The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
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 (“Nektar Second Amendment”) to the Company’s Cross-License and Option Agreement (the
“Nektar License Agreement”) with
Nektar Therapeutics, Inc. (“Nektar”), which
generated non-recurring royalty revenues of $7 million in the nine months ended
September
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 100% and 61% of the Company’s total royalty revenues for the
three months ended September 30, 2017 and 2016, respectively, and approximately 13% and 70% of the Company’s total royalty
revenue in the nine-month periods ended September 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 $0
and $564,000 for the three and nine-month periods ending September 30, 2017, respectively, 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 believed that Shire anticipated filing a Biologics License Application (“BLA”) for SC Oncaspar
with the FDA in the third quarter of 2017. As of September 30, 2017, there has been no public announcement by Shire of any
such filing. If filed and 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 assured.
On June 26, 2017, the
Company entered into the Nektar Second Amendment, wherein Nektar agreed to buy-out all remaining payment obligations to the Company
under the Nektar License Agreement. In consideration for fully paid-up licenses under the Nektar License 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 Nektar License Agreement, the
first $3.5 million of which was paid within one business day of the effective date of the Nektar Second Amendment and the remaining
$3.5 million will be paid within one business day of January 5, 2018. Accordingly, the Company recorded revenue of $7.0 million
and a receivable of $3.5 million in the second quarter of 2017.
(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 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” relating to revenue recognition.
This new standard provides for a single five-step model to be applied to all revenue contracts with customers as well as requires
additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue
and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative
effect adjustment approach to implement the standard. This ASU, as amended, is effective for fiscal years and interim periods
within those years beginning after December 15, 2017.
The
Company is currently assessing the impact of this update, but preliminarily believes that its adoption will not have a material
impact on the Company’s consolidated financial statements.
The Company does
not expect the adoption of other recently issued accounting pronouncements to have a significant impact on the
Company’s results of operations, financial position or cash flow.
(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 September 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 nine months ended September 30, 2017.
There were estimated
federal income tax payments of $135,000 and estimated New Jersey income tax payments of $1,500 made during the nine months ended
September 30, 2016. The $135,000 represented an over estimate of taxes due in the third quarter of 2016, such amount was recorded
as a receivable, included in other current assets, and subsequently collected.
On August 10,
2017, the Company’s Board of Directors declared a special cash dividend of $0.15 per share of the Company’s common
stock.
This dividend, aggregating approximately $6.6 million, was paid on September 26, 2017.
(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
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income Per Common Share – Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
153
|
|
|
$
|
936
|
|
|
$
|
4,983
|
|
|
$
|
3,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
44,215
|
|
|
|
44,214
|
|
|
|
44,215
|
|
|
|
44,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
As of September 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 and/or there was a net loss for the three-month period ended September
30, 2017.
(7)
Stock-Based Compensation
Stock Options and Restricted Stock Units
(RSUs or Nonvested Shares)
During the nine months
ended September 30, 2017 and 2016, no options were granted and the Company incurred no stock-based compensation expense. No RSUs
were outstanding as of September 30, 2017.
Activity related to
stock options and nonvested shares during the nine months ended September 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 September 30, 2017
|
|
|
42
|
|
|
|
|
|
|
Options vested and expected to vest at September 30, 2017
|
|
|
42
|
|
|
|
|
|
|
Options exercisable at September 30, 2017
|
|
|
42
|
|
(8)
Income Taxes
The
Company incurred tax expense of approximately $2.4 million for the nine months ended September 30, 2017 of which
approximately $0.3 million in income tax benefit was incurred during the third quarter of 2017. The effective tax rate for
the three-month period ended September 30, 2017 was 183% compared to 41.7% for the corresponding period in the prior year.
The change in the rate is attributable to a pre-tax book loss for the quarter as well as changes in projected income for the
year. 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 39.1% for the year.
After reducing its deferred tax assets
by approximately $2.2 million during nine months ended September 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 nine months
ended September 30, 2016, the Company recorded $2.5 million of income tax expense for U.S. federal income tax, substantially all
of which related to a reduction of the Company’s net deferred tax assets. Of this amount, approximately, $674,000 was recorded
in the third 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, unless extended by certain license events occurring. The Company’s future royalty revenues
are forecasted to aggregate approximately $11 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.
In the third quarter
of 2017, Merck again notified the Company that, based on rebates and returns of PegIntron products, they had deducted approximately
$150,000 from aggregate royalties that were otherwise due to Enzon. This resulted in a net amount due to Enzon of $150,000, which
was applied by Merck to the $363,000 liability to Merck. As a result, the Company recorded the $213,000 remaining to be recouped
by Merck as a liability to Merck in accounts payable at September 30, 2017.