SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2020, as compared to the significant accounting policies disclosed in Note 2 of the Consolidated Financial Statements in the Company’s 2019 Annual Report.

Basis of Presentation

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

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the risk factors discussed herein and in Part I, Item 1A. Risk Factors in our 2019 Annual Report filed with the SEC on March 16, 2020 and our subsequent filings and reports, including, without limitation, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Principles of Consolidation

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

Risks and Uncertainties

We are subject to risks and uncertainties as a result of the global COVID-19 pandemic. While we expect that COVID-19 will impact our business to some degree, the significance and duration of the impact on our business cannot be determined at this time due to numerous uncertainties, including the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and business closures, the effectiveness of actions taken to contain the disease, and other unforeseeable consequences.

Critical Accounting Policies, Estimates and Assumptions

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

Revenue Recognition

Under Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), we recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance

obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation(s).

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

Royalty / Mark-Up on Cost of Goods Sold

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

Licensing Revenue

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

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

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

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

Development and Regulatory Milestone Payments

Depending on facts and circumstances, the Company may conclude that it is appropriate to include the milestone, representing variable consideration, in the estimated total transaction price, or that it is appropriate to fully constrain the milestone. The Company may include revenues from certain milestones in the total transaction price in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future

periods. The Company records a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period. The Company adjusts its estimate of the total transaction price, including the amount of revenue that it has recorded, if necessary.

Recent Accounting Pronouncements

Accounting Pronouncements Adopted

We adopted ASU No. 2018-13, Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement as of January 1, 2020. This standard modifies certain disclosure requirements on fair value measurements. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

Accounting Pronouncements Not Yet Adopted

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

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes. This standard removes certain exceptions to the general principles of ASC 740 and improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.

Cash, Cash Equivalents, and Investments

Cash equivalents include only securities having a maturity of 90 days or less at the time of purchase. Investments are stated on an amortized cost basis. The Company limits its credit risk associated with cash, cash equivalents, and investments by placing its investments with banks it believes are highly creditworthy and with highly rated money market funds, certificates of deposit, commercial paper, U.S. government agency bonds, municipal bonds, and corporate bonds. All investments are classified as held to maturity. As of June 30, 2020, and December 31, 2019, the amortized cost of these investments was $103.0 million and $100.8 million, respectively. No unrealized gains or losses were recorded in either period.

Fair Value Measurements

Management believes that the carrying amounts of the Company’s financial instruments, including cash, cash equivalents, held-to-maturity investments, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the duration of those instruments. As of June 30, 2020, and December 31, 2019, there were no recorded unrealized gains or losses on our investments as they are classified as held-to-maturity. As of June 30, 2020, and December 31, 2019, amortized cost basis of the investments approximated their fair value. For three and six months June 30, 2020, the net amount included in interest income due to the amortization of bond discounts/premiums was $266,000 and $400,000, respectively. For the three and six months ended June 30, 2019, the net amount included in interest income due to the amortization of bond discounts/premiums was $32,000 and $82,000, respectively. At June 30, 2020 and December 31, 2019, the remaining unamortized net premium / (net discount) was $341,000 and $285,000, respectively.

The schedule of maturities at June 30, 2020 and December 31, 2019 are as follows:

	Maturities as of				Maturities as of
	June 30, 2020				December 31, 2019
	1 Year or Less		Greater than 1 Year		1 Year or Less		Greater than 1 Year
Municipal bonds	$	10,468,782	$	2,292,620	$	11,341,249	$	—
Government agency bonds		3,415,943		3,500,000		11,950,738		6,231,804
US Treasury bonds		6,016,914		—		—		—
Corporate bonds		57,296,635		13,924,557		57,321,784		6,675,958
Certificates of deposit		4,982,510		1,074,101		3,626,147		3,661,262
Total	$	82,180,784	$	20,791,278	$	84,239,918	$	16,569,024

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

As of June 30, 2020, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tables present the Company’s fair value hierarchy for these financial assets as of June 30, 2020 and December 31, 2019:

June 30, 2020	Type of Instrument	Fair Value		Level 1		Level 2		Level 3
Cash equivalents	Institutional Money Market	$	8,058,112	$	8,058,112	$	—	$	—
Investments	Certificates of Deposit		6,056,611		6,056,611		—		—
Cash equivalents	Municipal Bonds		2,248,333				2,248,333
Investments	Municipal Bonds		12,761,402		—		12,761,402		—
Investments	Government Agency Bonds		6,915,943		—		6,915,943		—
Investments	US Treasury Bonds		6,016,914		—		6,016,914		—
Investments	Corporate Bonds		71,221,192		—		71,221,192		—

December 31, 2019	Type of Instrument	Fair Value		Level 1		Level 2		Level 3
Cash equivalents	Institutional Money Market	$	950,658	$	950,658	$	—	$	—
Investments	Certificates of Deposit		7,287,409		7,287,409		—		—
Investments	Municipal Bonds		11,341,249		—		11,341,249		—
Investments	Government Agency Bonds		18,182,542		—		18,182,542		—
Investments	Corporate Bonds		63,997,742		—		63,997,742		—

Concentration of Credit Risk and Major Customers

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

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

The Company is currently dependent on one customer, Endo, which generates almost all the Company’s revenues. For the three-and six month periods ended June 30, 2020, licensing, sublicensing, milestones, and royalty revenues under the License Agreement with Endo were $3.9 million and $13.6 million, respectively and for the three and six months ended June 30, 2019, licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were $8.9 million and $17.0 million, respectively.

At June 30, 2020 and December 31, 2019, our accounts receivable balances from Endo were $11.7 million and $19.1 million, respectively.

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. For the six months ended June 30, 2020, we repurchased 7,573 shares at an average price of $54.50. For the six months ended June 30, 2019, there were 2,048 shares repurchased at an average price of $57.89.  The stock repurchase program terminated in May 2020.

Receivables and Doubtful Accounts

Trade accounts receivable are stated at the amount the Company expects to collect. We may maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Our accounts receivable balance is typically due from Endo, our single large specialty pharmaceutical customer. Endo has historically paid timely and has been a financially stable organization. Due to the nature of the accounts receivable balance, we believe the risk of doubtful accounts is minimal and therefore no allowance is recorded. If the financial condition of Endo were to deteriorate, adversely affecting its ability to make payments, additional allowances would be required. We may provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At June 30, 2020 and December 31, 2019, our accounts receivable balance was $11.7 million and $19.1 million, respectively, and was from one customer, Endo.

Third-Party Royalties

We have entered into licensing and royalty agreements with third parties and agreed to pay certain royalties on net sales of products for specific indications. The royalty rates differ from agreement to agreement. No assumptions should be made that any disclosed royalty rate payable to a particular third party is the same or similar with respect to any royalty rate payable to any other third parties. We accrue third-party royalty expenses on net sales reported to us by Endo. Third-party royalty costs are generally expensed under general and administrative in the quarter that the net sales have occurred. For the three-and six month periods ended June 30, 2020, third-party royalty expenses were $0.1 million and $0.2 million, respectively. For the three and six month periods ended June 30, 2019, third-party royalty expenses were $0.2 million and $0.6 million, respectively. As of June 30, 2019, we have no further third-party royalties in connection with PD as the agreement has expired.

Royalty Buy-Down

On March 31, 2012, we entered into an amendment to our existing agreement with Dr. Martin K. Gelbard, dated August 27, 2008, related to our future royalty obligations in connection with PD. The amendment enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment of $1.5 million and five additional cash payments of $600,000, all of which have been paid as of January 1, 2018. Royalty obligations terminated five years after the first commercial sale, which occurred in January 2014. Accordingly, we ceased paying royalties in February 2019. The Company amortizes long-term contracts with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. Dr. Gelbard’s agreement is amortized based on an income

forecast method by estimating sales of XIAFLEX® and Xiapex® for PD on an annual basis as measured by the proportion of the total estimated sales over the five year period. For the three and six months ended June 30, 2019 we amortized zero and $0.2 million related to this agreement, respectively, related to this agreement and is recorded as part of general and administrative expenses. As of both June 30, 2020 and December 31, 2019, there were no remaining capitalized balances outstanding related to this agreement.

Research and Development Expenses

R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expense, facility costs, and overhead. R&D expenses also consist of third-party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. We may fund R&D at medical research institutions under agreements that are generally cancelable. All of these costs are charged to R&D as incurred, which may be measured by percentage of completion, contract milestones, patient enrollment, or the passage of time.

Clinical Trial Expenses

Our cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with various clinical trial centers and clinical research organizations. In the normal course of business, we contract with third parties to perform various clinical trial activities in the ongoing development of potential drugs. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, the completion of portions of the clinical trial, or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual cost of services received and efforts expended. As such, expenses related to each patient enrolled in a clinical trial are recognized beginning upon entry into the trial and over the course of the patient’s continued participation in the trial. In the event of early termination of a clinical trial, we accrue an amount based on our estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trial. Our estimates and assumptions could differ significantly from the amounts that may actually be incurred.

Stock-Based Compensation

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

Under the Company’s 2019 Omnibus Incentive Compensation Plan (the “Plan”), grants to employees, key advisors, on non-employee directors may consist of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, or cash awards. As of June 30, 2020, options to purchase 232,187 shares of common stock and 4,036 restricted stock awards were outstanding under the Plan, and a total of 1,098,612 shares remained available for grant under the Plan. Grants under the Plan vest over periods ranging from one to four years and expire ten years from date of grant.

2019 Omnibus Incentive Compensation Plan (2019 Plan)

Restricted Stock Awards

A summary of the restricted stock awards activity during the six months ended June 30, 2020 is presented below:

		Weighted-
		Average Grant
		Date Fair Value
	Restricted Stock	Per Share
Nonvested at December 31, 2019	10,450	$	60.47
Issued	5,036		55.71
Vested	(11,450)		59.60
Forfeited	—		—
Nonvested at June 30, 2020	4,036	$	57.00

Stock-based compensation expense related to restricted stock awards recognized in general and administrative expense was $193,000 and $337,000 for the three month and six month periods ended June 30, 2020, respectively, and zero for the three and six month periods ended June 30, 2019, respectively.

As of June 30, 2020, there was $181,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to restricted stock. This cost is expected to be recognized over the vesting periods of the restricted stock, with a weighted-average period of 1.00 year.

Stock Option Activity

For the six months ended June 30, 2020, we granted a total of 182,000 stock options with a weighted average grant date fair value of $61.37 per share.

The assumptions used in the valuation of stock options granted during the six months ended June 30, 2020 were as follows:

		Six Months Ended
		June 30, 2020
Risk-free interest rate		0.34% - 1.61%
Expected term of option		5.5 - 6.25 years
Expected stock price volatility		39.5% - 41.5%
Expected dividend yield	$	0.0

A summary of our stock option activity during the six months ended June 30, 2020 is presented below:

				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
	Shares	Exercise Price		Contractual Term	Value
Outstanding at December 31, 2019	189,187	$	46.79	8.62	$	1,920,684
Grants	182,000		61.37	—		—
Exercised	(1,500)		41.15	—		—
Forfeited	(137,500)		55.79	—		—
Outstanding at June 30, 2020	232,187	$	56.02	8.12	$	1,222,261
Exercisable at June 30, 2020	52,687	$	39.70	2.50	$	1,136,761

During the six-month periods ended June 30, 2020 and 2019, the Company received $0.1 million and $1.7 million, respectively, from stock options exercised by option holders.

Aggregate intrinsic value represents the total pre-tax intrinsic value based on the closing price of our common stock of $61.28 on June 30, 2020, which would have been received by the option holders had all option holders exercised their options as of that date. We have $4.3 million in unrecognized compensation cost related to stock options outstanding as of June 30, 2020, which we expect to recognize over the next 8.1 years.

Stock-based compensation expense related to stock options recognized in general and administrative expenses was a credit of $31,000 for the three months ended June 30, 2020 and $136,000 for the six month period ended June 30, 2020, and $119,000 and $260,000 for the three and six month periods ended June 30, 2019, respectively.  The credit for the three months ended June 30, 2020 was the result of the reversal of $200,000 of previously recognized stock compensation expense due to forfeitures that occurred during the period.  In addition, stock compensation expense related to restructuring associated with the acceleration of vesting of certain stock options and restricted stock units was $190,000 for the three months ended March 31, 2020 (see Note 7).

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Machinery and equipment, furniture and fixtures, and autos are depreciated on a straight-line basis over their estimated useful lives of five to ten years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining life of the lease. At June 30, 2020, total property and equipment consisted of furniture and fixtures of $65,000 with an expected useful life of five years.  At December 31, 2019, all property and equipment were fully depreciated.

Comprehensive Income

For each of the three and six-month periods ended June 30, 2020 and 2019, we had no components of other comprehensive income other than net income itself.

Provision for Income Taxes

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

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate settlement. As of June 30, 2020 and December 31, 2019, the Company has not recorded any unrecognized tax benefits. We classify interest associated with income taxes under interest expense and tax penalties under other.

Commitments and Contingencies

We determine if an arrangement includes a lease at inception. Right-of-use lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The right-of-use lease asset includes any lease payments made and excludes lease incentives. Incremental borrowing rate is used in determining the present value of future payments. We apply a portfolio approach to the property leases to apply an incremental borrowing rate to leases with similar lease terms. The lease terms may include options to extend or terminate the lease. We recognize the options to extend the lease as part of the right-of-use lease assets and lease liabilities only if it is reasonably certain that the option would be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the non-cancelable lease term. The adoption of the new standard as of January 1, 2019 did not have a material impact on our consolidated financial statements for the six months ended June 30, 2019 due to the short-term nature of our then-existing lease in Lynbrook, New York.

In December 2019, we recorded a right-of-use lease asset of $243,000, a short-term lease liability of $76,000, and a long-term lease liability of $167,000 associated with the lease of our new headquarters in Wilmington, Delaware.

The following table summarizes the maturity of the Company’s lease obligations on an undiscounted cash flow basis and a reconciliation to the operating lease liabilities recognized on our balance sheet as of June 30, 2020 and December 31, 2019:

	June 30, 2020		December 31, 2019
2020	$	41,210	$	75,352
2021		84,893		84,893
2022		87,428		87,428
Total lease payments		213,531		247,673
Less: interest		(8,149)		(11,560)
Total lease obligation	$	205,382	$	236,113

On January 7, 2020, the Company provided three months’ notice to 35 Wilbur Street Associates, LLC of the Company’s intent to terminate the lease agreement for our former corporate headquarters, located at 35 Wilbur St., Lynbrook, New York 11563. Accordingly, the lease terminated on April 7, 2020. As the lease provided the Company the option to cancel the lease by giving three months’ prior written notice, the Company did not incur any termination penalties.

Total operating lease expenses amounted to $23,000 and $80,000 for the three and six month period ended June 30, 2020 and $34,000 and $67,000 for the three and six months period ended June 30, 2019, respectively.

The recent outbreak of the novel coronavirus (COVID-19) resulted in a decrease in revenues of 53% from the second quarter of 2020 as compared to the second quarter of 2019. Since XIAFLEX® is used primarily in elective procedures, which have been curtailed during the outbreak, and based on public statements made by Endo, the Company believes that the COVID-19 outbreak may have a material adverse effect on its business and financial results until the easing of the restrictions that have been imposed as a result of the outbreak.

On June 12, 2020, the Company filed an arbitration demand against the Research Foundation of the State University of New York for and on behalf of Stony Brook University (“Research Foundation”) seeking a declaration that one of its former employees is a co-inventor of the Research Foundation’s patent for the treatment of cellulite (U.S. Patent No. 10,123,959, which has an expiration date of February 7, 2027), and challenging the Research Foundation’s prospective rights to royalties under the Cellulite License Agreement dated August 23, 2007, which is described in the Company’s most recent annual report on Form 10-K.  This is a private and confidential arbitration administered by the American Arbitration Association.  On July 9, 2020, the Research Foundation filed a response, denying the allegations of the demand and making a counterclaim alleging principally that the Company is in breach of its obligations under the Cellulite License Agreement.  The Company has responded to the counterclaim, denying the allegations and requesting judgment in its favor on all claims.  However, should the Research Foundation prevail in this arbitration, it could have a material adverse effect on the Company’s future financial results.   See “Subsequent Events” (Note 8) for disclosure concerning FDA approval and postponement of commercial launch of the cellulite indication.

Stockholders’ Equity

At the Company’s annual meeting of stockholders held on June 12, 2020 (the “2020 Annual Meeting”), the stockholders approved an amendment to the Company’s Certificate of Incorporation, as amended, to increase the authorized number of shares of common stock from 10,000,000 shares to 15,000,000 shares.

On April 10, 2020, the Board approved an amendment to the Company's Rights Agreement, dated as of May 14, 2002 and amended June 19, 2003, February 3, 2011, March 5, 2014, May 27, 2016, and May 11, 2018 (the “Original Rights Agreement”), by and between the Company and Worldwide Stock Transfer, LLC (successor in interest to OTC Corporate Transfer Service Company), as rights agent (the “Rights Agent”). The amendment, which was subsequently executed on that date by the Company and the Original Rights Agent, changes the Final Expiration Date (as defined in the Original Rights Agreement) of the rights under the Original Rights Agreement (the “Original Rights”) from the close of business on May 31, 2020 to the close of business on April 10, 2020. As a result, the Original Rights have expired, and the Original Rights Agreement terminated.

Also, on April 10, 2020, the Board approved and adopted a Rights Agreement, dated as of April 10, 2020 (the “Rights Agreement”), by and between the Company and the Rights Agent. Pursuant to the Rights Agreement, the Board declared a dividend of one preferred share purchase right (each, a “Right”) for each outstanding share of common stock, par value $0.001, of the Company (each, a “Common Share" and, collectively, the “Common Shares”). The Rights are distributable to stockholders of record as of the close of business on April 21, 2020 (the “Record Date”). One Right also will be issued together with each Common Share issued by the Company after April 21, 2020, but before the Distribution Date (as defined in the Rights Agreement) (or the earlier redemption or expiration of the Rights) and, in certain circumstances, after the Distribution Date.

Generally, the Rights Agreement works by causing substantial dilution to any person or group that acquires beneficial ownership of twenty percent (20%) or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. The Rights Agreement is not intended to interfere with any merger, tender or exchange offer or other business combination approved by the Board. The Rights Agreement also does not prevent the Board from considering any offer that it considers to be in the best interest of its stockholders.

A proposal to ratify the adoption by the Board of the Rights Agreement was approved by the stockholders at the Company’s 2020 Annual Meeting.