Table of
Contents


UNITED
STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM 10-Q
 
 (Mark
One)
 [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For
the quarterly period ended June 30, 2008
 
 [
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For
the transition period from __________________ to __________________
 BIOSPECIFICS TECHNOLOGIES
      CORP.(Exact
      name of small business issuer as specified in its
      charter)
 
  Delaware
              0-19879
              11-3054851(State
      or other jurisdiction
                of
      incorporation or organization)
              (Commission
      file number)
              (I.R.S.
      Employer
                Identification
      No.)
   35 Wilbur Street
 Lynbrook, NY 
11563
 (Address
of principal executive office, including zip code)
 
 516.593.7000
 (Issuer's
telephone number, including area code)
  
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
[X]  No  [  ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, a
non-accelerated filer, or a smaller reporting company.  See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer
[   ]                                                                                           Accelerated
filer                  
[   ]
 
 Non-accelerated
filer   [   ]    (Do not check
if a smaller reporting company)      Smaller
reporting company [X]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  Yes
[   ]  No  [X]
  Indicate
the number of shares outstanding of the issuer's classes of common equity, as of
the latest practicable date:
 
 Class of
Stock                                Outstanding July 29,
2008
 Common
Stock ($.001 par
value)                                                                                                                             5,950,801
 Table of Contents




BIOSPECIFICS
TECHNOLOGIES CORP.
 
 TABLE OF CONTENTS
 
 
 PagePART
      I – FINANCIAL INFORMATIONITEM
      1.
              Consolidated Financial Statements
              2Consolidated Balance Sheet as of June 30, 2008 and December
      31, 2007
              2Consolidated Statements of Operations for the Three and Six
      Months Ended June 30, 2008 and 2007
              3Consolidated Statements of Cash Flows for the Six Months
      Ended June 30, 2008 and 2007
              4Notes to Consolidated Financial
    Statements
              5ITEM
      2.
              Management’s Discussion and Analysis
              14ITEM
      3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              21ITEM
      4.
              Controls and Procedures
              21PART
      II – OTHER INFORMATIONITEM
      1.
              Legal Proceedings
              22ITEM
      1A.
              Risk Factors
              22ITEM
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              22ITEM
      3.
              Defaults Upon Senior Securities
              22ITEM
      4.
              Submission of Matters to a Vote of Security
      Holders
              22ITEM
      5.
              Other Information
              22ITEM
      6.
              Exhibits
              22
  Table of Contents
  Introductory
Comments – Terminology
 
 Throughout
this quarterly report on Form 10-Q (this “Report”), the terms “BioSpecifics,”
“Company,” “we,” “our,” and “us” refer to BioSpecifics Technologies Corp. and
its subsidiary, Advance Biofactures Corporation (“ABC-NY”). We also owned two
dormant companies, BioSpecifics of Curacao N.V. and Biota N.V., which were
liquidated in January 2007.
 
 Introductory
Comments – Forward-Looking Statements
 
 This
Report includes “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities and Exchange Act of 1934, as amended. All statements other
than statements of historical facts are “forward-looking statements” for
purposes of these provisions, including any projections of earnings, revenues or
other financial items, any statements of the plans and objectives of management
for future operations, any statements concerning proposed new products or
licensing or collaborative arrangements, any statements regarding future
economic conditions or performance, and any statement of assumptions underlying
any of the foregoing. In some cases, forward-looking statements can be
identified by the use of terminology such as “may,” “will,” “expects,” “plans,”
“anticipates,” estimates,” “potential,” or “continue” or the negative thereof or
other comparable terminology. Although we believe that the expectations
reflected in the forward-looking statements contained in this Report are
reasonable, there can be no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to inherent risks and uncertainties,
including but not limited to the risk factors set forth below, and for the
reasons described elsewhere in this Report. All forward-looking statements and
reasons why results may differ included in this Report are made as of the date
hereof, and we assume no obligation to update these forward-looking statements
or reasons why actual results might differ.
 
 Table of Contents
 
 PART
I – FINANCIAL INFORMATION
 
 Item
1:  Consolidated Financial Statements
 
 BIOSPECIFICS
      TECHNOLOGIES CORP.Consolidated Balance SheetsAs
      of June 30,
              
              
              Fiscal
      Year Ended
                December
      31,2008
              
              
              2007(unaudited)
              
              
              (audited)AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              4,741,385
              
              
              $
              68,564Short-term
      investments(1)
              
              
              -
              
              
              
              975,000Accounts
      receivable, net
              
              
              102,180
              
              
              
              108,809Prepaid
      expenses and other current assets
              
              
              101,946
              
              
              
              73,158Total
      current assets
              
              
              4,945,511
              
              
              
              1,225,531Long-term
      investments(1)
              
              
              1,020,427
              
              
              
              -Property,
      plant and equipment, net
              
              
              17,133
              
              
              
              35,680Total
      assets
              
              
              5,983,071
              
              
              
              1,261,211Liabilities
      and Stockholders' DeficitCurrent
      liabilities:Accounts
      payable and accrued expenses
              
              
              719,623
              
              
              
              873,460Accrued
      third-party development expenses
              
              
              2,272,969
              
              
              
              2,272,969Accrued
      tax liability
              
              
              453,553
              
              
              
              453,553Deferred
      revenue
              
              
              1,345,125
              
              
              
              1,437,116Accrued
      tax and other accrued liabilities of discontinued
    operations
              
              
              78,138
              
              
              
              78,138Total
      current liabilities
              
              
              4,869,408
              
              
              
              5,115,236Long-term
      deferred revenue
              
              
              2,501,062
              
              
              
              2,881,633Stockholders'
      deficit:Series
      A Preferred stock, $.50 par value, 700,000 shares authorized; none
      outstanding
              
              
              -
              
              
              
              -Common
      stock, $.001 par value; 10,000,000 shares authorized; 6,082,068 shares
      and
                5,480,768 shares issued and outstanding at June 30, 2008 and
      December 31, 2007,
                respectively
              
              
              6,082
              
              
              
              5,481Additional
      paid-in capital
              
              
              11,092,925
              
              
              
              4,751,447Accumulated
      deficit
              
              
              (11,437,876
              )
              
              
              (10,172,855
              )Accumulated
      other comprehensive loss
              
              
              (354,573
              )
              
              
              -Treasury
      stock, 131,267 shares at cost at June 30, 2008 and December 31,
      2007
              
              
              (693,957
              )
              
              
              (693,957
              )Notes
      receivable from former CEO and Chairman and other related
      party
              
              
              -
              
              
              
              (625,774
              )Total
      stockholders' deficit
              
              
              (1,387,399
              )
              
              
              (6,735,658
              )Total
      liabilities and stockholders’ deficit
              
              $
              5,983,071
              
              
              $
              1,261,211(1)
      As discussed in note 2 to the consolidated financial statements, we have
      classified all of our auction rates securities held as of June
      30,
                2008
      as long-term investments as our ability to liquidate such securities in
      the next 12 months is uncertain. We had classified all of our
      auction
                rate
      securities held as of December 31, 2007 as short-term
      investments.
                
                See
      accompanying notes to consolidated financial statements
  2
 Table of Contents
 
 BIOSPECIFICS
      TECHNOLOGIES CORP.Consolidated Statements of Operations(unaudited)Three
      Months Ended
                June
      30,
              
              
              Six
      Months Ended
                June
      302008
              
              
              2007
              
              
              2008
              
              
              2007Revenues:Net
      sales
              
              $
              4,046
              
              
              $
              10,832
              
              
              $
              16,799
              
              
              $
              11,932Royalties
              
              
              2,028
              
              
              
              -
              
              
              
              2,028
              
              
              
              -Licensing
      fees
              
              
              266,282
              
              
              
              289,279
              
              
              
              532,563
              
              
              
              578,558Consulting
      fees
              
              
              162,000
              
              
              
              70,000
              
              
              
              284,185
              
              
              
              140,000Total
      Revenues
              
              
              434,356
              
              
              
              370,111
              
              
              
              835,575
              
              
              
              730,490Costs
      and expenses:General
      and administrative
              
              
              1,173,316
              
              
              
              812,947
              
              
              
              1,973,772
              
              
              
              1,910,414Research
      and development
              
              
              94,432
              
              
              
              72,060
              
              
              
              188,703
              
              
              
              458,419Total
      Cost and Expenses
              
              
              1,267,748
              
              
              
              885,007
              
              
              
              2,162,475
              
              
              
              2,368,833Operating
      loss from continuing operations
              
              
              (833,392
              )
              
              
              (514,896
              )
              
              
              (1,326,900
              )
              
              
              (1,638,343
              )Other
      income (expense):Interest
      income
              
              
              27,528
              
              
              
              36,894
              
              
              
              57,803
              
              
              
              78,143Interest
      expense
              
              
              -
              
              
              
              -
              
              
              
              (451
              )
              
              
              -Other
      income
              
              
              4,527
              
              
              
              -
              
              
              
              4,527
              
              
              
              -32,055
              
              
              
              36,894
              
              
              
              61,879
              
              
              
              78,143Loss
      from continuing operations before benefit (expense) for income
      tax
              
              
              (801,337
              )
              
              
              (478,002
              )
              
              
              (1,265,021
              )
              
              
              (1,560,200
              )Income
      tax benefit (expense)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,600
              )Net
      loss from continuing operations
              
              $
              (801,337
              )
              
              $
              (478,002
              )
              
              $
              (1,265,021
              )
              
              $
              (1,563,800
              )Basic
      and diluted net loss per share
              
              $
              (0.14
              )
              
              $
              (0.09
              )
              
              $
              (0.22
              )
              
              $
              (0.30
              )Shares
      used in computation of basic and diluted net loss per
share
              
              
              5,796,764
              
              
              
              5,275,337
              
              
              
              5,715,825
              
              
              
              5,255,354See
      accompanying notes to consolidated financial statements
  3
 Table of Contents
  BIOSPECIFICS
      TECHNOLOGIES CORP.Consolidated Statements of Cash Flows(unaudited)Six
      Months Ended
                June
      30Cash
      flows from operating activities:
              
              2008
              
              
              2007Net
      loss
              
              $
              (1,265,021
              )
              
              $
              (1,563,800
              )Adjustments
      to reconcile net loss to net cash providedby
      operating activities:Gain
      on disposal of fixed asset
              
              
              (4,527
              )
              
              
              -Depreciation
      and amortization
              
              
              16,074
              
              
              
              16,072Stock-based
      compensation expense
              
              
              737,791
              
              
              
              248,144Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              6,629
              
              
              
              (235
              )Prepaid
      expenses and other current assets
              
              
              (28,788
              )
              
              
              (75,448
              )Accounts
      payable and accrued expenses
              
              
              (153,837
              )
              
              
              194,556Deferred
      revenue
              
              
              (472,562
              )
              
              
              (318,558
              )Net
      cash used in operating activities from continuing
    operations
              
              
              (1,164,241
              )
              
              
              (1,499,269
              )Net
      cash used in discontinued operations
              
              
              -
              
              
              
              (321,037
              )Cash
      flows from investing activities:Maturities
      of marketable investments
              
              
              350,000
              
              
              
              -Purchases
      of long-term investments
              
              
              (750,000
              )
              
              
              -Proceeds
      from sale of fixed asset
              
              
              7,000
              
              
              
              -Net
      cash used in investing activities
              
              
              (393,000
              )
              
              
              -Cash
      flows from financing activities:Proceeds
      from issuance of capital stock
              
              
              4,882,679
              
              
              
              -Proceeds
      from stock option exercises
              
              
              230,825
              
              
              
              77,374Proceeds
      from pay-off of notes receivable from former CEO and
    Chairman
              
              
              1,116,558
              
              
              
              -Net
      cash provided by financing activities from continuing
      operations
              
              
              6,230,062
              
              
              
              77,374Increase
      in cash and cash equivalents
              
              
              4,672,821
              
              
              
              (1,742,932
              )Cash
      and cash equivalents at beginning of year
              
              
              68,564
              
              
              
              4,367,178Cash
      and cash equivalents at end of period
              
              $
              4,741,385
              
              
              $
              2,624,246Supplemental
      disclosures of cash flow information:Cash
      paid during the periods for:Interest
              
              $
              451
              
              
              
              -Taxes
              
              
              -
              
              
              $
              3,600Supplemental
      disclosures of non-cash transactions:
                
                In
      March 2007, in full repayment of the $304,398 loan owed to the Company by
      Wilbur Street Corporation (“WSC”), WSC offset $304,398 in back rent due
      from the Company in repayment of the loan. The transaction was recorded by
      reducing the rent payable by $304,398 and the receivable from the
      Company’s former CEO and Chairman by $98,253 and increasing additional
      paid in capital by $206,145.
                See
      accompanying notes to consolidated financial statements
  4
 Table of Contents
 
 BIOSPECIFICS
TECHNOLOGIES CORP.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  June
30, 2008
 (Unaudited)
 
 1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
 
 We are a
biopharmaceutical company that has been involved in the development of
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.  In June 2008, Auxilium announced
positive top-line efficacy and safety results from the CORD I and CORD II phase
III clinical trials for XIAFLEXTM in the
treatment of Dupuytren's contracture. In addition, Auxilium announced it intends
to submit a Biologics License Application (“BLA”) for XIAFLEX in Dupuytren's
contracture in early 2009.
 
 DISCONTINUED
OPERATIONS
 
 Prior to
March 2006, we were a party to an exclusive license agreement with Abbott
Laboratories, Inc. and its subsidiaries (“Abbott”), for the production of the
active pharmaceutical ingredient (“API” or “API Enzyme”) for topical
collagenase. In March 2006, we sold our topical collagenase business to DFB
Biotech, Inc. and its affiliates (“DFB”), including all rights to the exclusive
license agreement and we were released of any obligations
thereunder.
 
 In
addition, DFB acquired all of the issued and outstanding shares of Advance
Biofactures of Curacao, N.V. (“ABC-Curacao”), pursuant to the Asset Purchase
Agreement (the “Asset Purchase Agreement”) between us, DFB and Advance
Biofactures Corp. (“ABC-NY”). The operating results of ABC-Curacao and certain
operations of ABC-NY have been classified as discontinued operations in the
consolidated financial statements for all periods presented.
 
 As
consideration for the purchased assets including our API inventory we received
$8 million in cash, DFB’s assumption of certain liabilities, and the right to
receive earn out payments in the future based on sales of certain products. In
connection with the closing of the Asset Purchase Agreement, we agreed to
provide certain technical assistance and certain transition services to DFB 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 $1,000,000 in
payments from DFB. The consulting obligations generally expire during March
2011.
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Basis
of Presentation
  The
accompanying consolidated financial statements are unaudited, but include all
adjustments (consisting only of normal, recurring adjustments) which 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 accounting principles generally accepted
(“GAAP”) in the United States (the “U.S.”) has been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”) for quarterly reporting.
  5
 Table of Contents
  The
information included in this Report should be read in conjunction with our
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008
filed with the SEC on May 15, 2008 and our Annual Report on Form 10-KSB for the
year ended December 31, 2007 filed with the SEC on May 2,
2008.
 
 Principles
of Consolidation
 
 The
audited consolidated financial statements include the accounts of the Company
and its subsidiaries, ABC-NY, BioSpecifics of Curacao N.V. and Biota N.V. and
its wholly-owned subsidiary, which were both liquidated in January 2007. Due to
the sale of ABC-Curacao in March 2006 to DFB all accounts of this former
subsidiary and certain operations of ABC-NY are classified as discontinued
operations in the 2007 periods presented.
 
 Management
Estimates
 
 The
preparation of unaudited consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires the use of
management’s estimates and assumptions that affect the amounts reported in the
unaudited consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
 
 Cash,
Cash Equivalents and Short and Long-term Investments
 
 Cash,
cash equivalents and short and long-term investments are stated at market value.
Cash equivalents include only securities having a maturity of three months or
less at the time of purchase. The Company limits its credit risk associated with
cash, cash equivalents and short and long-term investments by placing its
investments with banks it believes are highly creditworthy and with highly rated
money market funds, U.S. government securities, or short-term commercial
paper.
 
 Fair
Value Measurements
 
 SFAS 157
requires expanded disclosures about fair value measurements. SFAS 157 applies to
other accounting pronouncements that require or permit fair value measurements,
but does not require any new fair value measurements. We adopted the provisions
of SFAS 157 relating to assets and liabilities recognized or disclosed in the
financial statements at fair value on a recurring basis on January 1, 2008. The
adoption of these provisions did not have a material effect on our consolidated
financial statements.
 
 SFAS 157
clarifies that fair value is an exit price, representing the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants based on the highest and best use of the
asset or liability. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. SFAS 157 requires us to use valuation techniques
to measure fair value that maximize the use of observable inputs and minimize
the use of unobservable inputs. These inputs are prioritized as
follows:
 
 ·
              Level
      1: Observable inputs such as quoted prices for identical assets or
      liabilities in active markets
 ·
              Level
      2: Other inputs that are observable directly or indirectly, such as quoted
      prices for similar assets or liabilities or market-corroborated
      inputs
 ·
              Level
      3: Unobservable inputs for which there is little or no market data and
      which require us to develop our own assumptions about how market
      participants would price the assets or
  liabilities
 
 The
following table sets forth the fair value of our financial assets that were
measured on a recurring basis as of June 30, 2008:
  6
 Table of Contents
  Level 1
              Level 2
              Level 3Cash
      and cash equivalents
              $4,741,385
              -
              -Auction
      rate securities
              -
              -
              $1,020,427
 
 Auction Rate
Securities. Long-term investments consist of taxable auction rate
securities, or ARS, with original maturities ranging up to 40 years. ARS have
interest reset dates of 28 or 35 days. The reset date is the date in which the
underlying interest rate is revised based on a Dutch auction and the underlying
security may be sold. The Company classifies ARS as available for sale under
SFAS No. 115. Dutch auctions have historically provided a liquid market for the
type of ARS owned by the Company. However, with liquidity issues experienced in
global credit and capital markets, all ARS held by the Company as of June 30,
2008 experienced failed auctions, beginning in February 2008, as the amount of
securities submitted for sale exceeded the amount of purchase orders. Given the
recent disruptions in the credit markets and the fact that the liquidity for
these types of securities remains uncertain, we have classified our auction rate
securities held as of June 30, 2008 as long-term investments in our consolidated
balance sheet as our ability to liquidate such securities in the next 12 months
is uncertain. The cost value of these securities held as of June 30, 2008
amounts to approximately $1.4 million with a current market value of
approximately $1.0 million. We recorded a temporary impairment within other
accumulated comprehensive loss of approximately $0.2 million and $0.4 million
for the three and six months ended June 30, 2008 related to these auction rate
securities, respectively. The Company will continue to assess its long-term
investments if uncertainties in the credit and capital markets
continue.
 
 Revenue
Recognition
  We
recognize revenues resulting from product sales, royalties, from licensing and
use of our technology, and from other services we sometimes perform in
connection with the licensed technology under the guidance of Staff Accounting
Bulletin (SAB) No. 104, “Revenue Recognition.”
  If we
determine that separate elements exist in a revenue arrangement under Emerging
Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (EITF 00-21), we recognize revenue for delivered elements only
when the fair values of undelivered elements are known, when the associated
earnings process is complete, when payment is reasonably assured and, to the
extent the milestone amount relates to our performance obligation, when our
customer confirms that we have met the requirements under the terms of the
agreement.
 
 Revenues,
and their respective treatment for financial reporting purposes, are as
follows:
 
 Product
Sales
 
 We
recognize revenue from product sales when there is persuasive evidence that an
arrangement exists, title passes, the price is fixed or determinable and
collectability is reasonably assured. No right of return exists for our products
except in the case of damaged goods. To date, we have not experienced any
significant returns of our products.
 
 Net sales
include the sales of the API Enzyme that are recognized at the time the product
is shipped to customers for laboratory use.
  7
 Table of Contents
  Royalty
Revenue
 
 We
recognize royalties under the earn-out provision of the Asset Purchase Agreement
with DFB. We have the right to receive earn out payments in the future based on
sales of certain products.  Royalties are recognized as earned in
accordance with the contract terms when royalties can be reliably measured, and
collectibility is reasonably assured, such as upon the receipt of a royalty
statement from our licensees. We have historically recognized royalty revenue in
the quarter in which the sale was made by our licensees.
 
 License
Fees
 
 We
include revenue recognized from upfront licensing and milestone payments in
“License Fees” in our unaudited consolidated statements of operations in this
Report.
 
 Upfront
License Fees
 
 We
generally recognize revenue from upfront fees when the agreement is signed, we
have completed the earnings process and we have no ongoing performance
obligation with respect to the arrangement. Nonrefundable upfront technology
license fees for product candidates for which we are providing continuing
services related to product development are deferred and recognized as revenue
over the development period.
 
 Milestones
 
 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 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
collection 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 a nonrefundable upfront license fee.
 
 The
timing and amount of revenue that we recognize from licenses of technology,
either from upfront fees or milestones where we are providing continuing
services related to product development, is primarily dependent upon our
estimates of the development period. We define the development period as the
point from which research activities commence up to regulatory approval of
either our, or our partners’ submission assuming no further research is
necessary. As product candidates move through the development process, it is
necessary to revise these estimates to consider changes to the product
development cycle, such as changes in the clinical development plan, regulatory
requirements, or various other factors, many of which may be outside of our
control. Should the FDA or other regulatory agencies require additional data or
information, we would adjust our development period estimates accordingly. The
impact on revenue of changes in our estimates and the timing thereof is
recognized prospectively over the remaining estimated product development
period.
 
 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.
 
 Reimbursable
Third-Party Development Costs
 
 We accrue
expenses to research and development for estimated third-party development costs
that are reimbursable under our agreement with Auxilium. Estimates are based on
contractual terms, historical
  8
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  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. Amendment
No.1 to the Development and License Agreement, dated May 5, 2006 provides that
Auxilium and BioSpecifics will share equally in third-party costs for the
development of the lyophilization of the injection formulation. On April 11,
2008, we received an invoice for approximately $2.3 million from Auxilium, which
represents an amount that Auxilium believes is owed by us through year
end 2007 under this provision. We have not had adequate time to verify the
accuracy or validity of the charges and have informed Auxilium that we cannot
pay the invoice until we have done so.  Based on our preliminary review, we
believe that only a portion of the amount charged actually relates to the
development of the lyophilization of the injection formulation and, therefore,
reserve all rights related to this matter, including but not limited to our
right to contest the amount charged by Auxilium.  For the three and six
month periods ended June 30, 2008, there has been no change to the estimated
amount owed and is still currently under review
  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.
 
 Research and Development
Expenses
 
 Our
research and development (“R&D”) costs are expensed as incurred. R&D
includes, but is not limited to, internal costs, such as salaries and benefits,
costs of materials, lab expense, facility costs and overhead. R&D also
consists of third-party costs, such as medical professional fees, contract
manufacturing costs for material used in clinical trials, consulting fees 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.
 
 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 ratably 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
 
 Under the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 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 of these assumptions
are our estimates of the expected volatility of the market price of our stock
and the expected term of the award. When establishing an estimate of the
expected term of an award, we consider the
  9
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  vesting
period for the award, our recent 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, our valuation assumptions used to value employee stock-based
awards granted in future periods may change. The weighted-average assumptions
used were as follows:
 
 Quarter
      Ended
                June
      30,
                2008
              
              Year
      Ended
                December
      31,
                2007Stock
      Option PlansExpected
      life, in years
              5.0
              
              
              5.0Risk
      free interest rate
              3.7
              %
              
              5.0
              %Volatility
              80
              %
              
              106
              %Dividend
      yield
              —
              
              
              —
 
  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.
 
 Stock-based
compensation expense recognized under SFAS 123(R) was as follows:
 
 Three
      Months Ended
                June
      30,
              Six Months Ended
                June
      30,2008
              
              
              
              2007
              
              
              2008
              
              
              2007Research
      and development
              
              $
              4,979
              
              
              $
              1,660
              
              
              $
              9,957
              
              
              $
              4,240General
      and administrative
              
              
              574,234
              
              
              
              107,937
              
              
              
              727,834
              
              
              
              243,904Total
      stock-based compensation expense
              
              $
              579,213
              
              
              $
              109,597
              
              
              $
              737,791
              
              
              $
              248,144
 
 Stock
Option Activity
  A summary
of our stock option and warrant activity during the six months ended June 30,
2008 is presented below:
  Option
              
              Total Number
                of
      Shares
              
              
              Weighted-Average
                Exercise
      PriceOutstanding
      as of December 31, 2007
              
              
              1,409,700
              
              
              $
              1.86Granted
              
              
              155,000
              
              
              $
              14.19Forfeited
              
              
              -
              
              
              
              -Exercised
              
              
              (201,300
              )
              
              $
              1.15Expired
              
              
              (1,500
              )
              
              $
              4.38Outstanding
      as of June 30, 2008
              
              
              1,361,900
              
              
              $
              3.37Exercisable
      as of June 30, 2008
              
              
              1,125,025
              
              
              $
              2.35
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  The
weighted-average grant-date fair value for options granted during the six months
ended June 30, 2008 was $14.19 per share and $4.30 per share in the
corresponding six month period of 2007. During the six months ended June 30,
2008 and 2007, $230,825 and $77,374 were received from stock options exercised
by employees, respectively.
  The
aggregate intrinsic value of options outstanding and exercisable as of June 30,
2008 was approximately $18.3 million. Aggregate intrinsic value represents the
total pre-tax intrinsic value, based on the closing price of our common stock of
$16.25 on June 30, 2008, which would have been received by the option holders
had all option holders exercised their options as of that date. Total
unrecognized compensation cost related to non-vested stock options outstanding
as of June 30, 2008 was approximately $1.1 million which we expect to recognize
over a weighted-average period of 1.5 years.
 
 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.
 
 Recent
Accounting Pronouncements
 
 In June
2007, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue
No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services
Received to Be Used in Future Research and Development Activities” (EITF No.
07-3). EITF No. 07-3 requires companies that are involved in research and
development activities to defer nonrefundable advance payments for future
research and development activities and to recognize those payments as goods and
services are delivered. The Company will be required to assess on an ongoing
basis whether or not the goods or services will be delivered and to expense the
nonrefundable advance payments immediately if it is determined that delivery is
unlikely. EITF No. 07-3 is effective for new arrangements entered into
subsequent to the beginning of the Company’s fiscal year 2009. The adoption of
this EITF did not have a material effect on our consolidated financial
statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161
requires enhanced disclosures about an entity’s derivative and hedging
activities. Entities will be required to provide enhanced disclosures about: (a)
how and why an entity uses derivative instruments; (b) how derivative
instruments and related hedge items are accounted for under SFAS No. 133 and its
related interpretations; and (c) how derivative instruments and related hedge
items affect an entity’s financial position, financial performance and cash
flows. The Company is required to adopt SFAS No. 161 beginning in fiscal year
2009. We do not expect the adoption of this FAS statement to have a material
effect on our consolidated financial statements.
 
 In
April 2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that
should be considered in developing the renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FAS 142,
“Goodwill and Other Intangible Assets.” FSP FAS 142-3 also requires expanded
disclosure related to the determination of intangible asset useful lives. FSP
FAS 142-3 is effective for fiscal years beginning after December 15, 2008.
Earlier adoption is not permitted. We do not expect the adoption of this FSP to
have a material effect on our consolidated financial statements.
 
 In May
2008, the FASB issued Staff Position No. APB 14-1, "Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement)" (the "FSP"), which clarifies the accounting for convertible
debt instruments that may be settled in cash
  11
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  (including
partial cash settlement) upon conversion. The FSP requires issuers to account
separately for the liability and equity components of certain convertible debt
instruments in a manner that reflects the issuer's nonconvertible debt
(unsecured debt) borrowing rate when interest cost is recognized. The FSP
requires bifurcation of a component of the debt, classification of that
component in equity and the accretion of the resulting discount on the debt to
be recognized as part of interest expense in our consolidated statement of
operations. The FSP requires retrospective application to the terms of
instruments as they existed for all periods presented. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. We do not expect the adoption of
this FSP to have a material effect on our consolidated financial
statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States (the GAAP hierarchy).
This Statement will not have any impact on the Company’s consolidated financial
statements.
  In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
this Statement is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This Statement
also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” We do not expect
the adoption of this FAS statement to have a material effect on our consolidated
financial statements.
 
 In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
We do not expect the adoption of this EITF to have a material effect on our
consolidated financial statements.
 
 In June
2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
is to provide transition guidance for conforming changes made to EITF No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
150, “Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity”. This Issue is effective for financial statements issued
for fiscal years ending after December 15, 2008. Early application is
permitted. We do not expect the adoption of this EITF to have a material
effect on our consolidated financial statements.
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  3.
NET LOSS PER SHARE
  In
accordance with SFAS No. 128, “Earnings Per Share” (SFAS 128), basic net
loss per share amount is computed using the weighted-average number of shares of
common stock outstanding during the periods presented, while diluted net
loss per share is computed using the sum of the weighted-average number of
common and common equivalent shares outstanding. Common equivalent shares used
in the computation of diluted earnings per share result from the assumed
exercise of stock options, and warrants using the if converted method. For the
three and six months ended June 30, 2008 and 2007, we incurred a net loss from
continuing operations and, as such, we did not include the effect of outstanding
stock options or warrants in the diluted net loss per share calculations, as
their effect would have been anti-dilutive.
 
 The
following table summarizes the number of common equivalent shares excluded from
the calculation of diluted net loss per share from continuing operations
reported in the consolidated statement of operations as their effect would have
been anti-dilutive:
  Three
      Months Ended
                June
      30,
              
              Six
      Months Ended
                June
      30,2008
              
              2007
              
              2008
              
              2007Stock
      options
              1,260,813
              
              1,266,967
              
              1,248,372
              
              1,235,384Warrants
              -
              
              10,000
              
              -
              
              10,000Total
              1,260,813
              
              1,276,967
              
              1,248,372
              
              1,245,384
 
 4.
TOTAL COMPREHENSIVE LOSS
 
 Comprehensive
loss is comprised of net loss and other comprehensive loss.  Specifically,
we include in other comprehensive loss the changes in unrealized gains and
losses on our holdings of available-for-sale securities, which are excluded from
our net loss. The following table presents the calculation of our comprehensive
loss:
  
 Three
      Months Ended
                June
      30,
              
              
              Six
      Months Ended
                June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      loss
              
              $
              801,337
              
              
              $
              478,002
              
              
              $
              1,265,021
              
              
              $
              1,563,800Other
      comprehensive loss:Change
      in unrealized losses on marketable securities
              
              
              142,184
              
              
              
              -
              
              
              
              354,572
              
              
              
              -Total
      Comprehensive Loss
              
              $
              943,521
              
              
              $
              478,002
              
              
              $
              1,619,593
              
              
              $
              1,563,800
  5.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
  Accounts
payable and accrued expenses consisted of the following:
  June
      30,
                2008
              
              December 31,
                2007Trade
      accounts payable and accrued expenses
              $
              556,193
              
              $
              686,742Accrued
      legal and other professional fees
              38,773
              
              
              98,438Accrued
      payroll and related costs
              124,657
              
              
              88,280Total
              $
              719,623
              
              $
              873,460
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  6.
INCOME TAXES
 
 We
recorded minimum income tax provisions for the three and six month periods ended
June 30, 2008 and 2007 of zero and $3,600, respectively
 
 7.
RELATED PARTY TRANSACTIONS
  On
February 1, 2008, the Estate of Edwin H. Wegman (the “Estate”) sold an aggregate
of 344,114 shares of the Company's common stock, par value $0.001, at a purchase
price of $12.00 per share to certain private investors. The Estate used certain
of the proceeds of the transaction to repay the loan owed to the Company by
Edwin H. Wegman, our former Chairman and CEO. The total loan repayment amount
was $1,116,558, which represents the principal amount of $625,774 owed to the
Company and accrued interest through January 31, 2008 of $490,784.
  In March
2007, in full repayment of the $304,398 loan owed to the Company by Wilbur
Street Corporation (“WSC”), WSC offset $304,398 in back rent due from the
Company in repayment of the loan.
 
 8.
SUBSEQUENT EVENTS
 
 On June
24, 2008, the Company announced that the date of its 2008 Annual Meeting of
Stockholders will be September 9, 2008 in New York City, New York.
 
 On July
29, 2008, DPT Lakewood, an affiliate of DFB, and the subtenant under a sublease
agreement with ABC-NY, dated as of March 3, 2006, as amended on January 11, 2007
and March 19, 2008, gave notice that it would terminate its sublease with ABC-NY
on October 31, 2008 in accordance with the terms of the sublease.  The
sublease is for a portion of our facility in Lynbrook, New York, which is
described under “Item 2—Description of Property” on our Form 10-KSB for the
fiscal year ended December 31, 2007, filed with the SEC on May 2,
2008.
 
 On August
5, 2008, the Company entered into an Executive Employment Agreement with Thomas
Wegman.  Under the Agreement, Mr. Wegman will serve as the President
and Principal Executive Officer of the Company for a two year period commencing
on August 5, 2008.  Upon the expiration of the initial two year term,
the Agreement will run for successive one year terms until terminated by the
Company or Mr. Wegman at the end of the then current term upon 90 days prior
notice of the termination to the other party. Mr. Wegman will earn a base
compensation equal to $250,000 per year and will receive an automobile allowance
of $350 per month, plus reimbursement of expenses incurred on the Company’s
behalf.  Mr. Wegman will also be eligible to receive stock options,
restricted stock or other equity awards at the discretion of the Board or the
Compensation Committee.  The agreement was filed as an exhibit to a
Form 8-K on August 8, 2008.
 
 Item
2: Management’s Discussion and Analysis or Plan of
Operation
 
 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 that has been involved in the development of
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.  In June 2008, Auxilium announced
positive top-line efficacy and
  14
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  safety
results from the CORD I and CORD II phase III clinical trials for XIAFLEXTM in the
treatment of Dupuytren's contracture. In addition, Auxilium announced it intends
to submit a Biologics License Application (“BLA”) for XIAFLEX in Dupuytren's
contracture in early 2009.
 
 Outlook
  We
foresee the potential to generate income from limited sources in the next
several years. Under the terms of our agreement with DFB Biotech, Inc and its
affiliates (“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”).
 
 Based on
our current business model, we expect to have adequate cash reserves until the
third quarter of 2009 depending on the amount actually owed to Auxilium, as
discussed in Item 1A, “Risk Factors”, included in our Annual Report on Form
10-KSB for the year ended December 31, 2007. As a significant portion of our
revenues is tied directly to the success of Auxilium in commercializing XIAFLEX,
we cannot reasonably forecast our financial condition beyond this
time.
  Significant
Risks
 
 In recent
history we have had operating losses and may not achieve sustained
profitability. As of June 30, 2008, we had an accumulated deficit from
continuing operations of $11,437,876.
 
 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
June 30, 2008, we held $1.4 million of taxable auction rate securities, or ARS,
which are classified as long-term investments with a current market value of
approximately $1.0 million. We
recorded a temporary impairment within other accumulated comprehensive loss of
approximately $0.2 million and $0.4 million for the three and six months ended
June 30, 2008 related to these auction rate securities, respectively.The
Dutch auctions have in the past provided a liquid market for these types of
securities. With the liquidity issues experienced in global credit and capital
markets, auctions of all the ARS we hold experienced failed auctions, beginning
in February 2008, as the amount of securities submitted for sale exceeded the
amount of purchase orders. If the uncertainties in the credit and capital market
continue, these markets deteriorate further or there are ratings downgrades on
any of the ARS we hold, we may be required to adjust the value of these
investments through an impairment charge to earnings, if the fair value of these
securities has declined to below their cost and such decline is assessed to be
“other than temporary” under SFAS No. 115. Further, we may not be able to
liquidate these investments until successful auctions occur, a buyer outside the
auction process is found, the issuer calls these debt securities, or the
securities mature.
 
 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
  15
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  assumptions
that we believe are reasonable under the circumstances. The information at June
30, 2008 and for the three and six months ended June 30, 2008 and 2007 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, 2007 balance
sheet amounts and disclosures included herein have been derived from the
Company’s December 31, 2007 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
years ended December 31, 2007 and 2006 included in the Company’s Form
10-KSB filed with the SEC on May 2, 2008 and our Quarterly Report on Form 10-QSB
for the quarter ended March 31, 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 and use of our technology and from services we sometimes perform
in connection with the licensed technology.
 
 We
recognize royalties under the earn-out provision of the Asset Purchase Agreement
with DFB. We have the right to receive earn out payments in the future based on
sales of certain products.  Royalties are recognized as earned in
accordance with the contract terms when royalties can be reliably measured, and
collectibility is reasonably assured, such as upon the receipt of a royalty
statement from our licensees. We have historically recognized royalty revenue in
the quarter in which the sale was made by our licensees.
  We enter
into product development licenses, and collaboration agreements that may contain
multiple elements, such as upfront license fees, and milestones related to the
achievement of particular stages in product development and royalties. As a
result, significant contract interpretation is sometimes required to determine
the appropriate accounting, including whether the deliverables specified in a
multiple-element arrangement should be treated as separate units of accounting
for revenue recognition purposes, and if so, how the aggregate contract value
should be allocated among the deliverable elements and when to recognize revenue
for each element.
  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.
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  We
recognize revenues from a consulting and technical assistance contract primarily
as a result of the Asset Purchase Agreement. Consulting revenues are recognized
ratably over the term of the contract. The consulting obligations under the
Asset Purchase Agreement generally expire during March 2011.
 
 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 $1,000,000
in payments from DFB. The consulting obligations generally expire during March
2011. As of June 30, 2008 the remaining accounts receivable balance due was
$400,000 for future services and was offset by the associated deferred revenues
to be recognized in future periods of $400,000.
 
 Reimbursable
Third-Party Development Costs. We accrue expenses to research and
development 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, Amendment No.1 to the Development and License Agreement, dated May 5,
2006 provides that Auxilium and BioSpecifics will share equally in third-party
costs for the development of the lyophilization of the injection formulation. On
April 11, 2008, we received an invoice for approximately $2.3 million from
Auxilium, which represents an amount that Auxilium believes is owed by
us through year end 2007 under this provision. We have not had
adequate time to verify the accuracy or validity of the charges and have
informed Auxilium that we cannot pay the invoice until we have done so.
 Based on our preliminary review, we believe that only a portion of the
amount charged actually relates to the development of the lyophilization of the
injection formulation and, therefore, reserve all rights related to this matter,
including but not limited to our right to contest the amount charged by
Auxilium.  For the three and six month periods ended June 30, 2008, there
has been no change to the estimated amount owed and is still currently under
review.
  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.
  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 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.
  17
 Table of Contents
  RESULTS
OF OPERATIONS
 
 THREE-MONTHS
ENDED JUNE 30, 2008 AND 2007
 
 Revenues
 
 Product
Revenues, net
 
 Product
revenues include the sales of the API Enzyme recognized at the time it is
shipped to customers. From continuing operations, we had a small amount of
revenue from the sale of collagenase for laboratory use.  For the
three months ended June 30, 2008 and 2007 product revenues were $4,046 and
$10,832, respectively. This decrease of $6,786 or 63% 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. Royalty revenues recognized under our
agreement with DFB for the three months ended June 30, 2008 were $2,028 and zero
in the comparable period of 2007. This increase for the 2008 was due to certain
foreign sales levels achieved and reported to us in the second quarter of 2008
by DFB in connection with the sale of topical collagenase.
 
 Licensing
Revenues
 
 For the
three months ended June 30, 2008 and 2007, we recognized licensing revenue of
$266,282 and $289,279, respectively.  This decrease of $22,997 or 8%
was primarily related to the extension of the development timeline for a certain
indication for injectable collagenase under the Auxilium Agreement. 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. 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 June 30, 2008 and
2007 consulting revenues were $162,000 and $70,000, respectively. This increase
of $92,000 or 131% was primarily due to the recognition 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 $94,432 and $72,060 respectively, for the three
months ended June 30, 2008 and 2007. This increase of $22,372 or 31% in research
and development expenses was primarily due to certain external study development
costs.
  18
 Table of Contents
  General
and Administrative Expenses
 
 General
and administrative expenses were $1,173,316 and $812,947 for the three months
ended June 30, 2008 and 2007, respectively. The increase in general and
administrative expenses of $360,369 or 44% was primarily due to stock-based
compensation expense partially offset by lower administrative personnel
costs.
 
 Other
Income (expense), net
 
 Other
income, net, was $32,055 and $36,894 for the three months ended June 30, 2008
and 2007, respectively. The decrease in other income, net of $4,839 or 13%
during the second quarter of 2008 as compared to the 2007 period was primarily
due to a lower return on invested balances during the 2008 period, partially
offset by a gain from proceeds received from the sale of a company owned
vehicle.
  Income
Taxes
 
 The
expense for income taxes for the three month periods ended June 30, 2008 and
2007 was zero.
 
 SIX-MONTHS
ENDED JUNE 30, 2008 AND 2007
 
 Revenues
 
 Product
Revenues, net
 
 Product
revenues include the sales of the API Enzyme recognized at the time it is
shipped to customers. From continuing operations, we had a small amount of
revenue from the sale of collagenase for laboratory use.  For the six
months ended June 30, 2008 and 2007 product revenues were $16,799 and $11,932,
respectively. This increase of $4,867 or 41% 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. Royalty revenues recognized under our
agreement with DFB for the six months ended June 30, 2008 were $2,028 and zero
in the comparable period of 2007. This increase for the 2008 was due to certain
foreign sales levels achieved and reported to us in the second quarter of 2008
by DFB in connection with the sale of topical collagenase.
 
 Licensing
Revenues
 
 For the
six months ended June 30, 2008 and 2007, we recognized licensing revenue of
$532,563 and $578,558, respectively.  This decrease of $45,995 or 8%
was primarily related to the extension of the development timeline for a certain
indication for injectable collagenase under the Auxilium Agreement. 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.
  19
 Table of Contents
  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. 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 six months ended June 30, 2008 and
2007 consulting revenues were $284,185 and $140,000, respectively. This increase
of $144,185 or 103% was primarily due to the recognition 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 $188,703 and $458,419 respectively, for the six
months ended June 30, 2008 and 2007. This decrease of $269,716 or 59% in
research and development expenses was primarily due to lower third-party
development costs partially offset by certain external study development
costs.
 
 General
and Administrative Expenses
 
 General
and administrative expenses were $1,973,772 and $1,910,414 for the six months
ended June 30, 2008 and 2007, respectively. The increase in general and
administrative expenses of $63,358 or 3% was primarily due to stock-based
compensation expense partially offset by lower administrative personnel costs
and legal fees.
 
 Other
Income (expense), net
 
 Other
income, net, was $61,879 and $78,143 for the six months ended June 30, 2008 and
2007, respectively. The decrease in other income, net of $16,264 or 21% during
the six month period of 2008 as compared to the 2007 period was primarily due to
a lower return on the invested balances during the 2008 period, partially offset
by a gain from proceeds received from the sale of a company owned
vehicle.
  Income
Taxes
 
 The
expense for income taxes for the six month periods ended June 30, 2008 and 2007
was zero and $3,600, respectively Income taxes for the six month period of 2007
primarily represents minimum payments of state franchise taxes.
 
 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 June 30, 2008 and December 31, 2007, we
had cash and cash equivalents in the aggregate of $4,741,385 and $68,564,
respectively.
  20
 Table of Contents
  Continuing
Operations
 
 Net cash
used in operating activities for the six months ended June 30, 2008 was
$1,164,241 as compared to net cash used in operating activities in the 2007
period of $1,499,269.  In the 2008 period, as compared to the 2007
period, the changes in net cash used in operating activities was primarily
attributable to decreases in operational expenses, non-cash stock compensation
expense, increases in accounts payable and accrued expenses, partially offset by
deferred revenue.
 
 Net cash
used in investing activities for the six months ended June 30, 2008 was $393,000
as compared to net cash used in investing activities in the 2007 period of zero.
The increase in net cash used in investing activities for the 2008 period,
reflect our investment in auction rate securities of $750,000 offset by
maturities of investments of $350,000 and proceeds of $7,000 from the sale of a
fixed asset.
 
 Net cash
provided by financing activities for the six months ended June 30, 2008 was
$6,230,062 as compared to the 2007 period of $77,374. The increase in net cash
provided by financing activities for the 2008 consisted of proceeds from the
sale of our common stock of $4,882,679, repayment of an outstanding loan from
our former Chairman and CEO of $1,116,558 and proceeds received from stock
option exercises of $230,825. Net cash provided by financing activities in the
2007 period was from proceeds received from stock option exercises.
 
 Discontinued
Operations
 
 Net cash
used in operating activities from discontinued operations for the six months
ended June 30, 2008 was zero as compared to $321,037 in the comparable period of
2007.
 
 Item
3: Quantitative and Qualitative Disclosures About Market
Risk.
 
 Pursuant
to Item 305(c) of Regulation S-K, the information under this Item 3 is not
required to be disclosed until after the first fiscal year end in which Item 305
is applicable.  Item 305 will be first applicable to the Company in
its annual report for the fiscal year ended December 31, 2008.
 
 Item
4. Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 The
Company, under the supervision and with the participation of Thomas L. Wegman,
the Company’s President, Principal Executive Officer and Principal Financial
Officer, evaluated the effectiveness of its disclosure controls and procedures
as of the end of the period covered by this Report. Based on that evaluation,
management has concluded that the Company’s disclosure controls and procedures
are effective to ensure that information required to be disclosed in reports
filed under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and that such information is
accumulated and communicated to the Company’s management to allow timely
decisions regarding required disclosure. Because of the inherent limitations in
all control systems, any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily is required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and procedures.
Furthermore, our controls and procedures can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control, and misstatements due to error or fraud may occur and
not be detected on a timely basis.
 
 Changes
in Internal Controls
 
 There
were no changes in our internal controls over financial reporting during the six
month period ended June 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
  21
 Table of Contents
  PART
II:   OTHER INFORMATION
 
 Item
1. Legal Proceedings
 
 None.
 
 Item
1A. Risk Factors
 
 Please
see Item 1A, “Risk Factors,” included in our Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2007 filed with the SEC on May 2,
2008.
 
 Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
 
 On May
30, 2008, the Company closed on the sale of 100,000 shares of its common stock
in a private placement offering to a private investment fund at a purchase price
of $13.00 per share, for aggregate proceeds to the Company of
$1,300,000.00.  On June 9, 2008, the Company closed on another sale of
100,000 shares of its common stock in a private placement offering to various
private investment funds at a purchase price of $15.00 per share, for aggregate
proceeds to the Company of $1,500,000.00.  The shares in both
transactions were offered and sold in reliance on Seciton 4(2) of the Act as
private placements of securities exempt from the registration requirements of
the Act.  The shares in both transactions were sold to financially
sophisticated investors who had access to the sort of information which
registration under the Act would disclose.  Additionally, no
commissions were paid and no general solicitation was made to any person or
entity in connection with the sale of the shares.
 
 Item
3. Defaults Upon Senior Securities
 
 None.
 
 Item
4. Submission of Matters to a Vote of Security
Holders
 
 None.
 
 Item
5. Other Information
 
 None.
 
 Item
6. Exhibits
 
 3.1
              Articles
      of Incorporation of the Registrant (incorporated by reference to Exhibit
      3.1 to the Registrant's Annual Report on Form 10-KSB for the fiscal years
      ended December 31, 2005, 2004 and
2003).
 3.2
              Bylaws
      of the Registrant (incorporated by reference to Exhibit 3.2 to the
      Registrant’s Annual Report on Form 10-KSB for the fiscal years ended
      December 31, 2005, 2004 and 2003).
 31*
              Certification of Principal Executive Officer and
      Principal Financial Officer pursuant
      toRule13a-14(a)/15d-14(a).*
 32*
              Certification of Principal Executive Officer and
      Principal Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act
      of 2002.*
 _____________
 * filed herewith
  22
 Table of Contents
 
 SIGNATURES
 
 Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly
authorized.
 
 
 BIOSPECIFICS
      TECHNOLOGIES CORP.
                  (Registrant)
 
 Date:  August
      11, 2008
              /s/
      Thomas L. Wegman
                
                Thomas
      L. Wegman
                President
                (Principal
      Executive and Financial Officer)