SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

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.”

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.

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 September 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 September 30, 2020, and December 31, 2019, amortized cost basis of the investments approximated their fair value.

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


	Maturities as of				Maturities as of
	September 30, 2020				December 31, 2019
	1 Year or Less		Greater than 1 Year		1 Year or Less		Greater than 1 Year
Municipal bonds	$	12,596,326	$	2,512,697	$	11,341,249	$	—
Government agency bonds		1,158,191		3,500,000		11,950,738		6,231,804
US Treasury bonds		6,006,593		—		—		—
Corporate bonds		60,012,228		27,812,183		57,321,784		6,675,958
Certificates of deposit		4,071,401		497,018		3,626,147		3,661,262
Total	$	83,844,739	$	34,321,898	$	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 September 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 September 30, 2020 and December 31, 2019:


September 30, 2020	Type of Instrument	Fair Value		Level 1		Level 2		Level 3
Cash equivalents	Institutional Money Market	$	253,460	$	253,460	$	—	$	—
Investments	Certificates of Deposit		4,568,419		4,568,419		—		—
Investments	Municipal Bonds		15,109,023		—		15,109,023		—
Investments	Government Agency Bonds		4,658,191		—		4,658,191		—
Investments	US Treasury Bonds		6,006,593		—		6,006,593		—
Investments	Corporate Bonds		87,824,411		—		87,824,411		—


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		—

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. For the nine months ended September 30, 2020, we repurchased 7,573 shares at an average price of $54.50. For the nine months ended September 30, 2019, there were 6,209 shares repurchased at an average price of $57.54. The stock repurchase program terminated in May 2020.

Third Party Royalties

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 nine months ended September 30, 2020, third-party royalty expenses on royalty revenue were $0.2 million and $0.4 million, respectively. For the three and nine months ended September 30, 2019, third-party royalty expenses on royalty revenue were $0.2 million and $0.7 million, respectively. In addition, the Company incurred a milestone fee of $1.5 million on license revenue in the third quarter 2020 upon the FDA approval of Qwo™ (collagenase clostridium histolyticum-aaes) for the treatment of cellulite.

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.

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 September 30, 2020, total gross property and equipment consisted of furniture and fixtures of $69,000 with an expected useful life of five years.

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 September 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.

Stockholders' Equity

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.

The Rights Agreement was amended on October 19, 2020; see Note 8 “Subsequent Events” for disclosure relating to the Rights Agreement amendment.

At-The-Market Equity Offering Sales Agreement

At-The-Market Equity Offering Sales Agreement

On August 31, 2020, the Company entered into an At-The-Market Equity Sales Agreement (the “ATM Agreement”) with Stifel, Nicolaus & Company, Incorporated (“Stifel”) and Oppenheimer & Co. Inc. (“Oppenheimer” and, together with Stifel, the “Agents”) pursuant to which the Company may issue and sell, from time to time, at its option, shares of its common stock, $0.001 par value per share, having an aggregate offering price of up to $75,000,000 (the “ATM Shares”) through the Agents, as its sales agents.

Subject to the terms and conditions of the ATM Agreement, the Agents will use their commercially reasonable efforts to sell the ATM Shares from time to time, based upon the Company’s instructions, by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The Company has agreed to pay the Agents’ commissions for their services in acting as the Company’s agents in the sale of the ATM Shares in the amount of 3.0% of gross proceeds from the sale of the ATM Shares pursuant to the ATM Agreement. The Company also has agreed to provide the Agents with customary indemnification and contribution rights. The offering of the ATM Shares will terminate upon the earliest of (a) the sale of the maximum number or amount of the ATM Shares permitted to be sold under the ATM Agreement and (b) the termination of the ATM Agreement by the parties thereto.

During the third quarter, the Company did not make any sales under the ATM Agreement.