The accompanying notes are an integral part
of these 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.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(1)
|
Description of Business
|
Enzon Pharmaceuticals,
Inc. (together with its subsidiaries, “Enzon” or the “Company,” “we” or “us”),
manages its sources of royalty revenues from existing licensing arrangements with other companies primarily related to sales of
certain drug products that utilize Enzon’s proprietary technology.
Prior to 2017, the
primary source of the Company’s royalty revenues was derived from 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. In
the first quarter of 2020, net royalties from PegIntron were $1,752. In the first quarter of 2019, net royalties from PegIntron
were negative $51,000, due to returns and rebates exceeding the amount of royalties earned.
At December 31, 2019,
as asserted by Merck, the Company had a liability to Merck of approximately $324,000, due primarily to product returns and rebates.
With the net royalties earned in the first quarter of 2020, this amount decreased to approximately $322,000 at March 31, 2020.
See Note 12 to the Condensed Consolidated Financial Statements.
In April 2013, the
Company announced that it intended to distribute excess cash, expected to arise from ongoing royalty revenues, in the form of periodic
dividends to stockholders. (See Note 7 to the Condensed Consolidated Financial Statements) On February 4, 2016, the Company’s
Board adopted a Plan of Liquidation and Dissolution (the “Plan of Liquidation and Dissolution”), the implementation
of which has been postponed. (See Note 11 to the Condensed Consolidated Financial Statements)
On
January 30, 2019, the Company entered into a letter agreement with Servier, a wholly owned indirect subsidiary of Les Laboratoires
Servier, in connection with the asset purchase agreement dated as of November 9, 2009 (the “Asset Purchase Agreement”),
by and between Klee Pharmaceuticals, Inc., Defiante Farmacêutica, S.A. (“Defiante”) and Sigma-Tau, on the one
hand, and the Company, on the other hand. Under the letter agreement, Servier, as successor-in-interest to Defiante, confirmed
its obligation to pay the Company a $7.0 million milestone payment related to SC Oncaspar as a result of the FDA’s December
20, 2018 approval of calaspargase pegol – mknl (brand name ASPARLAS™) as a component of a multi-agent chemotherapeutic
regimen for the treatment of acute lymphoblastic leukemia in pediatric and young adult patients age 1 month to 21 years. In addition,
under the letter agreement, the Company agreed to waive Servier’s obligations to pursue the development of SC Oncaspar in
Europe and the approval of SC Oncaspar by the European Medicines Agency (“EMEA”) under the Asset Purchase Agreement,
provided that the Company did not waive Servier’s obligation to make any applicable milestone payment to the Company upon
EMEA approval, if any, of SC Oncaspar. Servier was required to make the $7.0 million milestone payment to the Company within three
business days following the parties’ completion of procedures for claiming benefits under the double tax treaty between the
United States and the United Kingdom. That amount was recorded by the Company as a current receivable at March 31, 2019. The Company
received the $7.0 million payment in July 2019.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The
Company has a marketing agreement with Micromet AG (“Micromet”), now part of Amgen, Inc. (the “Micromet Marketing
Agreement”), that was entered into in 2004 under which Micromet is the exclusive marketer of the parties’ combined
intellectual property portfolio in the field of single-chain antibody technology. Under the Micromet Marketing Agreement,
the parties agreed to share, on an equal basis, in any licensing fees, milestone payments and royalty revenue received by Micromet
in connection with any licenses of the patents within the portfolio by Micromet to any third party during the term of the collaboration.
To the Company’s knowledge, Micromet has a license agreement with Viventia Biotech (Barbados) Inc. (“Viventia”),
now part of Sesen Bio, Inc. (“Sesen”), that was entered into in 2005, under which Micromet granted Viventia nonexclusive
rights, with certain sublicense rights, for know-how and patents allowing exploitation of certain single chain antibody products,
which patents cover some key aspects of Vicinium, one of Sesen’s drug candidates that is in Phase 3 clinical trials being
evaluated for the treatment of patients with non-muscle invasive bladder cancer and in Phase 1 and 2 clinical trials for the treatment
of head and neck cancer. To the Company’s knowledge, under the terms of this license agreement between Micromet and Viventia,
Micromet is entitled to receive (i) certain milestone payments with respect to the filing of a new drug application for Vicinium
with the FDA or the filing of a marketing approval application for Vicinium with the EMEA; (ii) certain milestone payments with
respect to the first commercial sale of Vicinium in the U.S. or Europe and (iii) certain royalties on net sales for ten years from
the first commercial sale of Vicinium on a country by country basis. Pursuant to the Micromet Marketing Agreement, the Company
would be entitled to a 50% share of these milestone payments and royalties received by Micromet. 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 Sesen may devote to its 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 the Micromet Marketing Agreement. The Company will not recognize revenue until all
revenue recognition requirements are met.
The Company maintains
its principal executive offices at 20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016 through a lease agreement for space
and services with Regus Management Group, LLC (“Regus”) and also has an office facility at 3556 Main Street, Manchester,
VT, 05225 pursuant to an office rental agreement with Equinox Junior, LLC (“Equinox”). See Note 10 to the Condensed
Consolidated Financial Statements.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(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 (the “SEC”). 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, 2019.
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 accounting principles generally accepted in the United States of America 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, relevant current information and various other assumptions that are believed to be reasonable under the
circumstances, actual results could differ from these estimates.
Revenue Recognition
Royalty revenues from
the Company’s agreements with third parties are recognized when the Company can reasonably determine the amounts earned.
In most cases, this will be upon notification from the third-party licensee, which is typically during the quarter following the
quarter in which the sales occurred. The Company does not participate in the selling or marketing of products for which it receives
royalties. No provision for uncollectible accounts is established upon recognition of revenues.
Contingent payments
due under the asset purchase agreement for the sale of the Company’s former specialty pharmaceutical business are recognized
as revenue when the milestone has been achieved and collection is assured, such payments are non-refundable and no further effort
is required on the part of the Company or the other party to complete the earning process.
Income Taxes
Income taxes are accounted
for under the asset and liability method. 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 realized. The effect of
a change in tax rates or laws on deferred tax assets and liabilities is recognized in operations in the period that includes the
enactment date of the rate change. A valuation allowance is established to reduce the deferred tax assets to the amounts that are
more likely than not to be realized from operations.
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.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(3)
|
Recent Accounting Pronouncements
|
Recent Accounting Standards Updates
(“ASUs”) issued by the Financial Accounting Standards Board (“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 Condensed Consolidated Financial Statements.
(4)
|
Financial Instruments and Fair Value
|
The carrying values
of cash, other current assets, accounts payable, accrued expenses and other current liabilities in the Company’s condensed
consolidated balance sheets approximated their fair values at March 31, 2020 and December 31, 2019 due to their short-term nature.
(5)
|
Supplemental Cash Flow Information
|
The Company made income
tax payments of $0 and $2,000 during the three months ended March 31, 2020 and 2019, respectively. There were no interest payments
made during the three months ended March 31, 2020 or 2019.
(6)
|
Loss Per Common Share
|
Basic loss per common
share is computed by dividing the net income by the weighted average number of shares of common stock outstanding during the period.
Restricted stock awards and restricted stock units (collectively, nonvested shares) are not considered to be outstanding shares
until the service or performance vesting period has been completed.
For purposes of calculating
diluted earnings per common share, the denominator normally 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. Because a
loss was incurred in each of the quarters ended March 31, 2019 and 2020, common stock equivalents would be anti-dilutive and, accordingly,
were excluded from the calculation of diluted loss per share in each of the periods. 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). During each of the three-month periods ended March 31, 2020 and 2019, there were no common stock equivalents. Loss
per common share information is as follows (in thousands, except per share amounts) for the three months ended March 31, 2020 and
2019:
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Loss Per Common Share – Basic and Diluted:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(242
|
)
|
|
$
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
At March 31, 2020 and
2019, there were 41,787 potentially dilutive securities outstanding that have been excluded from the calculation of dilutive weighted
average shares outstanding, as they would be anti-dilutive.
On January 30, 2019, the Board of Directors
of the Company declared a special cash dividend of $0.06 per share of the Company’s common stock, aggregating approximately
$2,653,000, which was paid on March 21, 2019 to stockholders of record as of the close of business on February 21, 2019.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Stock Options and Restricted Stock Units
(RSUs or Nonvested Shares)
During the quarter
ended March 31, 2020 no options were granted and the Company incurred no stock-based compensation expense. No RSUs were outstanding
as of March 31, 2020.
There were no options
granted during the three months ended March 31, 2019 and no nonvested shares granted or outstanding during the three months ended
March 31, 2019. The Company uses historical data to estimate forfeiture rates.
Activity related to
stock options and nonvested shares during the three months ended March 31, 2020 and related balances outstanding as of that date
are reflected below:
|
|
Stock
|
|
|
|
Options
|
|
Outstanding at January 1, 2020
|
|
|
41,787
|
|
Granted
|
|
|
-
|
|
Exercised and vested
|
|
|
-
|
|
Expired and forfeited
|
|
|
-
|
|
Outstanding at March 31, 2020
|
|
|
41,787
|
|
|
|
|
|
|
Options vested and expected to vest at March 31, 2020
|
|
|
41,787
|
|
|
|
|
|
|
Options exercisable at March 31, 2020
|
|
|
41,787
|
|
During each of the
three-month periods ended March 31, 2020 and 2019, the Company recorded approximately $2,000 and $2,000, respectively, of income
tax expense for NJ state income tax.
The Company continues
to provide a valuation allowance against all of its deferred tax assets, as the Company believes it is more likely than not that
its 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 when appropriate.
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.
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among its numerous changes to the
Internal Revenue Code, the Act allowed companies with existing alternative minimum tax credit (“MTC”)
carryforwards as of December 31, 2017 to receive refunds of the credits in tax years after 2017 and before 2022 in an amount
equal to 50% (100% in 2021) of the excess MTC over the amount of the credit allowable for the year against regular tax
liability. As a result of the Act’s provision allowing for the refund of MTC, the Company had recorded $485,000
as a long-term receivable and $485,000 as a current receivable as of December 31, 2019. As a result of provision in the
Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) that was signed into law on March 27, 2020,
the Company was able to reclassify the remaining long-term receivable of $485,000 as a current receivable as of March 31,
2020.
The
CARES Act also provides for an indefinite carryforward period and 5 year carryback period for net operating losses generated
after 2017 but before 2021 and removes the annual utilization limit of 80% of taxable income and allows the net operating losses
to offset 100% of taxable income during this period. Net operating losses generated prior to 2018 continue to be carried forward
for 20 years and have no 80% limitation on utilization.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(10)
|
Commitments and Contingent Liabilities
|
In December 2019, an outbreak
of a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. On March 11, 2020, the World Health
Organization characterized the global spread of COVID-19 as a pandemic. In an effort to slow the spread of the virus, the
United States and many other countries around the world imposed restrictions on non-essential work activities, travel and
mass gatherings. It is not known when and the extent to which these restrictions will be eased or the ultimate impact these
unprecedented actions will have on the Company’s financial condition and prospects. At the present time, the
Company’s business activities have been largely unaffected by COVID 19 restrictions as the Company’s workforce is
comprised solely of independent contractors who are able to perform their duties remotely. However, these restrictions may
impact the third parties who are responsible for obtaining final approval of and manufacturing product candidates for which
we share the right to receive licensing fees, milestone payments and royalty revenues. If those third parties are required to
curtail their business activities for a significant time, or if global supply chain disruptions impact their
ability to procure needed resources, raw materials or components, the Company’s right to receive licensing fees,
milestone payments or royalties could be materially and adversely affected. Additionally, the development timeline for
product candidates being developed by third parties that are pending FDA approval could be delayed if the agency is required
to shift resources to the review and approval of candidates for treatment of COVID 19.
Effective March 1,
2018, the Company renewed its office service agreement with Regus Management Group, LLC (“Regus”) for its principal
executive offices at 20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016. This agreement was renewed until February 28, 2019,
for a monthly fee of $1,259. In June 2018, the Company and Regus agreed to end the lease on August 31, 2018, and replace it with
an updated office service agreement. Effective September 1, 2018, the Company entered into an office service agreement with Regus
for mailbox plus, telephone answering, and virtual office services. Under the agreement, in exchange for the services provided
by Regus, the Company was required to pay Regus an initial service retainer of $259 and thereafter pay Regus a monthly fee of $259
until August 31, 2019. The term of this agreement was extended until August 31, 2020 at a monthly fee of $259.
Effective July 1, 2018,
the Company entered into an office rental agreement with Equinox Junior LLC (“Equinox”) for use of office space at
3556 Main Street, Manchester, VT, 05225. Under this agreement, in exchange for the Company’s right to use the office space
at this location, the Company was required to pay Equinox a monthly fee of $708 until June 30, 2019. The term of this agreement
was extended until June 30, 2020 at a monthly fee of $729. The Company has notified Equinox that it will not be renewing the office
rental agreement.
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.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(11)
|
Plan of Liquidation and Dissolution
|
On February 4, 2016,
the Company’s 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, the Company’s Board of Directors 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. After further consideration, the Company’s
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 the Company’s
Board of Directors.
From time to time,
the Company’s Board of Directors reviews the Company’s status and prospects in deciding on the timing of dissolution
and liquidation of the Company pursuant to the Plan of Liquidation and Dissolution. If the Company’s Board of Directors determines
to seek stockholder approval of such plan and such plan is approved by the Company’s stockholders and implemented by the
Company, it is expected that the Company’s corporate existence will continue for the purpose of winding up its business and
affairs for at least three years. The Company has forecasted minimal or no royalty or milestone revenues for the foreseeable
future. In light of the uncertainty as to whether any of the milestones under the Micromet Marketing Agreement would be achieved,
this forecast assumes that the Company would not receive any milestone or royalty payments under the Micromet Marketing Agreement.
As of December 31,
2019, according to Merck, the Company had a net liability to Merck (net of a 25% royalty interest that the Company had previously
sold) aggregating approximately $324,000. This was based on Merck’s assertions regarding the net result of overpayments,
rebates and returns related to prior periods sales of PegIntron. Merck expected to recoup such overpayments through reductions
of future royalties earned by the Company.
In the first quarter
of 2020, as reported by Merck, net royalties from PegIntron were approximately $2,000. As such, as asserted by Merck, the Company’s
liability to Merck was approximately $322,000 at March 31, 2020. The Company believes that it will receive no more royalties from
Merck, but may be charged with additional chargebacks from returns and rebates in amounts that, based on current estimates, are
not expected to be material.