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| BSTC.OB > SEC Filings for BSTC.OB > Form 10-Q on 12-May-2009 | All Recent SEC Filings |
12-May-2009
Quarterly Report
The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Report.
Overview
We are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We have a development and license agreement with Auxilium Pharmaceuticals, Inc. ("Auxilium") for injectable collagenase (which Auxilium has named "XIAFLEX TM" (formerly known as "AA4500")) for clinical indications in Dupuytren's disease, Peyronie's disease and frozen shoulder (adhesive capsulitis), and Auxilium has an option to acquire additional indications that we may pursue, including cellulite and lipomas.
The most advanced indications are for the treatment of Dupuytren's disease, Peyronie's disease and frozen shoulder. On June 3, 2004, we entered into a development and license agreement with Auxilium, as amended on May 10, 2005 and December 15, 2005, respectively (the "Prior Auxilium Agreement"), pursuant to which we granted to Auxilium an exclusive worldwide license to develop products containing our injectable collagenase for the treatment of Dupuytren's disease, Peyronie's disease and frozen shoulder, as well as an exclusive option to develop and license the technology for use in additional indications other than dermal formulations labeled for topical administration.
On December 11, 2008, the parties amended and restated the development and license agreement (the "Auxilium Agreement"), which became effective on December 17, 2008 upon the execution and effectiveness of the Development, Commercialization and Supply Agreement, dated December 17, 2008 (the "Pfizer Agreement") between Auxilium International Holdings, Inc., a wholly owned subsidiary of Auxilium, and Pfizer, Inc. ("Pfizer"), pursuant to which Pfizer will market XIAFLEX for the treatment of Dupuytren's disease and Peyronie's disease in Europe and various other territories. The Auxilium Agreement amends and restates in its entirety the Prior Auxilium Agreement.
Outlook
We foresee the potential to generate income from limited sources in the next several years. Under the terms of our agreement with DFB, we are scheduled to receive certain contractual anniversary payments and, if DFB exceeds a certain sales target, we would be entitled to an earn out on sales. Under the terms of our agreement with Auxilium, we may receive milestone payments upon their achieving certain regulatory progress and if Auxilium elects to pursue additional indications for injectable collagenase ("Additional Indications") as well as 8.5% of all sublicense income that Auxilium may receive from Pfizer under the Pfizer Agreement.
Significant Risks
In recent history we have had operating losses and may not achieve sustained profitability. As of March 31, 2009 we had an accumulated deficit from continuing operations of $7,374,423.
We are dependent to a significant extent on third parties, and our principal licensee, Auxilium, may not be able to successfully develop products, obtain required regulatory approvals, manufacture products at an acceptable cost, in a timely manner and with appropriate quality, or successfully market products or maintain desired margins for products sold, and as a result we may not achieve sustained profitable operations.
As of March 31, 2009 we held no taxable auction rate securities, or ARS. As of December 31, 2008, we held $0.9 million of ARS, which were classified as short-term investments. In October 2008, the Company received notice from UBS of a solution that provided us the option to continue to hold our ARS or sell the securities back to UBS at par value plus any accrued interest. On October 24, 2008 we accepted UBS's offer and instructed UBS that we would notify them if and when we want to exercise our rights and sell our ARS to UBS during the period January 2, 2009 through January 4, 2011. In early January 2009, we exercised our rights and instructed UBS to sell all our remaining ARS. On January 6, 2009, we received the remaining principal balance of our investment in auction rate securities of $0.9 million.
Critical Accounting Policies, Estimates and Assumptions
The preparation of unaudited consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The information at March 31, 2009 and for the three months ended March 31, 2009 and 2008 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth herein. The December 31, 2008 balance sheet amounts and disclosures included herein have been derived from the Company's December 31, 2008 audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 included in the Company's Form 10-K filed with the SEC on March 31, 2009 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008. While our significant accounting policies are described in more detail in the notes to our unaudited consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our unaudited consolidated financial statements.
Revenue Recognition. We recognize revenues from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixed and determinable, and payment is reasonably assured. We currently recognize revenues resulting from the licensing, sublicensing and use of our technology and from services we sometimes perform in connection with the licensed technology.
We recognize revenue for delivered elements only when the fair values of undelivered elements are known, when the associated earnings process is complete and, to the extent the milestone amount relates to our performance obligation, when our licensee confirms that we have met the requirements under the terms of the agreement, and when payment is reasonably assured. Changes in the allocation of the contract value between various deliverable elements might impact the timing of revenue recognition, but in any event, would not change the total revenue recognized on the contract. For example, nonrefundable upfront product license fees, for product candidates where we are providing continuing services related to product development, are deferred and recognized as revenue over the development period.
Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specific event identified in the contract, such as completion of specified clinical development activities and/or regulatory submissions and/or approvals. We believe that a milestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on our part. We recognize such milestones as revenue when they become due and payment is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, we recognize revenue in a manner similar to that of an upfront product license fee.
Royalty/Earn-Out Revenue. We recognize royalties under the earn-out provision of the Asset Purchase Agreement with DFB BioTech, Inc. ("DFB"). We have the right to receive earn out payments in the future based on sales of certain products. Generally, under this agreement we would receive royalty payments and a report within ninety (90) days from the end of each calendar year after the licensee has sold the royalty-bearing product. Our right to receive earn out payments under our agreement with DFB will expire in 2013. We recognize royalty revenues when we can reliably estimate such amounts and collectibility is reasonably assured.
Consulting and Technical Assistance Services. We recognize revenues from a consulting and technical assistance contracts primarily as a result of our agreements with DFB and Auxilium. Consulting revenues are recognized ratably over the term of the contract. The consulting obligations to DFB generally expire during March 2011.
Inventory and Warranty Provisions. Inventories are stated at the lower of cost or realizable market value. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements and compare that with the current inventory levels. In March 2006 we sold our topical collagenase business to DFB, including certain product inventory. As of a result of this sale our product inventory as of March 31, 2009 and December 31, 2008 was zero.
Reimbursable Third Party Development Costs. We accrue expenses to research and development and capitalize certain patent costs for estimated third party development costs that are reimbursable under our agreement with Auxilium. Estimates are based on contractual terms, historical development costs, reviewing third party data and expectations regarding future development for certain products. Further, we monitor the activities and clinical trials of our development partners.
If conditions or other circumstances change, we may take actions to revise our reimbursable third party development cost estimates. These revisions could result in an incremental increase in research and development costs. For example, the Auxilium Agreement provides that Auxilium and BioSpecifics will share equally in third party costs for the development of the lyophilization of the injection formulation and patent expenses.
Based on our preliminary review, we believe that only a portion of the amounts invoiced actually relates to the development of the lyophilization of the injection formulation as well as for patent and related legal fees, and therefore, reserve all rights related to this matter, including but not limited to our right to contest the amount charged by Auxilium.
Actual results have differed in the past, and may differ in the future, from our estimates and could impact our earnings in any period during which an adjustment is made.
Receivables and Deferred Revenue. Under our agreement with DFB, we agreed to provide certain technical assistance and transitional services in consideration of fees and costs totaling over $1.4 million. At the closing, DFB paid to us a partial payment of $400,000 in respect of the technical assistance to be provided by us. To date, we have received a total of $1,200,000 in payments from DFB. The consulting obligations generally expire during March 2011. As of March 31, 2009 the remaining accounts receivable balance due was $200,000 for future services and was offset by the associated deferred revenues to be recognized in future periods of $200,000.
Royalty Buy-Down. In August 2008, we signed an agreement to significantly improve the deal terms related to our future royalty obligations for Peyronie's disease by buying down our future royalty obligations with a one-time cash payment. We modified our agreement to lower future royalties payable on net sales of injectable collagenase, XIAFLEX, for Peyronie's disease. In addition, we agreed to pay certain development milestones, if achieved.
As of March 31, 2009, we capitalized $1,250,000 which will be amortized over approximately five years beginning on the date of the first commercial sale of XIAFLEX, for Peyronie's disease, which represents the period estimated to be benefited, using the straight-line method. In accordance with SFAS No. 142, Goodwill and Other Intangibles, the Company amortizes intangible assets with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the assets are amortized using the straight-line method.
Stock Based Compensation. Under the provisions of SFAS 123(R), we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of the award. Expected volatility is based on the historical volatility of our common stock. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our historical experience of employee stock option exercises (including forfeitures) and the expected volatility. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods.
Further, SFAS 123(R) requires that employee stock-based compensation costs to be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line are estimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period.
THREE-MONTHS ENDED March 31, 2009 and 2008
Revenues
Product Revenues, net
Product revenues include the sales of the API Enzyme recognized at the time it is shipped to customers. We recognized a small amount of revenue from the sale of collagenase for laboratory use. For the three months ended March 31, 2009 and 2008 product revenues were $7,191 and $12,753, respectively. This decrease of $5,562 or 44% was primarily related to the amount of material required to perform testing by our customers.
Royalties
We received all of our royalty revenues from DFB under the earn out payment provision of the Asset Purchase Agreement after certain net sales levels are achieved. Royalty revenues recognized under our agreement with DFB for the three months ended March 31, 2009 and 2008 were zero.
Licensing Revenues
For the three months ended March 31, 2009 and 2008, we recognized licensing revenue of $266,281 in each period. Licensing revenues recognized are related to the cash payments received under the Auxilium Agreement in prior years and amortized over the expected development period.
Under current accounting guidance, nonrefundable upfront license fees for product candidates where we are providing continuing services related to product development, are deferred and recognized as revenue over the development period. The remaining balance will be recognized over the respective development periods or when we determine that we have no ongoing performance obligations.
Consulting Services
We recognize revenues from consulting and technical assistance contracts primarily as a result of the Asset Purchase Agreement and an Auxilium consulting agreement signed in October 2007 which terminated during the second quarter of 2008. Consulting revenues are recognized ratably over the term of the contract. The consulting obligations under the Asset Purchase Agreement generally expire during March 2011. For the three months ended March 31, 2009 and 2008 consulting revenues were $70,000 and $122,185, respectively. This decrease of $52,185 or 43% in was primarily due to the recognition in 2008 of revenues earned in connection with the October 2007 consulting agreement with Auxilium.
Costs and Expenses
Research and Development Activities
Research and development expenses were $115,871 and $94,271 respectively, for the three months ended March 31, 2009 and 2008. This increase of $21,600 or 23% in research and development expenses was primarily due to certain employee costs which were reimbursable under our agreement with DFB which expired in October 2008 partially offset by decreases in external study development costs.
General and administrative expenses were $1,166,971 and $800,456 for the three months ended March 31, 2009 and 2008, respectively. The increase in general and administrative expenses of $366,515 or 46% was primarily due to higher stock-based compensation expense and outside consulting expense partially offset by lower legal fees.
Other Income (expense), net
Other expense, net, was $6,606 for the three months ended March 31, 2009 as compared to other income, net of $29,824 for the 2008 period. Components of other income, net, consist of investment income, a reduction in interest expense and other, net. Investment income for the three months ended March 31, 2009 was $2,857 as compared to $30,275 in the comparable period of 2008. This decrease of $27,418 or 91% was primarily due to lower interest rates and invested balances during the 2009 period. Interest expense for the three months ended March 31, 2009 was zero as compared to $451 in the 2008 period. Other expense, net for the three months ended March 31, 2009 was $9,463 as compared to zero in the 2008 period. The increase in other expense, net was primarily due to tax penalties in connection with our past delinquent federal tax returns.
Income Taxes
The expense for income taxes for the three months ended March 31, 2009 and 2008 was zero.
Liquidity and Capital Resources
To date, we have financed our operations primarily through product sales, debt instruments, licensing revenues, royalties under agreements with third parties and sales of our common stock. At March 31, 2009 and December 31, 2008, we had cash and cash equivalents in the aggregate of $10,741,213 and $3,494,150, respectively.
Continuing Operations
Net cash provided by operating activities for the three months ended March 31, 2009 was $6,344,063 as compared to net cash used in operating activities in the 2008 period of $175,515. In the 2009 period, as compared to the 2008 period, the changes in net cash provided by operating activities was primarily attributable to a the reduction in accounts receivable due to the receipt of a payment for a sublicense fee of $ 6.4 million and non-cash stock compensation expense partially offset by increased expenses during the period 2009 period.
Net cash provided by investing activities for the three months ended March 31, 2009 was $900,000 as compared to net cash used in investing activities in the 2008 period of $750,000. The change in net cash provided by investing activities for the 2009 period reflect redemption of our investment in marketable securities compared to cashed used in investing activities related to purchases of marketable securities in the 2008 period.
Net cash provided by financing activities for the three months ended March 31, 2009 was $3,000 as compared to the 2008 period of $3,409,133. The change in net cash provided by financing activities for the 2009 consisted of proceeds received from stock option exercises. Net cash provided by financing activities in the 2008 period consisted of proceeds from the sale of our common stock of $2,093,650, repayment of an outstanding loan from our former Chairman and CEO of $1,116,558 and proceeds received from stock option exercises of $198,925.
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