2003, an increase in other expense, net of $161,846. The
increase is due to interest expense on the 12% Senior Secured Convertible Note
borrowed in June 2003 and the March 2003 promissory note, and amortization of
the 12% Note's discount. The interest and discount amortization on these debt
instruments approximated $180,000 during calendar 2003. Interest expense in both
periods also includes interest on the two-year, 6.5% non-amortizing loan from
Korpodeko, a Curacao development corporation established to develop industry on
the island of Curacao. In September 2003, Korpodeko agreed to modify the terms
of the loan, by permitting us to repay 20%, or $91,000 of the loan principal in
November 2003, and pay the remaining principal, or $364,000 in November 2004. In
return, the Company agreed to an interest rate increase from 6.5% to 7.5% from
November 2003 to the new maturity in November 2004. In December 2003, we repaid
the $91,000 of loan principal.
The (expense) benefit for income taxes was ($13,000) and $260,464 respectively
during calendar year 2003 and fiscal year 2003. The net benefit in fiscal 2003
relates to US federal and state refunds of approximately $425,000 due by
carrying back most of the fiscal 2003 net operating loss to tax payments made in
prior taxable fiscal years, net of write-off of deferred tax assets. Due to a
change in the US tax law, we can only carryback net operating losses 2 years. We
recorded no income tax benefit for calendar 2003 because of uncertainties with
respect to the timing of future utilization of net operating loss benefit. Also,
the difference between the United States Federal statutory tax rate of 34% and
the effective tax rate in fiscal 2003 is due to the tax effect of foreign
sourced losses for which no benefit can be taken. 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
We have ceased operations in Germany and are in the process of liquidating our
subsidiary in Germany, Bio Pharma, which was managed by Rainer Friedel, MD., and
Ph.D.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Our primary source of working capital is from operations, which includes sales
of product, testing fees, royalties, periodic license fees, and borrowings. At
December 31, 2003, we had a working capital deficit of approximately $824,000.
The principal use of cash during the year ended December 31, 2003 was
approximately $1.6 million for operating activities. Sources of cash included
approximately $481,000 of repayments by our chairman of his notes, an increase
of $100,000 in short term debt, and proceeds from a $1,575,000 two year senior
secured convertible note bearing 12% interest, described below.
As previously mentioned, under the terms of the Auxilium Agreement we received,
in June 2004 and August 2004, payments totalling $5,000,000. We may also receive
$10,500,000 of contingent milestone payments under this agreement if all
existing conditions are met. Additional milestone obligations may be due if
Auxilium exercises an option to develop and license our enzyme for additional
medical indications.
21
Prior to the signing of the Auxilium Agreement, we funded operations by (1)
modification of the terms of two loans, principally, by deferring a balloon
payment of $364,000 due in November 2003 to November 2004; and deferring the
payment of $100,000 principal due on a promissory note from March 2004 to March
2005; (2) receiving a $250,000 advance of royalties from Abbott Laboratories,
our major customer, in January 2004 and a $500,000 royalty advance at the end of
March 2004, both of which are to be repaid from royalties to be earned from
distribution of Santyl(R) Ointment during 2004 (of which $94,000 and $130,000
were repaid from royalties earned during the respective quarters ended March 31,
2004 and June 30, 2004); (3) our chairman's deferred salary of $100,000 during
the three months ended June 2003 has been applied against the chairman note
receivable in March 2004, and (4) deferring or making partial payments to
creditors. Due to manufacturing problems encountered in 2003, we will be able to
supply Abbott with only limited quantities of our enzyme throughout 2004 and
will continue to incur significant operating losses exclusive of the income
received from the Auxilium agreement. As a result of payments due under the
Auxilium Agreement, we generated positive cash flow during the second quarter of
2004.
On June 19, 2003, the Company entered into a financing transaction with Bio
Partners LP, a private investor group, pursuant to which the Company sold to Bio
Partners in a private placement (i) a $1.575 million convertible note, (the
"Note") issued at face value, and (ii) 295,312 shares of Company common stock,
issued at par value, or $.001 per share. The net proceeds to the Company were
approximately $890,000, after the payment of expenses and repayment of $500,000
previously advanced to the Company by a principal of Bio Partners.
The Note matures on June 19, 2005 and bears interest at a rate of 12% per annum
with an effective interest rate of 36%. Interest-only payments under the Note
are payable monthly in arrears and the entire principal amount is payable at
maturity. At the time the agreement was made, up to $1,141,875 aggregate
principal amount of the Note is convertible into the Company's common stock, at
a conversion price of $2.50 per share, subject to customary adjustments. The
Note also contains restrictions on the Company's ability to incur debt as long
as the Note is outstanding. The Note is secured by a pledge of substantially all
of the assets of the Company and the Company's New York subsidiary, Advance
Biofactures Corporation ("ABC"). In addition, ABC has guaranteed the obligations
of the Company under the Note and our chairman, Edwin H. Wegman, has personally
guaranteed 50% of the obligations of the Company under the Note. The loan
discount of $281,000 and loan costs of $258,000 on the Note are being amortized
over two years, the expected life of the Note.
In November 2001, ABC-Curacao borrowed a non-amortizing loan of $455,000 at 6.5%
interest due in November 2003 from Korpodeko. In connection with this loan,
ABC-Curacao agreed to pledge as collateral substantially all of the assets owned
by ABC-Curacao, including the upgraded facility's manufacturing assets with a
book value of approximately $4.7 million at December 31, 2003. BioSpecifics has
also guaranteed the Korpodeko loan. In September 2003, Korpodeko agreed to
modify the terms of the loan. Korpodeko permitted us to repay 20%, or $91,000 of
the loan principal, which it did in December 2003, and pay the remaining
principal, or $364,000 in November 2004. In return, we agreed to an interest
rate increase from 6.5% to 7.5% from November 2003 to the new maturity in
November 2004. On the consolidated balance sheet as of December 31, 2003,
short-term liabilities include the remaining $364,000 due November 2004.
Long-term obligations at December 31, 2003 include operating leases of
approximately $159,000 annually through December 2004.
22
On March 22, 2004 the Nasdaq Listings Qualifications Panel (the "Panel")
informed us in writing of its determination to delist our common stock from The
NASDAQ SmallCap Market effective with the open of business on March 24, 2004.
The Nasdaq notice stated that the Panel's determination was based on our failure
to satisfy the $2.5 million shareholders' equity requirement as of December 31,
2003. Our common stock was immediately eligible for quotation on the OTC
Bulletin Board effective with the open of business on March 24, 2004. The OTC
Bulletin Board symbol assigned to us is BSTC. No application was required to be
filed for inclusion on the OTC Bulletin Board. BioSpecifics had the right to
request that the Nasdaq Listing and Hearing Review Council (the "Listing
Council") review this decision. The request for review had to be made in writing
and received within 15 days from the date of the Nasdaq decision. We did not
request the Nasdaq Listing Council to review the delisting decision. The Listing
Council had the option, on its own motion, to determine to review any Panel
decision within 45 calendar days after issuance of the written decision, or
until May 6, 2004. If the Listing Council had determined to review this
decision, it could have affirmed, modified, reversed, dismissed or remanded the
decision of the Panel. We would have been notified in the event the Listing
Council determined that this matter would have been called for review. No such
review was requested by us nor did the Listing Council opt to review the Panel
decision.
Our Common Stock traded on The NASDAQ SmallCap Market tier of the Nasdaq Stock
Market ("Nasdaq") under the symbol "BSTCC" until March 23, 2004. On March 24,
2004, our common stock began trading on the OTC Bulletin Board under the symbol
BSTC. Effective May 2004, our stock was moved from the OTC Bulletin Board to the
Pink Sheets due to our failure to file our financial reports on a timely basis
with the SEC.
As we currently meet the NASDAQ independent audit committee guidelines and
expect to meet the $2.5 million shareholders equity requirement, we anticipate
reapplying to the Nasdaq SmallCap Market upon our filing of all overdue
financial reports. However, there can be no assurance that we will be successful
in reapplying to the Nasdaq SmallCap Market.
ITEM 7. FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm .............. F-1
Consolidated Balance Sheet as of December 31, 2003 ..................... F-2
Consolidated Statements of Operations for Calendar Year ended
December 31, 2003, Fiscal Year ended January 31, 2003, and eleven
months ended December 31, 2003 ...................................... F-3
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for Calendar Year ended December 31, 2003 and Fiscal Year ended
January 31, 2003 .................................................... F-4
Consolidated Statements of Cash Flows for Calendar Year ended
December 31, 2003 and Fiscal Year ended January
31, 2003, and eleven months ended December 31, 2003 ................. F-5
Notes to Consolidated Financial Statements ............................. F-6
ITEM 8. CHANGES IN, AND DISAGREEMENTS WITH ACCOUNTANTS, ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
23
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Disclosure controls are controls and other procedures that are designed to
ensure that information that we are required to disclose in the reports we file
pursuant to the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported. We have evaluated the effectiveness of such controls.
Limitation on the Effectiveness of Controls
Our management does not expect that our disclosure controls or our internal
controls over financial reporting will prevent all error and fraud. A control
system, no matter how well conceived and operated can provide only reasonable,
but not absolute assurance that the objectives of a control system are met.
Further, any control system reflects limitations on resources and the benefits
of a control system must be considered relative to its costs. These limitations
also include the realities that judgments in decision-making can be faulty and
that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people or by management overrule of a control. A design
of a control system is also based upon certain assumptions about potential
future conditions over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected.
Conclusions
There were no changes in our internal controls that occurred during the quarter
covered by this report that have materially affected, or are reasonably likely
to materially affect our internal controls.
ITEM 8B. OTHER INFORMATION
NONE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Board of Directors is divided into three classes, each of which serves for a
term of three years, with only one class of directors being elected in each
year. The term of office of the first class of directors, presently consisting
of Thomas L. Wegman and Dr. Paul A. Gitman will expire at the Annual Meeting in
2006, the term of office of the second class of directors, presently consisting
of Henry Morgan and Michael Schamroth will expire on the date of the Annual
Meeting in 2004, and the third class of directors, consisting of Edwin H. Wegman
will expire on the date of the Annual Meeting in 2005. Dr Friedel resigned as a
Director and the Managing Director of Biospecifics Pharma GmbH on April 30,
2004. We do not anticipate replacing Dr. Friedel on the Board. In each case,
barring death, resignation or removal, each director serves from the date of his
election until the end of his term and until his successor is elected and
qualified.
24
The directors have the positions with the Company and principal occupations set
forth in the table below.
AGE AT MAY POSITION WITH THE COMPANY TERM
NAME 15, 2004 AND PRINCIPAL OCCUPATION DIRECTOR SINCE EXPIRES
---- -------- ------------------------ -------------- -------
Edwin H. Wegman 84 Chairman of the Board and President 1990 2005
Thomas L. Wegman 49 Director, Executive Vice President 1994 2006
Dr. Paul A. Gitman 63 Director; Director, Quality and Resource 1990 2006
Management, Long Island Jewish Medical
Center
Henry Morgan 83 Director; Senior partner of the law firm 1990 2004
Morgan, Melhuish, Monaghan, Arvidson,
Abrutyn & Lisowski
Michael Schamroth 64 Director, owner of M. Schamroth & Sons 2004 2004
Edwin H. Wegman has had the principal occupation and positions with the Company
set forth in the table above for the past five years, and has held similar
positions with the Company's subsidiaries, Advance Biofactures Corporation
("ABC-New York") and Advance Biofactures of Curacao ("ABC-Curacao"), for the
past five years.
Thomas L. Wegman was Secretary and Treasurer of the Company from inception to
July 1997, at which time he assumed his current position. In addition, he has
held, for the past five years, similar positions with the Company's
subsidiaries, ABC-New York and ABC-Curacao.
Dr. Gitman is Medical Director at Long Island Jewish Medical Center since
January 1, 1995 and prior thereto was an independent physician engaged in the
practice of internal medicine with Spellman Mykoff & Gitman, MD, P.C.
Henry Morgan has had the principal occupation set forth in the table above for
the past five years. For personal reasons, Mr. Morgan resigned from the board on
May 16, 2003 and rejoined the board on July 10, 2003.
Michael Schamroth became an interim director as of February 24, 2004. Mr.
Schamroth's appointment to the Board will be ratified at the Company's next
stockholders' meeting, which should take place near the end of 2004. Mr.
Schamroth, who runs a fourth generation family owned business, has in excess of
twenty years of experience as a Board Member of a major Long Island based health
system. His many roles have included Chairman of the Board, Chairman of the
Compensation Board and Member of the Finance Committee.
25
To the Company's knowledge, based solely on its review of the copies of Forms 4
and 5 furnished to it, the Company believes that all Section 16(a) reporting
requirements were complied with during the fiscal year ended December 31, 2003.
EXECUTIVE OFFICERS
In addition to the executive officers named above, the Company employed Albert
Horcher as its Secretary, Treasurer, and Principal Financial and Chief
Accounting Officer. Mr. Horcher, 44, is a certified public accountant and served
in these positions from July 1997 to April 2004, when he resigned from the
Company. From February 1991 to July 1997, he served as the Company's Controller
and Principal Financial and Chief Accounting Officer. In addition, he held for
the past five years similar positions with the Company's subsidiaries, ABC-New
York and ABC-Curacao. Executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board.
BOARD MEETINGS AND COMMITTEES
During the last fiscal year that ended December 31, 2003, the Board of Directors
met 5 times. All incumbent directors, with the exception of Mr. Schamroth who
joined the board in 2004, attended at least 80% of board meetings.
Audit Committee. The Board has an Audit Committee consisting of Dr. Paul A.
Gitman, and Henry Morgan. The function of the Audit Committee is to recommend
selection of the Company's independent accountants, review with the independent
accountants the results of their audits, review with the independent accountants
and management the Company's financial reporting and operating controls and the
scope of audits, review all budgets of the Company and its subsidiaries and make
recommendations concerning the Company's financial reporting, accounting
practices and policies and financial, accounting and operating controls and
safeguards and review matters relating to the relationship between the Company
and its auditors. The audit committee met 4 times during the fiscal year ended
December 31, 2003
Stock Option Committee. The stock option committee consists of Dr. Paul A Gitman
and Henry Morgan. The function of the Stock Option Committee is to administer
the Company's 1993 Stock Option Plan (the "1993 Plan") which expired July 2004,
the Company's 1997 Stock Option Plan (the "1997 Plan"), and the Company's 2001
Stock Option Plan (the "2001 Plan"). The stock option committee did not meet
during the last fiscal year.
Executive Committee. The executive committee consists of Edwin H. Wegman and
Thomas L. Wegman. The function of the Executive Committee is, except for certain
matters reserved to the full Board, to exercise all of the powers of the Board
in the management of the business of the Company during intervals between Board
meetings, if necessary. The executive committee held numerous meetings during
the last fiscal year.
The Board does not have nominating or compensation committees.
Family Relationships
--------------------
Edwin Wegman, our Chief Executive Officer, is the father of Thomas Wegman, who
is our Executive Vice President.
26
Involvement in Certain Legal Proceedings
----------------------------------------
None of our directors, executive officers, promoters or control persons has been
involved in any of the following events during the past five years:
1. any bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the bankruptcy
or within two years prior to that time; 2. any conviction in a criminal
proceeding or being subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); 3. being subject to any order, judgment,
or decree, not subsequently reversed, suspended or vacated, or any court of
competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities or banking activities; or 4. being found by a court of competent
jurisdiction (in a civil action), the Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or vacated.
Audit Committee Financial Expert
Our Board of Directors has determined that it does not have a member of its
audit committee that qualifies as an "audit committee financial expert" as
defined in Item 401(e) of Regulation S-B, and is "independent" as the term is
used in Tem 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of
1934, as amended.
We believe that retaining an independent director who would qualify as an "audit
committee financial expert" would be overly costly and burdensome and is not
warranted in our current circumstances.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers, directors and
persons who beneficially own more than ten percent of the Common Stock to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. These reporting persons also are required to furnish the Company
with copies of all Section 16(a) forms they file.
Code of Ethics
Our company's board of directors does not currently have a Code of Business
Conduct and Ethics but will be adopting one during the current calendar year
that will apply to, among other persons, members of our Board of Directors, our
company's officers including our president (being our principal officer) and our
company's chief financial officer (being our principal financial and accounting
officer), contractors, consultants and advisors. As adopted, our Code of
Business Conduct and Ethics will set forth written standards that are designed
to deter wrongdoing and to promote:
1. honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
2. full, fair, accurate, timely, and understandable disclosure in reports and
documents that we file with, or submit to, the Securities and Exchange
Commission and in other public communications made by us;
27
3. compliance with applicable governmental laws, rules and regulations;
4. the prompt internal reporting of violations of the Code of Business Conduct
and Ethics to an appropriate person or persons identified in the Code of
Business Conduct and Ethics; and 5. accountability for adherence to the Code of
Business Conduct and Ethics.
ITEM 10. - EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for services
rendered in all capacities awarded to, or earned by, certain of the Company's
executive officers for the fiscal years indicated. There are no other officers
who earned an aggregate salary and bonus in excess of $100,000 during the fiscal
year ended December 31, 2003. These executive officers also serve in the same
capacities in ABC-New York, and ABC-Curacao, except for Dr. Friedel.
--------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------
Annual Long-Term
Compensation Compensation
(no other (no restricted
compensation stock grants were
applicable) issued)
--------------------------- -------------- ------------------- -----------------
Edwin H. Wegman 12/31/03 297,402(1) -
President 1/31/03 405,169 39,000
1/31/02 405,169 100,000
--------------------------- -------------- ------------------- -----------------
Thomas L. Wegman 12/31/03 193,147 -
Executive 1/31/03 205,895 45,000
Vice President 1/31/02 205,895 50,000
--------------------------- -------------- ------------------- -----------------
Rainer Friedel 12/31/03 192,500 -
Managing Director 1/31/03 192,500 20,000
1/31/02 192,500 50,000
--------------------------- -------------- ------------------- -----------------
Albert Horcher 12/31/03 118,469 -
Secretary and 1/31/03 120,692 20,000
Treasurer 1/31/02 120,692 20,000
--------------------------- -------------- ------------------- -----------------
(1) Mr. Edwin H. Wegman's salary for the three months ended June 30, 2003 for
approximately $100,000 was deferred and subsequently, in March 2004, applied to,
the chairman note receivable with the Company.
DIRECTOR COMPENSATION
The Company has no specific policy for compensating directors. In past fiscal
years, directors, who were not employees, were compensated for meetings attended
in person at the Company's headquarters, at a rate of $1,500 per meeting. They
were also granted stock options. However, during the year ended December 31,
2003, none of the incumbent directors, and none of the former directors, were
paid for any meetings attended in person, and no accruals were made.
28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
To the Company's knowledge, the table that follows sets forth the beneficial
ownership of shares of Common Stock as of July 14, 2004 of (i) those persons or
groups known to the Company to beneficially own more than 5% of the Common
Stock, (ii) each director and nominee of the Company, (iii) each executive
officer whose compensation exceeded $100,000 (each, a "named executive officer")
in the calendar year ended December 31, 2003 (calendar 2003"), and (iv) all
directors and executive officers of the Company as a group. The information is
determined in accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), based on information
furnished by the persons listed or contained in filings made by them with the
Securities and Exchange Commission. Unless indicated below, the stockholders
listed possess sole voting and investment power with respect to their shares and
the business address of each stockholder is c/o BioSpecifics Technologies Corp.,
35 Wilbur St., Lynbrook, New York 11563.
NUMBER OF SHARES
NAME AND ADDRESS OF OF COMMON STOCK PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
---------------- ------------------ -----
Edwin H. Wegman (1)(5) 2,235,192 39.4%
Thomas L. Wegman (2)(5) 240,544 4.2
Paul A. Gitman, MD. (3)(5) 72,925 1.3
Henry Morgan (5) 35,425 *
Michael Schamroth (4)(5) 110,000 1.9
Bio Partners LP (5) 295,312 5.5
Directors and executive officers as a 2,694,086 46.8%
group (5 persons)
------------------------------------
(*) Less than 1%.
(1) Includes 1,843,327 shares of Common Stock owned by The S.J. Wegman
Company, a partnership of which Edwin H. Wegman is the sole general
partner. Includes 120,000 shares beneficially owned by The Isabel H.
Wegman Rev. Trust. The sole trustee of this trust is the estate of
Mr. Wegman's brother. Includes options to purchase 66,750 shares of
Common Stock that are currently exercisable. Does not include options
to purchase 79,250 shares of Common Stock that are not currently
exercisable. Edwin H. Wegman is the father of Thomas L. Wegman.
(2) Includes 7,300 shares of Common Stock held by Thomas L. Wegman's wife
and child. Includes options to purchase 205,800 shares of Common
Stock that are currently exercisable. Thomas L. Wegman is a son of
Edwin H. Wegman.
(3) Includes 16,500 shares of Common Stock held by Dr. Gitman's wife and
children. Includes options to purchase 35,425 shares of Common Stock
that are currently exercisable. Dr. Gitman's business address is c/o
Long Island Jewish Medical Center, 270-05 76th Ave., New Hyde Park,
New York 11040.
29
(4) Includes 100,000 shares owned by M. Schamroth & Sons and options to
purchase 10,000 shares of Common Stock, which are currently
exercisable.
(5) Listed address is 35 Wilbur Street, Lynbrook, New York 11563
Equity Compensation Plan Information
We maintain three equity compensation plans, the 1993 stock option plan (which
expired July 2004), the 1997 stock option plan and the 2001 stock option plan.
In July 1994, the Company's stockholders approved a stock option plan (the "1993
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 1993 plan,
qualified incentive stock options and non-qualified stock options may be granted
to purchase up to an aggregate of 200,000 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 1993 plan, no option shall be granted under the plan subsequent to ten
years after its effective date, or July 2004.
In July 1997, the Company's stockholders approved a stock option plan (the "1997
plan") with terms identical to the 1993 plan. 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 authorized 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. On December 16, 2003,
stockholders approved an amendment to the 2001 stock option plan which increased
the number of shares authorized for grant from 750,000 shares to 1,750,000
shares, an increase of 1,000,000 shares. A total of 1,750,000 shares of common
stock are now authorized for issuance under the amended 2001 plan.
The following table sets forth information regarding securities authorized for
issuance under our equity compensation plans as of December 31, 2003.
------------------------------ --------------------------- --------------------- ----------------------------
Number of securities
Number of securities to Weighted average remaining available for
be issued upon exercise exercise price of future issuance under
of outstanding options outstanding options equity compensation plans
------------------------------ --------------------------- --------------------- ----------------------------
Equity compensation plans
approved by security holders 1,350,625 $1.77 1,018,650
------------------------------ --------------------------- --------------------- ----------------------------
30
EXECUTIVE STOCK OPTION GRANT TABLE
-------------------------- ------------------------- ----------------------- --------------------------------
Executive Total Options Issued Number Exercisable Exercisable and under $1.47
-------------------------- ------------------------- ----------------------- --------------------------------
Edwin Wegman 139,000 66,750 13,250
-------------------------- ------------------------- ----------------------- --------------------------------
Thomas Wegman 205,800 205,800 115,000
-------------------------- ------------------------- ----------------------- --------------------------------
Paul Gitman, M.D. 35,425 35,425 15,425
-------------------------- ------------------------- ----------------------- --------------------------------
Henry Morgan 35,425 30,000 10,000
-------------------------- ------------------------- ----------------------- --------------------------------
There were no grants of options to the executives of the Company during the
fiscal year ended December 31, 2003 and no officer or director exercised any
option during the year ended December 31, 2003.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The S.J. Wegman Company owns Wilbur Street Corporation ("WSC"), which has leased
to ABC-New York a building serving as a manufacturing facility and headquarters
in Lynbrook, New York for over 30 years. The building also serves as the
Company's administrative headquarters. Edwin H. Wegman, the Company's Chairman
of the Board and President, is the President of WSC and the sole general partner
of The S.J. Wegman Company, a limited partnership. 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 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
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
The Company has two outstanding loans to the Company's chairman. One loan, whose
principal balance at December 31, 2003 is $494,302 is a demand promissory note,
bears interest at 9% per annum, and is collateralized by approximately 1,800,000
shares of the Company's stock. Another loan, whose principal balance at December
31, 2003 is $56,820 is a demand promissory note, bears interest at 9% per annum,
and 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 in the amount of $15,647. For financial
statement purposes, all these loans, which aggregate $649,375 of principal, are
classified as components of stockholders' equity in the balance sheet and appear
as "Notes due from chairman and other related party". During calendar 2003, the
Chairman repaid net principal of $375,935 on these loans. There is no assurance
that the Company will be able to collect on these notes. Interest income accrued
for these loans but not recognized for financial statement purposes aggregated
approximately $42,000 and $101,000 for the calendar year 2003 and fiscal 2003,
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 $15,010 at
December 31, 2003. The notes, which bear interest at 9% per annum, are payable
on demand.
31
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.)
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 3.3 Registrant's by-laws as amended [Note: section 1.15
deleted in its entirety]*
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.)
32
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.)
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.
33
Exhibit 10.17 Promissory note loan and warrant agreement between
BioSpecifics Technologies Corp. and David Geller dated
March 11, 2003
Exhibit 10.20 12% Senior Secured Convertible Note dated June 19,
2003 between BioSpecifics Technologies Corp. and Bio
Partners LP. (Previously filed on the Registrant's Form
8-K dated June 19, 2003 and incorporated herein by
reference.)
Exhibit 10.21 Securities Purchase Agreement dated June 19, 2003
between BioSpecifics Technologies Corp., Advance
Biofactures Corporation, and Bio Partners LP. (Previously
filed on the Registrant's Form 8-K dated June 19, 2003
and incorporated herein by reference.)
Exhibit 10.22 Investor Rights Agreement dated June 19, 2003
between BioSpecifics Technologies Corp. and Bio Partners
LP. (Previously filed on the Registrant's Form 8-K dated
June 19, 2003 and incorporated herein by reference.)
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 24 Development and Licensing Agreement dated June 3, 2004
between BioSpecifics Technologies Corp. and Auxilium
Pharmaceuticals, Inc.
Exhibit 31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
Exhibit 32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
-----------------------------
* Filed herewith
(B) REPORTS ON FORM 8-K
Form 8-K dated March 22, 2004
Form 8-K dated June 10, 2004
Form 8-K dated June 10, 2004
34
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our principal accountants for each of the past two years has been BDO Seidman,
LLP.
Audit Fees
The aggregate audit fees billed for each of the last two fiscal years for
professional services rendered by our principal accountants for the audit of our
annual financial statements included in our report on form 10-KSB and review of
our quarterly financial statements included in our Reports on Form 10-QSB were
$80,000 and $86,000 in the year ended December 31, 2003 and January 31, 2003,
respectively.
Audit Related Fees
For the fiscal years ended December 31, 2003 and January 31, 2003, there were no
aggregate fees billed for assurance and related services by BDO Seidman, LLP
relating to the performance of the audit of our financial statements, which are
not reported under the caption "Audit Fees" above.
Tax Fees
The aggregate fees billed in each of the last two fiscal years for professional
services rendered by our principal accountants for tax compliance, tax advice
and tax planning were $26,000 and $38,500 in fiscal years ended December 31,
2003 and January 31, 2003, respectively. These services included, in each fiscal
year reported, preparation of our corporate income tax returns, tax planning
advice related to our tax returns and tax advice relating to contemplated
corporate transactions.
All Other Fees
Other than the fees described above, we have not incurred any fees for any
services rendered by our principal accounting firm.
Pre-approval Policies and Procedures
It is our policy that, before we engage our principal accountants for any audit
or non-audit services, the engagement is approved by our audit committee. Our
audit committee has delegated to Henry Morgan, its Audit Committee Chairman, and
an independent director, the authority to grant such pre-approval during periods
when the audit committee is not in session and a meeting cannot be readily
convened. A decision by Mr. Morgan to pre-approve an audit or non-audit service
must be presented to the full audit committee at it next scheduled meeting. All
fees paid to, and or billed by, our principal accountants were approved in
accordance with the policy described above beginning May 6, 2003.
35
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: November 2, 2004 By: /s/ 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.
/s/ Edwin H. Wegman Chairman of the Board, President and November 2, 2004
--------------------- Director (Principal Executive Officer),
Edwin H. Wegman and Interim Principal Accounting Officer
November 2, 2004
/s/ Thomas L. Wegman Executive Vice President and Director
---------------------
Thomas L. Wegman
November 2, 2004
/s/ Paul A. Gitman, Director
---------------------
M.D. Paul A. Gitman, M.D.
/s/ Michael Schamroth Director November 2, 2004
---------------------
Michael Schamroth
/s/ Henry Morgan Director November 2, 2004
---------------------
Henry Morgan
36
BDO SEIDMAN, LLP INTERNAL PUBLICATION
Report of Independent Registered Public Accounting Firm
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 December 31, 2003, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss and cash flows for the years ended December 31, 2003 and January 31, 2003,
and the eleven months ended December 31, 2003. 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BioSpecifics Technologies Corp.
and Subsidiaries as of December 31, 2003 and the results of its operations and
its cash flows for the years ended December 31, 2003 and January 31, 2003, and
the eleven months ended December 31, 2003, in conformity with U.S. generally
accepted accounting principles.
/s/ BDO Seidman, LLP
Melville, New York
March 22, 2004, except for Note 15, as to
Which the date is June 3, 2004
F-1
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2003
-----------------
Assets
Current assets:
Cash and cash equivalents $ 268,998
Marketable securities 3,026
Accounts receivable, net 306,786
Inventories, net 880,452
Prepaid expenses and other current assets 47,151
-----------
Total current assets 1,506,413
Other assets - loan costs 203,457
Property, plant and equipment, net 3,845,102
-----------
5,554,972
===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,806,850
Notes payable to related parties 15,010
Deferred revenue 45,000
Short-term debt - Korpodeko 364,000
Short-term debt - promissory note 100,000
-----------
Total current liabilities 2,330,860
Minority interest in subsidiaries 89,728
Senior secured convertible 12% note, net of discount . 1,364,591
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; 5,249,528 shares issued 5,249
Additional paid-in capital 4,144,207
Retained earnings 180,949
Treasury stock, 361,380 shares at cost (1,911,237)
Notes receivable from chairman and other related party (649,375)
-----------
Total stockholders' equity 1,769,793
-----------
$ 5,554,972
===========
See accompanying notes to consolidated financial statements.
F-2
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Year ended Eleven months
December 31, January 31, ended December 31,
2003 2003 2003
----------- ----------- -----------
Revenues:
Net sales $ 1,555,625 $ 1,938,706 $ 1,332,762
Royalties 1,683,915 2,140,534 1,515,931
----------- ----------- -----------
3,239,540 4,079,240 2,848,693
Costs and expenses:
Cost of sales 2,843,921 3,205,235 2,571,780
General and administrative 2,615,007 3,045,319 2,317,739
Research and development 884,685 1,069,045 806,312
----------- ----------- -----------
6,343,613 7,319,599 5,695,831
----------- ----------- -----------
Loss from operations (3,104,073) (3,240,359) (2,847,138)
----------- ----------- -----------
Other income (expense):
Investment income 22,794 23,462 19,740
Interest expense (207,734) (46,556) (225,629)
----------- ----------- -----------
(184,940) (23,094) (205,889)
Loss before benefit (expense) for income taxes and minority interest (3,289,013) (3,263,453) (3,053,027)
Income tax benefit (expense) (13,000) 260,464 (13,000)
----------- ----------- -----------
Loss before minority interest (3,302,013) (3,002,989) (3,066,027)
Minority interest in loss of subsidiaries 77,413 78,220 70,730
----------- ----------- -----------
Net loss ($3,224,600) ($2,924,769) ($2,995,297)
=========== =========== ===========
Basic and diluted net loss per share ($ 0.68) ($ 0.64) ($ 0.63)
=========== =========== ===========
Weighted-average common shares outstanding 4,734,867 4,564,336 4,734,867
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-3
BioSpecifics Technologies Corp
Consolodated Statments of Stockholders' Equity
Common Stock Preferred Stock Retained
Shares Amount APIC Shares Amount Earnings
----------- ----------- ----------- ----------- ----------- -----------
Balances - 31 Jan 2002 4,912,216 $ 4,912 $ 3,800,104 0 0 $ 6,101,015
=========== =========== =========== =========== =========== ===========
Foreign currency translation -- -- -- -- -- --
Consultant option grants -- -- 7,600 -- -- --
Options exercised 27,000 27 26,973 -- -- --
Proceeds from Chairman -- -- -- -- -- --
Net (loss) -- -- -- -- -- (2,924,769)
----------- ----------- ----------- ----------- ----------- -----------
Balances - 31 Jan 2003 4,939,216 4,939 3,834,677 0 0 3,176,246
=========== =========== =========== =========== =========== ===========
Less: Jan 2003 activity na na na na na 229,303
Balances - 31 Dec 2002 4,939,216 4,939 3,834,677 0 0 3,405,549
Foreign currency translation -- -- -- -- -- --
Consultant option grants - IS 15,000 15 14,985 -- -- --
BioPartners loan/discount 295,312 295 280,546 -- -- --
Geller warrants, Garut options -- -- 14,000 -- -- --
Proceeds from Chairman -- -- -- -- -- --
Net (loss) -- -- -- -- -- (3,224,600)
----------- ----------- ----------- ----------- ----------- -----------
Balances - 31 Dec 2003 5,249,528 $ 5,249 $ 4,144,208 0 0 $ 180,949
=========== =========== =========== =========== =========== ===========
[RESTUBBED-
Treas Due from Currency Stkholder Eq Comprehen
stock Chairman Transl Total inc (loss)
----------- ----------- ----------- ----------- -----------
Balances - 31 Jan 2002 ($1,911,237) ($1,116,378) $ 15,811 $ 6,894,227 ($ 259,656)
=========== =========== =========== =========== ===========
Foreign currency translation -- -- (6,823) (6,823) (6,823)
Consultant option grants -- -- -- 7,600
Options exercised -- -- -- 27,000
Proceeds from Chairman -- 91,069 -- 91,069
Net (loss) -- -- -- (2,924,769) (2,924,769)
----------- ----------- ----------- ----------- -----------
Balances - 31 Jan 2003 (1,911,237) (1,025,309) 8,988 4,088,304 (2,931,592)
=========== =========== =========== =========== ===========
Less: Jan 2003 activity na (105,000) na 124,303 na
Balances - 31 Dec 2002 (1,911,237) (1,130,309) 8,988 4,212,607 --
Foreign currency translation -- -- (8,988) (8,988) (8,988)
Consultant option grants - IS -- -- -- 15,000 --
BioPartners loan/discount -- -- -- 280,841 --
Geller warrants, Garut options -- -- -- 14,000 --
Proceeds from Chairman -- 480,934 -- 480,934 --
Net (loss) -- -- -- (3,224,600) (3,224,600)
----------- ----------- ----------- ----------- -----------
Balances - 31 Dec 2003 ($1,911,237) ($ 649,375) $ 0 $ 1,769,794 ($3,233,588)
=========== =========== =========== =========== ===========
F-4
BIOSPECIFICS TECHNOLOGIES CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Twelve months ended Eleven months
December 31, January 31, ended December 31,
2003 2003 2003
----------- ----------- --------------------
Cash flows from operating activities:
Net loss ($3,224,600) ($2,924,769) ($2,995,297)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 699,129 636,657 650,011
Options and warrants issued for services 14,000 7,600 14,000
Issuance of stock for services 15,000 -- 15,000
Amortization of loan discount 70,137 -- 70,137
Minority interest in loss of subsidiaries (77,413) (78,220) (70,730)
Deferred taxes -- 164,536
Changes in operating assets and liabilities:
Accounts receivable 562,024 1,616,574 683,056
Inventories (231,572) 105,258 (201,546)
Prepaid expenses and other current assets (13,003) (21,270) (13,003)
Accounts payable and accrued expenses 150,302 192,110 (65,894)
Income taxes 417,000 (425,000) 425,000
----------- ----------- -----------
Net cash used in operating activities (1,618,996) (726,524) (1,489,266)
Cash flows from investing activities:
Net paydown of notes receivable from chairman 480,934 91,069 375,934
Expenditures for property, plant and equipment (16,189) (52,268) (16,189)
----------- ----------- -----------
Net cash provided by investing activities 464,745 38,801 359,745
----------- ----------- -----------
Cash flows from financing activities:
Interest accrued on notes payable to related parties 500 500 500
Exercise of stock options -- 27,000 --
Increase in short-term debt 100,000 -- 100,000
Decrease in short-term debt (91,000) -- (91,000)
Proceeds from senior secured convertible debt 1,575,000 -- 1,575,000
Proceeds from issuance of common stock 295 -- 295
Deferred loan costs, net (203,457) -- (203,457)
----------- ----------- -----------
Net cash provided by financing activities 1,381,338 27,500 1,381,338
----------- ----------- -----------
Effect of exchange rates on cash and equivalents (8,988) (6,823) (8,988)
Increase (decrease) in cash and cash equivalents 218,099 (667,046) 242,829
Cash and cash equivalents at beginning of year 50,899 693,215 26,169
----------- ----------- -----------
Cash and cash equivalents at end of year $ 268,998 $ 26,169 $ 268,998
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest 157,599 46,555 157,599
=========== =========== ===========
Income taxes 0 14,050 0
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
BIOSPECIFICS TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and January 31, 2003
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") that 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.
Historically, the Company's revenues have been from one customer in the United
States, Abbott Laboratories ("Abbott") who, pursuant to an exclusive licensing
agreement (the "Abbott Agreement", or the "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 "topical ointment business").
The Company also earns royalties on the sale of Santyl(R) to distributors by
Abbott.
2. 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. We
have ceased operations in Germany and are in the process of liquidating Bio
Pharma of Germany.
Change in Fiscal Year
In March 2003 we changed our fiscal year end from January 31 to December 31. Our
first fiscal year using this new basis is the twelve months ending December 31,
2003 similarly in this report we compare the twelve months ended December 31,
2003 ("calendar year 2003") to the twelve months ended January 31, 2003 ("fiscal
year 2003"). The year ended January 31, 2003 is not materially different to the
eleven month period therefore the eleven months ended December 31, 2002 is not
presented.. The eleven months period ended December 31, 2003 is also presented.
As a result of the signing of the Auxilium Agreement in June 2004, the Company
now has sufficient liquidity to fund its operations (See Note 15).
F-6
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 the lesser of their estimated
useful lives or the life of the lease which is approximately 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.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), relying on a number of factors including operating results, business
plans, economic projections and anticipated future cash flows. SFAS 144 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. The
Company recorded no impairment charges for the year ended December 31, 2003 and
January 31, 2003.
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 assets and liabilities of ABC Curacao are denominated in U.S. dollars.
ABC-Curacao conducts local transactions in local currency, which is translated
using average exchange rates for the period. The local currency in Curacao is
pegged to the US dollar; therefore gains and losses resulting from translation
are minimal and not included in stockholders' equity as accumulated other
comprehensive income or loss.
F-7
Gains and losses resulting from translation of the Euro, the functional currency
of Bio Pharma GmbH had been included in stockholders' equity as accumulated
other comprehensive income (loss).
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 nominal fees
the Company charges Abbott for testing Santyl(R) Ointment products manufactured
by Abbott. Net sales from testing are recognized when Santyl(R) is released by
the FDA 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. The royalty revenues
from Abbott for both periods presented were earned on North American sales of
Santyl(R) to distributors by Smith & Nephew, Inc. ("S&N") through December 31,
2003.
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 and milestone payments for potential
products are recognized when earned and the item is delivered under the guidance
of EITF No. 00-21 "Revenue Arrangements with Multiple Deliverables". The Company
did not recognize any license fee revenue during the periods ended December 31,
2003 and January 31, 2003.
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 $ 884,685 and
$1,069,045 in the calendar 2003 and fiscal 2003, 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 and diluted net loss per share has been
calculated by dividing net loss attributable to common stockholders by the
weighted-average number of common shares outstanding during the period.
Diluted net loss 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 December 31, 2003 and January 31, 2003, as their effect is
antidilutive For the years ended December 31, 2003 and January 31, 2003,
potential dilutive securities representing 1,350,625 and 1,358,325 options
outstanding are not included as their effect would be antidilutive. Furthermore,
for the year ended December 31, 2003 the Company also has 456,750 shares that
would be issued assuming $1,141,875 aggregate principal amount of the
convertible Note were converted into the Company's common stock at a conversion
price of $2.50 per share, subject to customary adjustments. These potentially
dilutive securities are not included since their effect would be anti-dilutive
because of the net loss incurred.
F-8
Stock Based Compensation
The Company has three stock-based employee compensation plans in effect which
are described more fully in Note 10. The Company accounts for all transactions
under which employees receive shares of stock or other equity instruments in the
Company based on the price of its stock in accordance with the provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees." No stock-based employee compensation cost for stock options is
reflected in net loss, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The Company recorded an expense of $14,000 and $7,600 during calendar
2003 and fiscal 2003, respectively, for options granted to consultants. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123
"Accounting for Stock-Based Compensation".
------------------------------------------------- ------------------- ------------------ --------------------
Year ended December 31, 2003 January 31, 2003 Eleven Months
Ended December 31,
2003
------------------------------------------------- ------------------- ------------------ --------------------
Net loss as reported ($3,224,600) ($2,924,769) ($2,995,297)
------------------------------------------------- ------------------- ------------------ --------------------
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net effect of minority
interest (221,361) (280,297) (196,800)
------------------------------------------------- ------------------- ------------------ --------------------
Proforma net loss (3,445,961) (3,205,066) (3,192,097)
------------------------------------------------- ------------------- ------------------ --------------------
Basic and diluted net loss per share:
------------------------------------------------- ------------------- ------------------ --------------------
As reported ($0.68) ($0.64) ($0.63)
------------------------------------------------- ------------------- ------------------ --------------------
Proforma SFAS 123 $(0.73) $(0.70) ($0.67)
------------------------------------------------- ------------------- ------------------ --------------------
The fair value for each option granted was estimated at the date of grant using
the Black-Scholes option-pricing model, one of the allowable valuation methods
under SFAS 123, with the following assumptions:
---------------------------------------- ----------------------- ----------------------- --------------------
Year Ended December 31, 2003 January 31, 2003 Eleven Months
Ended December 31,
2003
---------------------------------------- ----------------------- ----------------------- --------------------
Average risk free interest rates 4.75% 4.50% 4.75%
---------------------------------------- ----------------------- ----------------------- --------------------
Average expected life (in years) 5.00 5.00 5.00
---------------------------------------- ----------------------- ----------------------- --------------------
Volatility 82% 82% 82%
---------------------------------------- ----------------------- ----------------------- --------------------
The weighted-average fair value of the options granted during the calendar year
2003 and fiscal year 2003 was estimated to be $0.95 and $0.69, respectively, for
options granted at market value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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.
F-9
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. It is impractical to determine the fair value of notes
receivable due from the chairman and other related party.
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 9.)
Recently Issued Accounting Pronouncements
FIN No. 46 "Consolidation of Variable Interest Entities" was effective
immediately upon its issuance during fiscal 2003 for all enterprises with
interests in variable interest entities created after January 31, 2003. In
December 2003, FASB issued FIN No. 46 (R) that changes the effective dates for
the recording of interests in variable interest entities created before February
1, 2003 beginning with the first interim reporting period ending after March 15,
2004. If an entity is determined to be a variable interest entity, it must be
consolidated by the enterprise that absorbs the majority of the entity's
expected losses if they occur, or receives a majority of the entity's expected
residual returns if they occur, or both. Where it is reasonably possible that
the enterprise will consolidate or disclose information about a variable
interest entity, the enterprise must disclose the nature, purpose, size and
activity of the variable interest entity and the enterprise's maximum exposure
to loss as a result of its involvement with the variable interest entity in all
financial statements issued after January 31, 2003.
A determination has been made that although the lessor of its operating facility
is a variable interest entity, the Company is not the primary beneficiary. Under
FIN 46 the lessor will not be consolidated in the Company's consolidated balance
sheet. The adoption of this interpretation in 2004 is not expected to have an
effect on the Company's financial statements.
3. Marketable Securities
Marketable securities at December 31, 2003 consist of common and preferred
stock, with a cost basis of $245,713 unrealized holding losses of $242,687, and
fair market value of $3,026. Fair values are based upon quoted market prices.
F-10
4. Inventories, net
Inventories, net at December 31, 2003 consist of:
Raw materials $ 65,166
Work-in-process 815,286
--------
$880,452
========
5. Property, Plant and Equipment, net
Property, plant and equipment at December 31, 2003 consist of:
Machinery and equipment $2,379,795
Furniture and fixtures 371,917
Leasehold improvements 4,079,120
----------
6,830,832
Less accumulated depreciation and amortization (2,985,730)
----------
$3,845,102
==========
Depreciation and amortization expense amounted to $699,129 and $636,657 for
calendar 2003 and fiscal year 2003, respectively.
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2003 consist of the
following:
Trade accounts payable and accrued expenses $ 984,509
Accrued legal and other professional fees 542,036
Accrued payroll and related costs 280,305
----------
$1,806,850
==========
7. Income Taxes
The (expense) benefit for income taxes consist of the following:
Year ended December 31, January 31,
2003 2003
--------- ---------
Current:
Federal $ (13,000) $ 425,000
State -- --
$ (13,000) $ 425,000
--------- ---------
Deferred:
Federal -- (148,783)
State -- (15,753)
--------- ---------
-- (164,536)
--------- ---------
Total $ (13,000) $ 260,464
--------- ---------
The effective income tax rate of the Company differs from the federal statutory
tax rate of 34% in calendar 2003 and fiscal 2003 as a result of the effect of
the following items:
F-11
Year ended December 31, January 31,
2003 2003
----------- -----------
Computed tax benefit at statutory rate $ 1,118,264 $ 1,109,574
Tax effect of foreign sourced loss (506,511) (307,645)
State income taxes, net of federal tax benefit -- (10,397)
Non-deductible expenses (4,116) (4,143)
Orphan drug and other tax credits -- 20,000
Increase in valuation allowance (620,637) (546,925)
----------- -----------
$ (13,000) $ 260,464
=========== ===========
The components of the Company's deferred tax assets, pursuant to SFAS No. 109,
are summarized as follows:
Year ended December 31, January 31,
2003 2003
----------- -----------
Tax Credit Carryforwards 1,033,693 $ 1,037,182
Inventory 34,226 172,776
Accrued expenses 61,918 144,638
Depreciation and amortization 49,351 77,917
Capital loss carryforward 66,412 66,412
Net operating loss carryforward 873,962 --
----------- -----------
Net deferred tax assets before
valuation allowance 2,119,562 1,498,925
Valuation allowance (2,119,562) (1,498,925)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
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 $620,637 during the year ended December 31, 2003. The net
deferred tax asset has been fully reserved due to the uncertainty of the
Company's ability to generate taxable income under the more likely than not
criteria of FAS 109.
The Company had domestic losses before taxes of $1,784,230 and $2,234,994 for
the years ended December 31, 2003 and January 31, 2003, respectively. The
Company had foreign losses before taxes of $1,447,370 and $950,239 for the years
ended December 31, 2003 and January 31, 2003, respectively. The Company has
permanently reinvested the accumulated earnings of its foreign subsidiaries,
mostly in the form of plant, property and equipment, and therefore will not
repatriate the net balance of such earnings (approximately $.9 million as of
December 31, 2003) to the United States.
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%.
At December 31, 2003, the Company has net operating loss carryforwards of
approximately $2.1 million and $4.0 million for Federal and State income tax
purposes, respectively. These will expire at various dates from 2022 and 2023.
As December 31, 2003, the Company has approximately $1,000,000 in tax credits
which expire at various dates from 2018 through 2023.
F-12
8. Credit Facilities
The Company, through its subsidiary ABC-Curacao, has 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 was due November 2003. In September 2003, Korpodeko agreed to modify
the terms of the loan. Korpodeko permitted the Company to repay 20%, or $91,000
of the loan principal in December 2003, and pay the remaining principal, or
$364,000 in November 2004. In return, the Company agreed to an interest rate
increase from 6.5% to 7.5% from November 2003 to the new maturity in November
2004. On the consolidated balance sheet as of December 31, 2003, short-term
liabilities include the remaining $364,000 due November 2004. Substantially all
of the Company's fixed assets located in Curacao, with a book value of $3.2
million at December 31, 2003, are pledged as collateral for these obligations.
The Company has also guaranteed the Korpodeko loan.
In March 2003, the Company borrowed $100,000 from an individual lender,
evidenced by a one-year promissory note, bearing interest of 8% per annum, which
was due March 11, 2004. In March 2004, the holder of the note extended the note
for one year. The Company granted to the lender warrants to purchase up to
10,000 common shares of the Company at $1.18, the closing price on that day,
until March 11, 2008. The fair value of these warrants, based on Black-Scholes
methodology, is $5,000 and was recorded as interest expense during the calendar
year 2003. The Company's chairman has personally guaranteed the promissory note.
On June 19, 2003, the Company entered into a financing transaction with Bio
Partners LP, a private investor group, pursuant to which the Company sold to Bio
Partners in a private placement (1) a $1.575 million convertible note (the
"Note"), issued at face value, and (2) 295,312 shares (the "Shares") of Company
common stock, issued at par value, or $.001 per share. The net proceeds to us
were approximately $890,000, after the payment of expenses and repayment of
$500,000 previously advanced to us by a principal of Bio Partners. The Note
matures on June 19, 2005 and bears interest at a rate of 12% per annum with an
effective interest rate of 36%. Interest-only payments under the Note are
payable monthly in arrears and the entire principal amount is payable at
maturity. Up to $1,141,875 aggregate principal amount of the Note is convertible
into the Company's common stock at any time, at a conversion price of $2.50 per
share, subject to customary adjustments. The Note also contains restrictions on
the Company's ability to incur debt as long as the Note is outstanding. The Note
is secured by a pledge of substantially all of the assets of BioSpecifics and
its New York subsidiary, Advance Biofactures Corporation ("ABC"). In addition,
ABC has guaranteed the obligations of the Company under the Note and the
chairman has personally guaranteed 50% of the obligations under the Note. The
loan discount of $281,000 (representing the fair value of the shares issued) and
loan costs of $258,000 on the Note are being be amortized over the expected life
of the Note.
9. Major Customer and Royalty and License Agreements
The Company's primary royalty and license agreements are for its FDA approved
product, Collagenase ABC. The Company derives most of its net sales of the
product and all of its royalty revenues from one customer in the United States,
Abbott Laboratories ("Abbott") who, pursuant to an exclusive licensing agreement
(the "Agreement"), compounds the product into Collagenase Santyl(R) Ointment
("Santyl(R)" or "ointment"), a prescription drug used to treat dermal ulcers and
burns.
F-13
Abbott accounted for approximately $2,906,000 and $3,196,000 of our product
sales and royalties for the calendar year 2003 and fiscal year 2003,
respectively. These amounts were approximately 90% and 78% of our revenues
during the calendar year 2003 and fiscal year 2003, respectively. At December
31, 2003, we had firm booked orders with Abbott for the product. We will not be
able to fulfill all these orders in a timely manner due to the time required to
manufacture our product. Abbott and the Company have agreed on a manufacturing
and delivery timetable for future deliveries of product and manufacture of
Santyl(R).
The royalty revenues from Abbott were earned on North American sales of
Santyl(R) to distributors by Smith & Nephew, Inc. ("S&N") through December 31,
2003. The January 2000 sub-license agreement under which S&N marketed Santyl(R)
ointment terminated on June 30, 2003 but it was agreed they would continue to
market through the end of 2003. The Ross Products Division of Abbott
Laboratories Inc. assumed United States marketing responsibility for Collagenase
Santyl(R) Ointment effective January 1, 2004. During 2003, the Abbott Agreement
automatically renewed for an additional 10-year period, to August 2013. The
minimum annual royalty is $60,000 per year. Royalties from Abbott were
$1,683,915 and $2,140,534 in calendar year 2003 and fiscal year 2003,
respectively.
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 December 31, 2003 is
$45,000 from this agreement. The deferred revenue is refundable if approval in
Germany is not obtained.
10. Stockholders' Equity
Stock Option Plans
In July 1994, the Company's stockholders approved a stock option plan (the "1993
plan", which expired July 2004) 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 1993 plan, qualified incentive stock options and
non-qualified stock options may be granted to purchase up to an aggregate of
200,000 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 1993 plan, no option shall be granted
under the plan subsequent to ten years after its effective date, or July 2004.
In July 1997, the Company's stockholders approved a stock option plan (the "1997
plan") with terms identical to the 1993 plan. 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.
F-14
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. On December 16, 2003,
stockholders approved an amendment to the 2001 stock option plan which increased
the number of shares authorized for grant from 750,000 shares to 1,750,000
shares, an increase of 1,000,000 shares. A total of 1,750,000 shares of common
stock are now authorized for issuance under the amended 2001 plan, of which
775,000 were subject to outstanding options at December 31, 2003. There are a
total of 1,018,650 shares available for grant from the 1993, 1997, and 2001
plans.
The summary of the stock options activity is as follows:
Year ended December 31, 2003 January 31, 2003
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------- ---------- --------
Outstanding at beginning of year 1,358,325 $ 1.98 1,100,500 $ 2.00
Options granted 50,000 1.28 427,750 1.00
Options exercised -- -- (27,000) 1.00
Options canceled or expired (57,700) 2.77 (142,925) 4.20
---------- -------- ---------- --------
Outstanding at end of year 1,350,625 $ 1.77 1,358,325 1.98
---------- ------- ---------- --------
Options exercisable at year end 1,250,625 1.86 1,269,325 1.98
Shares available for future grant 1,006,150 -- 56,150 --
During calendar 2003 and fiscal 2003, the Company granted 15,000 and 11,000
options, respectively, to consultants at an exercise price of $1.23 and $1.00
per share, respectively. In connection with these options, the Company recorded
in calendar 2003 and fiscal 2003 an expense of $14,000 and $7,600, respectively,
representing the estimated fair value of the options. During calendar 2003 and
fiscal 2003, the Company granted 35,000 and 416,750 options, respectively, to
employees of the Company at prices ranging from $1.00 to $3.00. The calendar
2003 options vest over 4 years and the fiscal 2003 options immediately vest. The
following table summarizes information relating to stock options by exercise
price as at December 31, 2003:
Outstanding Exercisable
Weighted Averag Weighted Average
Option Life Exercise Option
exercise price Shares (years) price Shares price
---------- --------- ----- -------- --------- --------
$1.00-1.38 973,600 7.8 $ 1.04 873,600 $ 1.00
1.88 108,250 6.0 1.88 108,250 1.88
2.00-2.88 54,750 6.8 2.63 54,750 2.63
3.00-3.88 48,300 4.5 3.04 48,300 3.04
4.00-4.63 97,425 3.4 4.17 97,425 4.17
5.81-7.25 23,000 1.0 6.32 23,000 6.32
8.00 5,300 1.0 8.00 5,300 8.00
9.13 40,000 0.5 9.13 40,000 9.13
--------- ----- -------- --------- --------
1,350,625 6.8 $ 1.77 1,250,625 $ 1.86
--------- ----- -------- --------- --------
F-15
11. 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 December 31,
2004 $159,000
2005 47,000
2006 6,000
Rent expense under all operating leases amounted to approximately $191,000 in
both calendar 2003 and fiscal 2003, 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 calendar 2003 and fiscal 2003.
ABC-Curacao leases a building in Brievengat, Curacao, Netherlands Antilles from
an unrelated 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
calendar 2003 and fiscal 2003.
(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 fiscal 2003, the
Company recorded approximately $24,000 for payments to Board members under these
agreements. In calendar 2003, the Company made no payments to the Board.
(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 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.
F-16
(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. The managing director left the employ
of the Company in January 2004 and resigned as a Director effective April 30,
2004.
(e) FDA Observation
In 1999, the FDA advised the Company, as a result of their inspectional
observations, that it would revoke its license to manufacture the enzyme and
ointment unless the Company could immediately provide satisfactory assurance of
its compliance with the applicable GMP regulations. The Company submitted such a
plan in 1999.
The FDA notified the Company on July 28, 2003 that its request to supplement its
biologics license for collagenase ABC was approved ("FDA approval"). The FDA
notification acknowledged the Company's written commitments to provide
additional information regarding ongoing studies and when to submit this
information to its biologics license for review. Regardless of this FDA
approval, the FDA letter will remain in effect until the Company demonstrates
compliance with the applicable federal standards and regulations, which the
Company understands to be two "satisfactory annual GMP inspections" of its
Lynbrook and Curacao manufacturing facilities. The Company believes that it has
made progress in complying with the applicable federal standards and
regulations, although there can be no assurances as to when the FDA letter will
be rescinded, if at all. During the quarter ended June 30, 2004, the FDA
completed an inspection of the Company's Lynbrook facility. The Company is
hopeful that after the next FDA inspection is completed at its Lynbrook
facility, the Company will be eligible to have the FDA letter rescinded. In May
2004, the FDA inspected the facility of the Company's Subcontractor. To the best
of the Company's knowledge, the FDA has not commented on the inspection, nor is
the FDA obligated to do so.The FDA has not conducted an inspection of the
Company's Curacao facility since July 2002.
12. Segment Information
The Company is engaged in one segment, specifically research, development, and
production 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 December 31, 2003: America S.A. and Europe Eliminations Consolidated
----------------------------- ------- --------------- ------------ ------------
Revenues $2,905,765 $333,775 $3,239,540
Intercompany revenue between
geographic regions 764,471 (764,471) -
Loss from operations (1,652,836) (1,451,237) (3,104,073)
Loss before taxes (1,784,230) (1,447,370) (3,231,600)
Identifiable assets 2,141,223 3,541,657 (127,909) 5,554,971
Capital expenditures (7,960) 24,149 16,189
Depreciation and amortization 117,670 581,459 699,129
F-17
North
Year ended January 31, 2003: America S.A. and Europe Eliminations Consolidated
----------------------------- ------- --------------- ------------ ------------
Revenues $3,196,356 $882,884 $4,079,240
Intercompany revenue between
geographic regions 629,640 (629,640) -
Loss from operations (2,299,442) (940,917) (3,240,359)
Loss before taxes (2,234,994) (950,239) (3,185,233)
Identifiable assets 2,614,313 4,284,218 (262,520) 6,636,011
Capital expenditures 3,885 48,383 52,268
Depreciation and amortization 125,199 511,458 636,657
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.
13. Related Party Transactions
The Company has two loans to the Company's chairman. One loan, whose principal
balance at December 31, 2003 is $494,302 is a demand promissory note, bears
interest at 9% per annum, and is collateralized by approximately 1,800,000
shares of the Company's stock. Another loan, whose principal balance at December
31, 2003 is $56,820 is a demand promissory note, bears interest at 9% per annum,
and is uncollateralized. The Company also has two loans with Wilbur St.
Corporation ("WSC"), an affiliate of the chairman. One loan is a non-amortizing
loan from WSC in the amount of $82,606 and bears interest at 9% per annum; the
other is for advances to WSC in the amount of $15,647. For financial statement
purposes, all these loans, which aggregate $649,375 of principal, are classified
as components of stockholders' equity in the balance sheet and appear as "Notes
due from chairman and other related party". During calendar 2003, the Chairman
repaid net principal of $375,935 on these loans. There is no assurance that the
Company will be able to collect on these notes. Interest income accrued for
these loans but not recognized for financial statement purposes aggregated
approximately $42,000 and $101,000 for the calendar year 2003 and fiscal 2003,
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 $15,010 at
December 31, 2003. The notes, which bear interest at 9% per annum, are payable
on demand.
14. 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 calendar 2003 or fiscal 2003.
F-18
15. Subsequent Events
In June 2004, the Company entered into a development and license agreement
Auxilium Pharmaceuticals, Inc.("the Auxilium Agreement"). Under the agreement,
the Company has granted Auxilium the rights to develop products containing its
enzyme ("AA4500") for the treatment of Peyronie's and Dupuytren's disease. The
Company has granted Auxilium the exclusive world-wide license to any products
developed under the agreement other than dermal formulations labeled for topical
administration. The Company also granted Auxilium the option to develop and
license the technology for use in other indications other than dermal
formulations labeled for topical administration. The agreement extends, on a
country-by-country and product-by-product basis, for the longer of the patent
life, the expiration of any regulatory exclusivity period or 12 years. Auxilium
may terminate the agreement with 90 days written notice. Auxilium is obligated
to pay all clinical and regulatory development costs on an on-going basis, to
purchase commercial inventory from the Company and to pay royalties based on
product sales. In addition, Auxilium is obligated to make milestone payments for
contract initiation, receipt of technical data, manufacturing process
development, the one-year anniversary date, filing of regulatory applications
and receipt of regulatory approval.
In June 2004, we received an up-front payment under the agreement totalling
$2,500,000. In August 2004, we received an additional $2,500,000 for delivery of
all in-process research and development material product data relating to
Dupuytren's and Peyronie's disease. We may also receive up to $10,500,000 of
contingent milestone payments under this agreement if all existing conditions
are met. Additional milestone obligations may be due if Auxilium exercises an
option to develop and license our enzyme for additional medical indications.
In March 2004, the chairman's deferred salary of $100,000 during the three
months ended June 2003 has been applied against the chairman's note receivable.
On March 22, 2004 the Nasdaq Listings Qualifications Panel (the "Panel")
informed the Company in writing of its determination to delist the Company's
common stock from The NASDAQ SmallCap Market effective with the open of business
on March 24, 2004. The Nasdaq notice stated that the Panel's determination was
based on the Company's failure to satisfy the $2.5 million shareholders' equity
requirement as of December 31, 2003. The Company's common stock was immediately
eligible for quotation on the OTC Bulletin Board effective with the open of
business on March 24, 2004. The OTC Bulletin Board symbol assigned to the
Company is BSTC. No application was required to be filed for inclusion on the
OTC Bulletin Board.
F-19