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BioSpecifics
Technologies Corp.
3-Jul-2003 Annual Report
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, our liquidity in light of the depletion of our stockpiled inventory and our inability to distribute quarantine enzyme to Abbott until the Curacao facility and the quarantine enzyme are approved, government regulation, our ability to obtain the approval of our production facilities, our ability to provide additional enzyme to Abbott in a timely fashion regardless of when FDA approval is received, 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. Further, any forward
Summary - We are a biopharmaceutical company focusing on wound healing and tissue remodeling. We produce Collagenase ABC enzyme, (the "product" or the "enzyme") which is the active ingredient in the prescription drug Collagenase Santyl(R) Ointment sold in the United States and indicated for debriding chronic dermal ulcers and second and third degree burns (the "topical ointment business"). We are developing an injectable form of our enzyme for treating Dupuytren's disease, Peyronie's disease, frozen shoulder, and lipomas. We have completed Phase 2 clinical trials for Dupuytren's disease and Phase 1 trials for Peyronie's disease. A Phase 2 trial for frozen shoulder is ongoing. Clinical trials investigating the use of injectable collagenase for lipoma reduction have been initiated. As of the date of this report, we have limited cash resources available to fund our operations. Over the past few months, we have been able to fund our operations only because (1) we borrowed $100,000 from an unaffiliated individual and an aggregate of $500,000 on seven separate occasions from an individual who is a principal of Bio Partners LP, a private investment group and unrelated third party ("Bio Partners"), (2) we received from Abbott Laboratories, our major U.S. customer, in May 2003 early payment of royalties earned from distribution of Santyl(R) Ointment from a supply that we estimate will be depleted by July 30, 2003, (3) our chairman has deferred salary of approximately $100,000 since February 1, 2003 and in February and April repaid a total of $50,000 of the $1,025,309 principal amount he and his affiliate owed to the Company as of January 31, 2003 and (4) we are deferring or making partial payments to creditors. 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, 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. Based on our operating projections, we believe these funds will enable us to continue operations to December 31, 2003. Our projections assume that, among other things: o we obtain FDA approval of our production facilities by August 2003; o it is determined that we can sell our quarantine inventory (inventory produced at the renovated Curacao manufacturing facility, our primary manufacturing facility) in the United States; o our chairman repays to the company $325,000 of the amount he and his affiliate owe the Company by the end of July 2003. Our chairman has indicated that he intends to refinance the mortgage on our administrative headquarters in Lynbrook, New York, which is owned by the affiliate of our chairman, and use the proceeds of the refinancing to repay this $325,000 to the Company; and o We receive a tax refund of $425,000 in August 2003. There is no assurance that any of these events will occur. If any of the assumptions on which our projections are based do not occur, we may not be able to fund our operations past the next several months. In addition, we cannot assure you that we will be able to obtain any additional financing on acceptable terms or at all. We are also in negotiations to license our injectable collagenase product under development for up-front license fees and milestone payments. Our projections do not assume this transaction. Historically, we have derived substantially all of our revenues from the topical ointment business, through an exclusive license agreement with Abbott Laboratories (the "Abbott Agreement" or the "Agreement"). Revenues from this
Our production of the product was voluntarily suspended in March 2000 due to an upgrade program at our manufacturing facilities in Curacao and Lynbrook to address various FDA concerns. Since March 2000, we supplied Abbott with the product from an inventory built up in anticipation of the upgrade. This built up inventory was depleted in July 2002 by delivery to Abbott. The physical upgrades at the Curacao and Lynbrook facilities have been completed and we believe that our subsequent validation work, which is required for FDA approval, is nearing completion. The upgraded Curacao facility commenced limited production during the fiscal year ended January 31, 2002 and was inspected by the FDA in July 2002. However, the facility must still be approved by the FDA before we can supply Abbott with the quarantine product being produced there. There is no assurance that we will receive FDA approval of the facility, or that we will be permitted to sell to Abbott the enzyme we have produced in the facility during any period we did not have approval, which product we refer to as "quarantine inventory". If we are not able use the quarantine inventory, then we will not be able to supply Abbott with the enzyme until approximately one year after approval of the Curacao facility, if and when that approval is given. Abbott accounted for approximately $3,196,000 and $7,199,000 of our product sales and royalties for the fiscal years ended January 31, 2003 and 2002, respectively. These amounts were approximately 78% and 87% of our revenues during the fiscal years ended January 31, 2003 and 2002, respectively. On February 3, 2003 we received approximately $3.6 million of firm booked orders with Abbott for the product. We will not be able to fulfill all these orders on a timely basis, regardless of when the Curacao facility receives FDA approval, if at all. Both Abbott and S&N are aware that we cannot fulfill any of these orders until the FDA approves the Curacao facility. Because we are unable to provide enzyme at the present time, under terms of the Abbott Agreement, we may be required to provide Abbott with necessary technical information and manufacturing know-how for the manufacture of our product. Furthermore, we estimate that the quarantine inventory can only fulfill approximately half of the 2003 firm booked orders. We cannot assure you that Abbott will not claim that our inability to deliver the enzyme to it is an event of default under terms of the Agreement, or claim that they have the right to terminate the Agreement because of default.
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 in a specific period.
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 January 31, 2003, we did not take any impairment charges.
Royalties earned on Collagenase Santyl(R) Ointment sales by S&N were $2,140,534 and $2,269,048 for the fiscal years ended January 31, 2003 and 2002, respectively, representing a decrease in fiscal 2003 of $128,514 or 6%. We believe that S&N, the distributor of Collagenase Santyl Ointment, maintained level Santyl sales during fiscal 2003 to conserve the supply of Collagenase Santyl(R) Ointment as we attempted to get approval of the enzyme production facility in Curacao. We believe the inventory of Collagenase Santyl Ointment produced from our now depleted enzyme stockpile will support S&N's distribution of the Ointment to the end of July 2003. Ointment sales beyond that date can only come from our quarantine inventory of enzyme, which cannot be used until the FDA approves our production facilities. Cost of sales was $3,205,235 and $5,106,234, respectively, in fiscal 2003 and 2002, a decrease in fiscal 2003 of $1,900,999 or 37%. We had a negative gross profit margin in fiscal 2003 because of limited enzyme production in fiscal 2003 (quarantine inventory) as we attempt to validate the Curacao production facility, fixed production costs, and the depletion of the stockpiled enzyme inventory. Reserves were also recorded against the quarantine inventory since FDA approval of our production facilities cannot be assured. General and administrative expenses ("G&A") were $3,045,319 and $2,319,853 respectively, in fiscal 2003 and 2002, an increase in fiscal 2003 of $725,466, or 31%. The increase is attributable to the continued effort to gain approval of the production facilities. 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. During the year ago period, the upgraded facility's construction had just been completed and therefore the FDA inspection was not pending. Research and development expenses ("R&D") were $1,069,045 and $1,067,450 respectively, in fiscal 2003 and 2002, an increase in fiscal 2003 of $1,595 or less than 1%. The slight increase is due to external costs incurred for the development of Cordase(TM), as we prepare for the initiation of Phase 3 clinical trials for this potential product. We will need to raise considerable funds to continue the development of Cordase(TM) and other product candidates. Other income (expense), net was ($23,094) and $8,636 respectively, in fiscal 2003 and 2002, an increase in other (expense), net of $31,730. Interest expense increased due to the borrowing in the fourth quarter of fiscal 2002 of the two-year, non-amortizing loan of $455,000 at 6.5% interest from Korpodeko, a Curacao development corporation established to develop industry on the island of Curacao. In fiscal 2003, we incurred a full year's interest expense on this loan.
As previously noted, we have limited cash resources available to fund our operations. If we are unable to achieve the projections mentioned previously, our cash reserves will be depleted and we may have to cease operations or explore available alternatives. We are engaged in various efforts to obtain liquidity. There can be no assurances that any of these efforts will be successful. 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 $3.7 million at January 31, 2003. BioSpecifics has also guaranteed the Korpodeko loan. In addition to the Korpodeko loan, long-term obligations at January 31, 2003 include operating leases of approximately $191,000 annually through January 2005. On March 11, 2003, we borrowed $100,000 from an 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 will be recorded as interest expense in subsequent periods. 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. 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 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 $185,000 on the Note will be amortized over the expected life of the Note.
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