Item 1. Financial Statements.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per
share amounts)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
11,206
|
|
|
$
|
7,639
|
|
Other receivable
|
|
|
3,500
|
|
|
|
-
|
|
Other current assets
|
|
|
127
|
|
|
|
270
|
|
Total current assets
|
|
|
14,833
|
|
|
|
7,909
|
|
Deferred tax assets, net
|
|
|
815
|
|
|
|
3,362
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,648
|
|
|
$
|
11,271
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
363
|
|
|
$
|
770
|
|
Accrued expenses and other current liabilities
|
|
|
124
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
487
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock - $0.01 par value, authorized 3,000,000 shares; no shares issued and outstanding at June 30, 2017 and December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.01 par value, authorized 170,000,000 shares; issued and outstanding 44,214,603 shares at June 30, 2017 and December 31, 2016
|
|
|
441
|
|
|
|
441
|
|
Additional paid-in capital
|
|
|
90,282
|
|
|
|
90,282
|
|
Accumulated deficit
|
|
|
(75,562
|
)
|
|
|
(80,392
|
)
|
Total stockholders’ equity
|
|
|
15,161
|
|
|
|
10,331
|
|
Total liabilities and stockholders’ equity
|
|
$
|
15,648
|
|
|
$
|
11,271
|
|
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(In thousands, except per share amounts)
(Unaudited)
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
6,775
|
|
|
$
|
2,272
|
|
|
$
|
8,215
|
|
|
$
|
5,496
|
|
Miscellaneous income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42
|
|
Total revenues
|
|
|
6,775
|
|
|
|
2,272
|
|
|
|
8,215
|
|
|
|
5,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
337
|
|
|
|
436
|
|
|
|
686
|
|
|
|
1,157
|
|
Total operating expenses
|
|
|
337
|
|
|
|
436
|
|
|
|
686
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income and income before income tax expense
|
|
|
6,438
|
|
|
|
1,836
|
|
|
|
7,529
|
|
|
|
4,381
|
|
Income tax expense
|
|
|
2,253
|
|
|
|
801
|
|
|
|
2,699
|
|
|
|
1,829
|
|
Net income
|
|
$
|
4,185
|
|
|
$
|
1,035
|
|
|
$
|
4,830
|
|
|
$
|
2,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
0.06
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares – basic
|
|
|
44,215
|
|
|
|
44,120
|
|
|
|
44,215
|
|
|
|
44,167
|
|
Weighted-average shares – diluted
|
|
|
44,215
|
|
|
|
44,120
|
|
|
|
44,215
|
|
|
|
44,167
|
|
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
(Unaudited)
|
|
Six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,830
|
|
|
$
|
2,552
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Deferred tax provision
|
|
|
2,547
|
|
|
|
1,829
|
|
Changes in operating assets and liabilities
|
|
|
(3,810
|
)
|
|
|
(4,822
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
3,567
|
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
3,567
|
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
7,639
|
|
|
|
11,672
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
11,206
|
|
|
$
|
11,231
|
|
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(1) Description of Business
Enzon
Pharmaceuticals, Inc. (together with its subsidiaries, “Enzon” or the “Company”) receives
royalty revenues from existing licensing arrangements with other companies primarily related to sales of four marketed drug
products, namely, PegIntron ®, Sylatron ®, Macugen ® and CIMZIA ®. The primary source of the Company’s
royalty revenues in 2017 is the entrance into a Second Amendment (“Second Amendment”) to the Company’s
Cross-License and Option Agreement (the “Agreement”) with
Nektar Therapeutics, Inc.
(“Nektar”), which generated non-recurring royalty revenues of $7 million in the six months ended June 30, 2017
(see below).
Previously,
the
primary source of the Company’s royalty revenues was sales of PegIntron, which is marketed by Merck &
Co., Inc. (“Merck”). The Company currently has no clinical operations and limited corporate operations.
The
Company
has no intention of resuming any clinical development activities or acquiring new sources of royalty
revenues. Royalty revenues from sales of PegIntron accounted for approximately 5% and 72% of the Company’s total
royalty revenues for the three months ended June 30, 2017 and 2016, respectively, and approximately 11% and 73% of the
Company’s total royalty revenue in the six month periods ended June 30, 2017 and 2016, respectively, before adjustment
for Merck’s recoupment of previously overpaid royalties. The effects of such recoupments were recorded as decreases of
royalty revenues aggregating $564,000 for each of the three and six month periods ending June 30, 2017, as discussed in Note
11.
The Company was previously
dedicated to the research and development of innovative therapeutics for patients with high unmet medical needs. Beginning in
December 2012, the Company’s Board of Directors (the “Board”), with outside consultants, began a review of the
possible sale or disposition of one or more corporate assets or a sale of the Company. At that time, the Company suspended substantially
all clinical development activities with a goal of conserving capital and maximizing value returned to the Company’s stockholders.
By April 2013, the review did not result in a definitive offer to acquire the Company or all or substantially all of the
Company’s assets. At the same time, the Company announced that its Board intended to distribute excess cash, expected
to arise from ongoing royalty revenues, in the form of periodic dividends to stockholders. On
February 4, 2016, the Company’s Board adopted a Plan of Liquidation and Dissolution, the implementation of
which has been postponed. (See Note 10.)
Under the Company’s
existing agreements with certain third party licensees, the Company may be entitled to (i) potential future milestone payments
contingent upon the achievement of certain milestones with respect to several other drug products in various stages of clinical
and preclinical development and (ii) potential future royalty payments related to any future sales of these drug products.
Due to the challenges associated with developing and obtaining approval for drug products, there is substantial uncertainty whether
any of these milestones will be achieved. The Company also has no control over the time, resources and effort that these
third party licensees may devote to their programs and limited access to information regarding or resulting from such programs.
Accordingly, there can be no assurance that the Company will receive any of the milestone or royalty payments under these agreements.
As
part of the Company’s sale of its former specialty pharmaceutical business that was completed in January 2010,
the Company may be entitled to certain potential future milestone payments contingent upon the achievement of certain
regulatory approval-related milestones with respect to Oncaspar from Shire plc (“Shire”), which assumed the
milestone payment obligations when it acquired the Oncaspar product portfolio from Sigma-Tau Finanziaria S.p.A. in July 2015.
Based on Shire’s May 2, 2017 investor presentation, the Company understands that Shire anticipates filing a Biologics
License Application (“BLA”) for SC Oncaspar with the FDA in the third quarter of 2017. If FDA approval
is obtained for SC Oncaspar, under its agreement, the Company would be entitled to a milestone payment of $7.0 million.
There can be no assurance that Shire will file a BLA for SC Oncaspar with the FDA or that the FDA will approve the BLA,
if filed. Accordingly, there can be no assurance that the Company will receive any of the milestone payments related to
SC Oncaspar or any other such milestone payments resulting from its agreements with any of the Company’s other third
party licensees.
The Company will not recognize revenue
until notification from Shire or
any of the Company’s other third party licensees
that the conditions necessitating payment of the milestone were satisfied and collection of the milestone payment
is reasonably as
sured.
On June 26, 2017,
the Company entered into the Second Amendment with Nektar, wherein Nektar agreed to buy-out all remaining payment obligations
to the Company under the Agreement. In consideration for fully paid-up licenses under the Agreement and for the dismissal with
prejudice of all claims and counterclaims asserted in the litigation with Nektar, Nektar agreed to pay the Company the sum of
$7.0 million, which satisfies all future obligations of royalty payments pursuant to the Agreement, the first $3.5 million of
which was paid within one business day of the effective date of the Second Amendment and the remaining $3.5 million of which will
be paid within one business day of January 5, 2018. Accordingly, the Company recorded revenue of $7.0 million and an other receivable
of $3.5 million in the second quarter of 2017. The Agreement also resulted in the dismissal with prejudice of all claims and counterclaims
in the litigation with Nektar.
(2) Basis of Presentation
Interim Financial Statements
The accompanying unaudited
condensed consolidated financial statements have been prepared from the books and records of the Company in accordance with United
States generally accepted accounting principles (U.S. GAAP) for interim financial information and Rule 10-01 of Regulation S-X
promulgated by the U.S. Securities and Exchange Commission. Accordingly, these financial statements do not include all of the
information and footnotes required for complete annual financial statements. Interim results are not necessarily indicative of
the results that may be expected for the full year. Interim condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2016.
Principles of Consolidation
The condensed consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated as part of the consolidation.
Use of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These
estimates include legal and contractual contingencies and income taxes. Although management bases its estimates on historical
experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could
differ from these estimates.
Revenues
Royalties under the
Company’s license agreements with third-parties and pursuant to the sale of its former specialty pharmaceutical business
are recognized when reasonably determinable and earned through the sale of the product by the third-party and collection is reasonably
assured. Notification from the third-party licensee of the royalties earned under the license agreement is the basis for royalty
revenue recognition. This information generally is received from the licensees in the quarter subsequent to the period in which
the sales occur.
(3) New Accounting Pronouncements
In
May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2017-09
Compensation – Stock Compensation (Topic 718): Scope of Modification
Accounting.
This update provides clarity, reduces the diversity in practice, and the cost and complexity when applying
the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. The new standard is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017,
although early adoption is permitted. The Company does not believe that the updated standard will have a material effect on
its financial statements.
Other recent
ASU's issued by the FASB and guidance issued by the Securities and Exchange Commission did not, or are not believed by management
to, have a material effect on the Company’s present or future consolidated financial statements.
(4) Financial Instruments and Fair Value
The carrying values
of cash, other receivables, other current assets, accounts payable, accrued expenses and other current liabilities in the Company’s
condensed consolidated balance sheets approximated their fair values at June 30, 2017 and December 31, 2016 due to their short-term
nature.
(5) Supplemental Cash Flow Information
There were no income
tax or interest payments made during the six months ended June 30, 2017.
There were estimated
federal income tax payments of $135,000 and estimated New Jersey income tax payments of $1,000 made during the six months ended
June 30, 2016. The $135,000 represented an over estimate of taxes due. In the second quarter of 2016, such amount was recorded
as a receivable, included in other current assets, and subsequently collected.
(6) Income Per Common Share
Basic earnings per
common share is computed by dividing the income available to common stockholders by the weighted-average number of shares of common
stock outstanding during the period. Restricted stock units (nonvested shares) are not considered to be outstanding shares until
the vesting criteria (service and/or performance) have been satisfied.
For purposes of
calculating diluted earnings per common share, the denominator includes both the weighted-average number of shares of common
stock outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive.
Dilutive common stock equivalents potentially include stock options and nonvested shares using the treasury stock method and
shares issuable under the employee stock purchase plan (ESPP). There were no common stock equivalents during any of the
periods presented. Income per common share information is as follows (in thousands, except per share amounts):
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income Per Common Share – Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,185
|
|
|
$
|
1,035
|
|
|
$
|
4,830
|
|
|
$
|
2,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
44,215
|
|
|
|
44,120
|
|
|
|
44,215
|
|
|
|
44,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share
|
|
$
|
0.09
|
|
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
0.06
|
|
As of June 30, 2017
and 2016, options for 41,787 and 218,719 shares, respectively, were outstanding that have been excluded from the calculation of
diluted weighted average shares outstanding, as they would be anti-dilutive since the respective options’ strike price was
greater than the current market price of the shares.
(7) Stock-Based Compensation
Stock Options and Restricted Stock
Units (RSUs or Nonvested Shares)
During the six months
ended June 30, 2017, no options were granted and the Company incurred no stock-based compensation expense. No RSUs were outstanding
as of June 30, 2017.
During the six months
ended June 30, 2016, the Company incurred no stock-based compensation expense. Shares were withheld to pay approximately $6,000
of taxes on behalf of employees because restricted stock units (RSUs) vested during the period, which had no effect on additional
paid-in capital.
Activity related to
stock options and nonvested shares during the six months ended June 30, 2017 and related balances outstanding as of that date
are reflected below (in thousands):
|
|
Stock
|
|
|
|
Options
|
|
Outstanding at January 1, 2017
|
|
|
219
|
|
Granted
|
|
|
-
|
|
Exercised and vested
|
|
|
-
|
|
Expired and forfeited
|
|
|
177
|
|
Outstanding at June 30, 2017
|
|
|
42
|
|
|
|
|
|
|
Options vested and expected to vest at June 30, 2017
|
|
|
42
|
|
|
|
|
|
|
Options exercisable at June 30, 2017
|
|
|
42
|
|
(8) Income Taxes
The Company
incurred tax expense of approximately $2.7 million for the first half of 2017 of which approximately $2.3 million was
incurred during the second quarter of 2017. The effective tax rate for the three-month period ended June 30, 2017 was 35%
compared to 41.7% for the corresponding period in the prior year. The reduction in the rate is attributable to changes in
projected income for the year. In addition, the Company recorded tax expense of $1.4 million as a discrete item
for the three-month period ended June 30, 2017 for the tax effect of projected income reduction in future years. The
Company expects to continue to utilize the deferred tax asset through the remainder of 2017, resulting in an
expected effective tax rate of approximately 30% for the year.
After reducing
its deferred tax assets by approximately $2.5 million during six months ended June 30, 2017, the Company continues to
provide a valuation allowance against all of its deferred tax assets except for NOLs expected to be utilized in the 2018 and
2019 tax years as the Company believes it is more likely than not that these remaining deferred tax assets will not be
realized. Management of the Company will continue to assess the need for this valuation allowance and will make adjustments
to it when appropriate.
During the
six months ended June 30, 2016, the Company recorded approximately $1.8 million of income tax expense for U.S. federal and
New Jersey state income tax, substantially all of which related to a reduction of the Company’s net deferred tax
assets. Of this amount, approximately, $801,000, was recorded in the second quarter of 2016.
Tax benefits
of uncertain tax positions are recognized only if it is more likely than not that the Company will be able to sustain a position
taken on an income tax return. The Company has no liability for uncertain tax positions. Interest and penalties, if any, related
to unrecognized tax benefits, would be recognized as income tax expense.
(9) Commitments and Contingent Liabilities
Commencing on March
1, 2016, the Company changed the location of its principal executive offices to 20 Commerce Drive, Suite 135, Cranford, New Jersey,
07016. The Company entered into an office service agreement with Regus Management Group, LLC (“Regus”) for use of
office space at this location effective March 1, 2016. Under the agreement, in exchange for the Company’s right to use the
office space at this location, the Company was required to pay Regus an initial service retainer of $2,418 and thereafter pay
Regus a monthly fee of $1,209 until February 28, 2017. This agreement was renewed for another year, until February 28, 2018, for
a monthly fee of $1,229.
The Company has been
involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company’s consolidated financial position, results of
operations, or liquidity.
(10)
Plan of Liquidation and Dissolution
On February 4, 2016,
the Company’s Board adopted a Plan of Liquidation and Dissolution (the “Plan of Liquidation and Dissolution”),
pursuant to which the Company would, subject to obtaining requisite stockholder approval, be liquidated and dissolved in accordance
with Sections 280 and 281 (a) of the General Corporation Law of the State of Delaware. In approving the Plan of Liquidation and
Dissolution, the Company’s Board had considered, among other factors, the ability of the Company to obtain
no-action relief from the SEC to suspend certain of the Company’s reporting obligations under the Securities Exchange Act
of 1934, as amended, and the anticipated cost savings if such relief is granted by the SEC. Upon further review, the Company concluded
that the SEC was unlikely to grant such relief to the Company in 2016. Accordingly, after further consideration, the Company’s
Board determined that it would be fair, advisable and in the best interests of the Company and its stockholders to
postpone seeking stockholder approval of the Plan of Liquidation and Dissolution until a later time to be determined by the Company’s
Board.
If dissolution and
liquidation of the Company pursuant to the Plan of Liquidation and Dissolution are approved by the Company’s stockholders
and implemented by management, it is expected that the Company’s corporate existence will continue for the purpose of winding
up its business and affairs through the year 2021, consistent with the expiration of the Company’s existing license arrangements
that generate its royalty revenues. The Company’s future royalty revenues are forecasted to aggregate approximately $13
million from the beginning of 2017 through the end of 2021. This forecast is based upon a variety of estimates and numerous assumptions
made by the Company’s management with respect to, among other matters, forecasted sales of the drug products for which the
Company has the right to receive royalties and other matters, many of which are difficult to predict, are subject to significant
uncertainties, and are beyond the Company’s control. As a result, there can be no assurance that the estimates and assumptions
upon which this forecast is based will prove accurate, that the projected results will be realized or that actual results will
not be substantially higher or lower than forecasted.
(11)
Royalty Revenues and Accounts Payable
In March 2017, Merck notified the Company
that, during the second and third quarters of 2016, it had made an overpayment to Enzon of approximately $770,000 in royalties
(net of a 25% royalty interest that the Company had previously sold). This was due to a previous misunderstanding regarding the
date on which the Company’s right to receive royalties from U. S. sales of PegIntron expired, which Merck then advised had
occurred in February 2016. Merck notified the Company that it intended to recover such overpayment from the Company by reducing
future royalties to which the Company would otherwise be entitled from Merck until the full amount of the overpayment had been
recouped. Accordingly, in the December 31, 2016 financial statements, the Company reduced its previously recorded revenues by the
net $770,000 overpayment and recorded a corresponding liability to Merck in accounts payable.
During the three-month period ending March
31, 2017, Merck reported net royalties earned by the Company aggregated approximately $636,000 and withheld that amount as a partial
recoupment of its overpayment. That left a balance due to Merck of approximately $134,000 at March 31, 2017.
During the second quarter of 2017, Merck
reported net royalties earned by the Company of approximately $335,000. From this amount, Merck would have withheld approximately
$134,000, as the balance of the recoupment of the previously reported overpayment. This would have left approximately $201,000
as due to the Company.
However, in the second
quarter of 2017, Merck notified the Company that they discovered additional overpayments to the Company resulting from the inaccuracy
as to the date on which the Company’s right to receive royalties from various countries’ sales of PegIntron expired.
Such net overpayment to Enzon aggregated approximately $563,000 in royalties during 2015 and 2016. Merck notified the Company
that it intended to recover such overpayment from the Company by reducing future royalties to which the Company would otherwise
be entitled from Merck until the full amount of the overpayment had been recouped. Accordingly, in the June 30, 2017 financial
statements, the Company reduced its previously recorded revenues by the net $563,000 overpayment. Merck withheld the $201,000
of the royalties otherwise due for the second quarter of 2017 as a partial recoupment. As a result, the Company recorded the $363,000
remaining to be recouped by Merck as a liability to Merck in accounts payable at June 30, 2017.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context
requires otherwise, references in this Quarterly Report on Form 10-Q to “Enzon,” the “Company,” “we,”
“us,” or “our” and similar terms mean Enzon Pharmaceuticals, Inc. and its subsidiaries.
Overview
We
receive royalty revenues from existing licensing arrangements with other companies primarily related to sales of four
marketed drug products, namely, PegIntron
®
, Sylatron
®
, Macugen
®
and CIMZIA
®
.
The primary source of our royalty revenues in 2017 is the non-recurring $7.0 million of royalties resulting from our
entrance into a Second Amendment (the “Second Amendment”) to the Company’s Cross-License and Option
Agreement (the “Agreement”) with
Nektar Therapeutics, Inc. (“Nektar”).
(See below.) Previously, the
primary source of our royalty revenues was sales of PegIntron, which is marketed by Merck
& Co., Inc. (“Merck”). We currently have no clinical operations and limited corporate operations.
We
have
no intention of resuming any clinical development activities or acquiring new sources of royalty revenues.
Royalty revenues from sales of PegIntron accounted for approximately 5% and 72% of our total royalty revenues for the three
months ended June 30, 2017 and 2016, respectively, and approximately 11% and 73% of our total royalty revenue in the six month
periods ended June 30, 2017 and 2016, respectively, before adjustment for Merck’s recoupment of previously overpaid
royalties. The effects of such recoupments were recorded as decreases of royalty revenues aggregating $564,000 for each of
the three and six month periods ending June 30, 2017, respectively, as discussed in Note 11 to the Condensed Consolidated
Financial Statements.
We
were previously dedicated to the research and development of innovative therapeutics for patients with high unmet
medical needs. In December 2012, we announced that our Board of Directors with outside consultants began a review of the
possible sale or disposition of one or more corporate assets or a sale of our company. At that time, we
substantially suspended all clinical development activities with a goal of conserving capital and maximizing value returned
to our stockholders. In April 2013, we announced that we had concluded a review of the sale or disposition of one or more
corporate assets or a sale of our company. The review did not result in a definitive offer to acquire our company or all or
substantially all of our assets. In the same announcement, we also announced that our Board of Directors intended to
distribute excess cash, expected to arise from ongoing royalty revenues, in the form of periodic dividends to
stockholders.
In June 2015, we delivered
notice to Nektar Therapeutics, Inc. (“Nektar”) asserting a breach of our Cross-License and Option Agreement with Nektar
for Nektar’s failure to pay a post-patent expiration immunity fee that we believe became payable under such agreement. Nektar
had disputed our claim to an immunity fee. On August 14, 2015, we filed a summons and complaint against Nektar in the Supreme
Court of the State of New York for breach of contract (the “Nektar Litigation”).
On June 26, 2017, we entered into a Second
Amendment to the Company’s Cross-License and Option Agreement (the “Agreement”) with Nektar ,wherein Nektar
agreed to buy-out all remaining payment obligations to us under the Agreement, and in connection therewith, Nektar and we also
agreed to settle the Nektar Litigation. In consideration for fully paid-up licenses under the Agreement and for the dismissal
with prejudice of all claims and counterclaims asserted in the Nektar Litigation, Nektar agreed to pay us the sum of $7.0 million,
which satisfies all future obligations of royalty payments pursuant to the Agreement, the first $3.5 million of which was paid
within one business day of the effective date of Agreement and the remaining $3.5 million of which will be paid within one business
day of January 5, 2018.
Under our existing agreements
with certain third party licensees, we may be entitled to (i) potential future milestone payments contingent upon the achievement
of certain milestones with respect to several drug products in various stages of clinical and preclinical development and (ii)
potential future royalty payments related to any future sales of these drug products. Due to the challenges associated with
developing and obtaining approval for drug products, there is substantial uncertainty whether any of these milestones will be
achieved. We also have no control over the time, resources and effort that these third party licensees may devote to their
programs and limited access to information regarding or resulting from such programs. Accordingly, there can be no
assurance that the Company will receive any of the milestone or royalty payments under these agreements.
As
part Enzon’s sale of its former specialty pharmaceutical business that was completed in January 2010, we may be
entitled to certain potential future milestone payments contingent upon the achievement of certain regulatory
approval-related milestones with respect to Oncaspar from Shire plc (“Shire”), which assumed the milestone
payment obligations when it acquired the Oncaspar product portfolio from Sigma-Tau Finanziaria S.p.A. in July 2015. Based on
Shire’s May 2, 2017 investor presentation, we understand that Shire anticipates filing a Biologics License Application
(“BLA”) for SC Oncaspar with the FDA in the third quarter of 2017. If FDA approval is obtained for SC
Oncaspar, under our agreement, we would be entitled to a milestone payment of $7.0 million. There can be no assurance that
Shire will file a BLA for SC Oncaspar with the FDA or that the FDA will approve the BLA, if filed. Accordingly, there
can be no assurance that we will receive any of the milestone payments related to SC Oncaspar or any other such milestone
payments resulting from our agreements with any of Enzon’s other third party licensees.
We
will not recognize revenue until notification from Shire or
any of our other third party
licensees
that the conditions necessitating payment of the milestone were satisfied and collection of the milestone
payment is reasonably as
sured.
Commencing
on March 1, 2016, we changed the location of our principal executive offices to 20 Commerce Drive, Suite 135, Cranford, New Jersey,
07016. We entered into an office service agreement with Regus Management Group, LLC (“Regus”) for use of office space
at this location effective March 1, 2016. Under the agreement, in exchange for our right to use the office space at this location,
the Company was required to pay Regus an initial service retainer of $2,418 and thereafter pay Regus a monthly fee of $1,209 until
February 28, 2017. This agreement was renewed for another year, until February 28, 2018, for a monthly fee of $1,229.
We wound down our
remaining research and development activities during 2013. We have no intention of resuming any clinical development activities
or acquiring new sources of royalty revenues.
Plan of Dissolution
On February 4, 2016,
our Board of Directors adopted a Plan of Liquidation and Dissolution (the “Plan of Liquidation and Dissolution”),
pursuant to which the Company would, subject to obtaining requisite stockholder approval, be liquidated and dissolved in accordance
with Sections 280 and 281(a) of the General Corporation Law of the State of Delaware. In approving the Plan of Liquidation and
Dissolution, our Board of Directors had considered, among other factors, the ability of the Company to obtain no-action relief
from the Securities and Exchange Commission (the “SEC”) to suspend certain of the Company’s reporting obligations
under the Securities Exchange Act of 1934, as amended, and the anticipated cost savings if such relief is granted by the SEC.
Upon further review, we concluded that the SEC was unlikely to grant such relief to the Company in 2016. Accordingly,
after further consideration, our Board of Directors determined that it would be fair, advisable and in the best interests of the
Company and its stockholders to postpone seeking stockholder approval of the Plan of Liquidation and Dissolution until a later
time to be determined by our Board of Directors.
If dissolution
and liquidation of the Company pursuant to the Plan of Liquidation and Dissolution are approved by our stockholders and
implemented by us, we expect the Company’s corporate existence to continue for the purpose of winding up its business
and affairs through the year 2021, consistent with the expiration of our existing license arrangements that generate our
royalty revenues. Our future royalty revenues are forecasted to aggregate approximately $13 million from the beginning of
2017 through the end of 2021. This forecast is based upon a variety of estimates and numerous assumptions made by our
management with respect to, among other matters, forecasted sales of the drug products for which we have the right
to receive royalties and other matters, many of which are difficult to predict, are subject to significant uncertainties, and
are beyond our control. As a result, there can be no assurance that the estimates and assumptions upon which
this forecast is based will prove accurate, that the projected results will be realized or that actual results will not be
substantially higher or lower than forecasted.
Throughout this Management’s
Discussion and Analysis, the primary focus is on our results of operations, cash flows and financial condition. The percentage
changes throughout the following discussion are based on amounts stated in thousands of dollars and not the rounded millions of
dollars reflected in this section.
Results of Operations
Revenues:
Royalties
(in millions
of dollars):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
%
Change
|
|
|
2016
|
|
|
2017
|
|
|
%
Change
|
|
|
2016
|
|
Royalty revenue
|
|
$
|
7.4
|
|
|
|
222
|
%
|
|
$
|
2.3
|
|
|
$
|
8.8
|
|
|
|
60
|
%
|
|
$
|
5.5
|
|
Less: Recoupment by Merck
|
|
|
(0.6
|
)
|
|
|
N/A
|
|
|
|
-
|
|
|
|
(0.6
|
)
|
|
|
N/A
|
|
|
|
-
|
|
|
|
$
|
6.8
|
|
|
|
196
|
%
|
|
$
|
2.3
|
|
|
$
|
8.2
|
|
|
|
49
|
%
|
|
$
|
5.5
|
|
Royalty
revenues related to the Second Amendment of our agreement with Nektar aggregated $7.0 million in the second quarter of 2017.
Royalty revenues from sales of PegIntron were negative in the first and second quarters of 2017 due to the recoupment by
Merck of previously overpaid royalties and accounted for approximately 2% and 72% (before recoupment) of our total royalty
revenues for the three months ended June 30, 2017 and 2016, respectively, and 9% and 73% (before recoupment) of our total
royalty revenues for the six-month periods ended June 30, 2017 and 2016, respectively. Aside from the negative effects of
the recoupments, royalty revenues from Merck have been declining sharply. There are multiple oral drug therapies, both
available and in development, that have been effective for treatment of hepatitis C that do not require interferon. As a
result, it is likely that sales of PegIntron-related products will continue their declining trend.
The following table
summarizes our PegIntron royalties earned (in millions of dollars):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Dollar
|
|
|
Percent
|
|
|
June 30,
|
|
|
Dollar
|
|
|
Percent
|
|
PEGINTRON royalties from:
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
US sales
|
|
$
|
(0.03
|
)
|
|
$
|
0.26
|
|
|
$
|
(0.29
|
)
|
|
|
(111
|
)%
|
|
$
|
(0.03
|
)
|
|
$
|
0.58
|
|
|
$
|
(0.61
|
)
|
|
|
(105
|
)%
|
Foreign sales - Europe
|
|
|
0.16
|
|
|
|
0.39
|
|
|
|
(0.23
|
)
|
|
|
(59
|
)%
|
|
|
0.42
|
|
|
|
0.91
|
|
|
|
(0.49
|
)
|
|
|
(54
|
)%
|
Foreign sales - Japan
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.00
|
|
|
|
0
|
%
|
|
|
(0.05
|
)
|
|
|
0.03
|
|
|
|
(0.08
|
)
|
|
|
(266
|
)%
|
Foreign sales - Other
|
|
|
0.19
|
|
|
|
0.97
|
|
|
|
(0.78
|
)
|
|
|
(80
|
)%
|
|
|
0.63
|
|
|
|
2.47
|
|
|
|
(1.84
|
)
|
|
|
(75
|
)%
|
Total
|
|
|
0.33
|
|
|
|
1.63
|
|
|
|
(1.30
|
)
|
|
|
(130
|
)%
|
|
|
0.97
|
|
|
|
3.99
|
|
|
|
(3.02
|
)
|
|
|
(76
|
)%
|
Less: Recoupment by Merck
|
|
|
(0.56
|
)
|
|
|
-
|
|
|
|
(0.56
|
)
|
|
|
|
|
|
|
(0.56
|
)
|
|
|
-
|
|
|
|
(0.56
|
)
|
|
|
|
|
|
|
$
|
(0.23
|
)
|
|
$
|
1.63
|
|
|
$
|
(1.86
|
)
|
|
|
|
|
|
$
|
0.41
|
|
|
$
|
3.99
|
|
|
$
|
(3.58
|
)
|
|
|
|
|
Our future revenues
are heavily weighted towards royalties and revenues to be received from the use of our technology and are dependent upon numerous
factors outside of our control. We derive a significant portion of our royalty revenues from sales of PegIntron, which have been
in decline since 2008. Merck’s obligation to pay us royalties on sales of PegIntron terminates, on a country-by-country
basis, upon the later of the date on which the last patent to contain a claim covering PegIntron expires in the country or 15
years after the date on which PegIntron was first approved for commercial marketing in such country. Our rights to receive royalties
from sales of PegIntron expired in the U.S. in 2016 and are expected to expire in Europe in 2018 and in Japan in 2021.
Other factors potentially
affecting our royalty revenues include new or increased competition from products that may compete with the products for which
we receive royalties, the effectiveness of marketing by our licensees, and new uses and geographies for PegIntron, CIMZIA and
Macugen. After the expiration of the patents and royalties, we are entitled to immunity fees on a country-by-country and product-by-product
basis for up to twelve years from the date of first sale of these drugs.
On June 26, 2017, we entered into a Second
Amendment to our Cross-License and Option Agreement with Nektar wherein Nektar agreed to buy-out all remaining payment obligations
to us under the Cross-License and Option Agreement, and in connection therewith, Nektar and we also agreed to settle prior litigation
in which we had alleged a breach of contract for Nektar’s failure to pay a post-patent expiration immunity fee that we believe
became payable under the Cross-License and Option Agreement. In consideration for fully paid-up licenses under the Cross-License
and Option Agreement and for the dismissal with prejudice of all claims and counterclaims asserted in the litigation, Nektar agreed
to pay us the sum of $7.0 million, which satisfies all future obligations of royalty payments pursuant to the Cross-License and
Option Agreement, the first $3.5 million of which was paid within one business day of the effective date of the Second Amendment
and the remaining $3.5 million of which will be paid within one business day of January 5, 2018. Accordingly, the Company recorded
revenue of $7.0 million and an account receivable of $3.5 million in the second quarter of 2017.
Miscellaneous Income
There was no miscellaneous
income for the three-month and six-month periods ended June 30, 2017.
Miscellaneous income
was approximately $42,000 in the six months ended June 30, 2016, all of which was earned during the first quarter of 2016 and
related, primarily, to sublease income.
Operating Expenses:
General and Administrative
(in millions of dollars):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
%
Change
|
|
|
2016
|
|
|
2017
|
|
|
%
Change
|
|
|
2016
|
|
General and administrative
|
|
$
|
0.34
|
|
|
|
(23
|
)%
|
|
$
|
0.44
|
|
|
$
|
.69
|
|
|
|
(41
|
)%
|
|
$
|
1.16
|
|
General and administrative
expenses in the three months ended June 30, 2017 declined by approximately $100,000, or 23%, to $340,000 from $440,000 for the
second quarter of 2016. The decrease in expense is substantially attributable to the decrease in rent expense, utility costs and
general insurance expense in connection with our lease termination as well as a decrease in professional fees, primarily legal
and accounting fees, incurred in 2016 in connection with the Plan of Liquidation and Dissolution that was adopted in February
2016.
General and administrative
expenses in the six months ended June 30, 2017 decreased by approximately $470,000, or 41%, to $690,000 from $1.16 million for
the first six months of 2016. The decrease in expense is substantially attributable to the decrease in rent expense, utility costs
and general insurance expense in connection with our lease termination as well as a decrease in professional fees, primarily legal
and accounting fees, incurred in 2016 in connection with the Plan of Liquidation and Dissolution that was adopted in February
2016.
Tax Expense:
We incurred a tax
expense of approximately $2.7 million in the first half of 2017, of which approximately $2.3 million was incurred during the second
quarter of 2017. The effective tax rate for the six months ended June 30, 2017 was 36%, compared with 41.7% for the corresponding
period in the prior year. The reduction in the effective tax rate is attributable to changes in projected income for the current
year, in particular, for the effect of the $7 million in revenues related to the Second Amendment with Nektar. In addition, we
recorded tax expense of $1.4 million as a discrete item for the three months ended June 30, 2017 for the tax effect of a decrease
in the beginning of the year projection of income expected to be available in future years.
Liquidity and Capital Resources
Our current
sources of liquidity are our (i) cash on hand and (ii) anticipated royalty revenues from third-party sales of marketed drug
products that utilize our proprietary technology, including the $3.5 million due from Nektar. While we no longer have any research and development activities, we continue to retain
rights to receive royalties from existing licensing arrangements with other companies. We believe that our cash on hand,
collection of the $3.5 million receivable from Nektar and anticipated royalty revenues, will be sufficient to fund our operations, at least, through June 30, 2018.
However, our future royalty revenues are expected to decrease sharply over the next several years and there can be no
assurance that we will receive amounts of royalty revenues as anticipated.
In January 2010, we
sold our former specialty pharmaceutical business to Klee Pharmaceuticals Inc. (later known as Sigma-Tau PharmaSource, Inc.),
Defiante Farmacêutica, S.A and SigmaTtau Finanziaria S.p.A. (collectively, the Sigma-Tau Group). The sale agreement provided
for certain potential future payments due to Enzon contingent upon the achievement of certain regulatory approval-related milestones.
As a result of a
series of corporate transactions, the obligations contained in the sale agreement with the Sigma-Tau Group were assumed by
Shire plc (“Shire”). Shire has disclosed that it intends to file a Biologics License Application
(“BLA”) for SC Oncaspar with the FDA in the third quarter of 2017. Approval by the FDA would trigger a $7.0
million milestone for approval of SC Oncaspar. There can be no assurance that Shire will file a BLA or, if filed the FDA
would approve such BLA. The Company would recognize revenue only upon notification from Shire that the conditions
necessitating payment of the milestone were achieved and that payment was reasonably assured.
Cash was $11.2 million
as of June 30, 2017, as compared to $7.6 million as of December 31, 2016. The increase of approximately $3.6 million was attributable
to the net cash from our operating activities, particularly the $3.5 million received from Nektar.
Off-Balance Sheet Arrangements
As part of our ongoing
business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established
for the purpose of facilitating off-balance sheet arrangements or other contractually limited purposes. As of June 30, 2017, we
were not involved in any SPE transactions.
Critical Accounting Policies and Estimates
A critical accounting
policy is one that is both important to the portrayal of a company’s financial condition and results of operations and requires
management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.
Our consolidated
financial statements are presented in accordance with accounting principles that are generally accepted in the United States
(“U.S. GAAP”). All applicable U.S. GAAP accounting standards effective as of June 30, 2017 have been taken
into consideration in preparing the consolidated financial statements. The preparation of the consolidated financial
statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from
those estimates. The following accounting policies and estimates have been highlighted as significant because changes to
certain judgments and assumptions inherent in these policies could affect our consolidated financial statements.
We base our estimates,
to the extent possible, on historical experience. Historical information is modified as appropriate based on current business
factors and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of
assets and liabilities. We evaluate our estimates on an ongoing basis and make changes when necessary. Actual results could differ
from our estimates.
Revenues
Royalties under our
license agreements with third-parties and pursuant to the sale of our former specialty pharmaceutical business are recognized
when reasonably determinable and earned through the sale of the product by the third-party and collection is reasonably assured.
Notification from the third-party licensee of the royalties earned under the license agreement is the basis for royalty revenue
recognition. This information generally is received from the licensees in the quarter subsequent to the period in which the sales
occur.
Income Taxes
Under the asset and
liability method of accounting for income taxes, deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. A valuation allowance on deferred tax assets is provided for when it is more likely than not some portion or all of
the deferred tax assets will not be realized. As of June 30, 2017, we believe, based on our projections, that it is more likely
than not that, except for $4.0 million of net operating losses, our deferred tax assets, including the remaining net operating
losses from operating activities and stock option exercises, will not be realized. We recognize the benefit of an uncertain tax
position that we have taken or expect to take on the income tax returns we file if it is more likely than not we will be able
to sustain our position.
Forward-Looking Information and Factors That May Affect
Future Results
This Quarterly Report
on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995. All statements contained in the Quarterly Report on Form 10-Q, other than statements that are purely historical,
are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as
the words “believes,” “expects,” “may,” “will,” “should,” “potential,”
“anticipates,” “plans” or “intends” or the negative thereof, or other variations thereof,
or comparable terminology, or by discussions of strategy. Forward-looking statements are based upon management’s present
expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future and are subject
to known and unknown risks and uncertainties that could cause actual results, events or developments to be materially different
from those indicated in such forward-looking statements, including, but not limited to, the following risks and uncertainties:
|
·
|
The
proposed dissolution and liquidation of the Company may not be completed in a timely manner or at all.
|
|
·
|
The
amount we distribute to our shareholders as liquidating distributions, if any, pursuant to the Plan of Liquidation and
Dissolution may be substantially less than estimated.
|
|
·
|
We
derive a significant portion of our royalty revenues from continued sales of PegIntron, which have been in decline since 2008,
and if sales of PegIntron continue to decline or sales of other drug products for which we receive royalty revenues materially
decline, our results of operations and financial position could be materially harmed
.
|
|
·
|
We
may not be able to sustain profitability and we may incur losses over the next several years.
|
|
·
|
Our
rights to receive royalties on sales of PegIntron and sales of other drug products will eventually expire and we currently
do not intend on acquiring new sources of royalty revenues.
|
|
·
|
We
may not realize our deferred income tax assets.
|
|
·
|
We
have reallocated certain employment responsibilities and outsourced certain corporate functions, which make us more dependent
on third-parties to perform these corporate functions.
|
|
·
|
We
may be subject to a variety of types of product liability or other claims based on allegations that the use of our product
candidates by participants in our previously conducted clinical trials has resulted in adverse effects, and our insurance
may not cover all product liability or other claims.
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Our
revenues depend on patents and proprietary rights, which may offer only limited protection against potential infringement
and the development of competing products.
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We
are party to license agreements whereby we may receive royalties from products subject to regulatory approval.
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The
price of our common stock has been, and may continue to be, volatile.
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Our
common stock is quoted on the OTCQX market of the OTC Markets Group, Inc., which has a very limited trading market and, therefore,
market liquidity for our common stock is low and our stockholders’ ability to sell their shares of our common stock
may be limited.
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If
we experience an "ownership change," as defined in
Section 382 of the Internal Revenue Code of 1986, as amended,
our ability to fully utilize our net operating loss carryforwards (“NOLs”) on an annual basis will be substantially
limited, and the timing of the usage of the NOLs could be substantially delayed, which could therefore significantly impair
the value of those benefits.
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The
declaration of dividends is within the discretion of our Board of Directors, subject to any applicable limitations under Delaware
corporate law. Our ability to pay dividends in the future depends on, among other things, our future royalty revenues, which
are expected to decrease sharply over the next several years, as well as our ability to manage expenses, including costs relating
to our ongoing operations.
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Anti-takeover
provisions in our charter documents and under Delaware corporate law may make it more difficult to acquire us, even though
such acquisitions may be beneficial to our stockholders.
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The
issuance of preferred stock may adversely affect rights of our common stockholders.
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A more detailed discussion
of these risks and uncertainties and other factors that could affect results is contained in our filings with the U.S. Securities
and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2016, as updated in “Item
1A. Risk Factors” of our subsequent quarterly report on Form 10-Q. These risks and uncertainties and other factors should
be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. As such, no
assurance can be given that the future results covered by the forward-looking statements will be achieved. All information in
this Quarterly Report on Form 10-Q is as of the date of this report, unless otherwise indicated, and we undertake no duty to update
this information.