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.
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. In 2017, the primary source of the Company’s royalty
revenues was the revenue received from Nektar Therapeutics, Inc. (“Nektar”) pursuant to the execution of a Second Amendment
(“Nektar Second Amendment”) to the Company’s Cross-License and Option Agreement (the “Nektar License Agreement”)
with Nektar, which generated non-recurring royalty revenues of $7 million (see below). The receipt of this $7 million satisfied
all future obligations of royalty payments pursuant to the Nektar License Agreement.
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”). Prior to 2013, the Company was dedicated to the research and development of innovative therapeutics
for patients with high unmet medical needs. 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 5% of the Company’s
total royalty revenues for the three months ended June 30, 2018 and 2017, respectively, and 80% and 11% of the Company’s
total royalty revenues for the six-month periods ended June 30, 2018 and 2017, respectively. In March 2018, Merck notified the
Company that a downward adjustment of approximately $313,000 in royalties was necessary, resulting, primarily, from product returns.
Accordingly, at December 31, 2017, the Company accrued a liability to Merck of approximately $313,000 and partially offset that
amount by the $88,000 that was due to the Company from Merck. Thus, the Company recorded a net payable to Merck of approximately
$225,000 at December 31, 2017. In January 2018, Merck paid the $88,000 to the Company, which increased the liability to $313,000.
During the second quarter, Enzon earned approximately $60,000 of royalties, which reduced the royalty payable to Merck to $253,000
(See Note 11 Royalty Revenues and Accounts Payable.)
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. 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 10 Plan of Liquidation and Dissolution.)
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.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 was to be paid on January 6, 2018. Accordingly, the Company
recorded revenue of $7.0 million and a receivable of $3.5 million in the second quarter of 2017. The $3.5 million receivable
was paid in full in December 2017.
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. 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, 2017.
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.
Revenues
In accordance with
Financial Accounting Standards Board (“
FASB”)
Accounting
Standards Update (“ASU”) No. 2014-09 (Topic 606), 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. (See Note 3.)
Contingent payments
due under the asset purchase agreement for the sale of the Company’s former specialty pharmaceutical business are recognized
as income 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.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(3)
|
New Accounting Pronouncements
|
In May 2014,
the
FASB issued
ASU No. 2014-09
(Topic 606), “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, was effective January 1, 2018.
The
adoption of this update did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the
FASB issued
ASU No. 2016-02
(Topic 842), “Leases,” which is intended to improve financial reporting around leasing transactions. This ASU
affects all companies and other organizations that engage in leasing transactions (both lessee and lessor) that lease assets such
as real estate and manufacturing equipment. This ASU will require organizations that lease assets – referred to as “leases”
– to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU
2016-02 is effective for fiscal years and interim periods within those years beginning January 1, 2019. On January 5, 2018, the
FASB issued an exposure draft amending certain aspects of the new leasing standard. The proposed amendments include a provision
to allow entities to elect not to restate comparable periods in the period of adoption when transitioning to the new standard and
instead permit a modified retrospective approach. The Company believes that the new standard will not have a material effect on
its
consolidated 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 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, 2018 and December 31, 2017 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, 2018 or 2017.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(6)
|
Earnings Per Common Share
|
Basic earnings 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.
The diluted earnings
per share calculation would normally involve adjusting both the denominator and numerator as described here if the effect is dilutive.
The denominator would include both the weighted average number of shares of common stock outstanding and common stock equivalents.
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.
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). Earnings per common share information is as follows (in thousands, except per share amounts)
for the three months and six months ended June 30, 2018 and 2017:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(Loss) Earnings Per Common Share – Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(206
|
)
|
|
$
|
4,185
|
|
|
$
|
(513
|
)
|
|
$
|
4,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income per
share
|
|
$
|
(0.01
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings Per Common Share – Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(206
|
)
|
|
$
|
4,185
|
|
|
$
|
(513
|
)
|
|
$
|
4,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
Weighted-average incremental shares related to vesting of nonvested shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted-average common shares outstanding and common share equivalents
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income per
share
|
|
$
|
(0.01
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
As of June 30, 2018
and 2017, options for 41,787 and 41,787 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.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
(7)
|
Stock-Based Compensation
|
Stock Options and Restricted Stock Units
(RSUs or Nonvested Shares)
During the six months
ended June 30, 2018, no options were granted and the Company incurred no stock-based compensation expense. No RSUs were outstanding
as of June 30, 2018.
There were no options
granted during the six months ended June 30, 2017 and no nonvested shares granted or outstanding during the six months ended June
30, 2017. The Company uses historical data to estimate forfeiture rates.
Activity related to
stock options and nonvested shares during the six months ended June 30, 2018 and related balances outstanding as of that date are
reflected below (in thousands):
|
|
Stock
|
|
|
|
Options
|
|
Outstanding at January 1, 2018
|
|
|
41,787
|
|
Granted
|
|
|
-
|
|
Exercised and vested
|
|
|
-
|
|
Expired and forfeited
|
|
|
-
|
|
Outstanding at June 30, 2018
|
|
|
41,787
|
|
|
|
|
|
|
Options vested at June 30, 2018
|
|
|
41,787
|
|
|
|
|
|
|
Options exercisable at June 30, 2018
|
|
|
41,787
|
|
During the six months
ended June 30, 2018, the Company recorded approximately $1,000 of income tax expense for New Jersey state income tax.
During the six months
ended June 30, 2017, the Company incurred tax expense of approximately $2.7 million of which approximately $2.3 million was incurred
during the second quarter of 2017. The recorded tax expense included $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 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 reduced the U.S. federal corporate tax rate from 35% to 21% for years beginning after December 31, 2017.
In addition, the Act repealed the corporate alternative minimum tax (“AMT”) for years beginning after December 31,
2017 and allows 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. The Act also provides for an indefinite
carryforward period for net operating losses
generated after 2017 and limits annual utilization to 80% of taxable income.
Net operating losses generated prior to 2018 continue to be carried forward for 20 years and have no 80% limitation on utilization.
Our accounting is complete as of December 31, 2017 as related to the remeasurement of deferred taxes to the new tax rate of
21%, repeal of the AMT, receipt of MTC refunds and limitation of net operating losses generated after 2017 to 80% of taxable income.
No provisional amounts were recorded as a result.
As a result of the
Act’s provision allowing for the refund of MTC beginning with tax year 2018, the Company has recorded MTC as a long-term
receivable of approximately $1.9 million.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(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 two one-year extensions, 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. The Company entered into an office service agreement with Regus for mailbox plus, telephone
answering, and virtual office services effective September 1, 2018. 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.
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 is required to pay Equinox a security deposit of $708 and thereafter pay Equinox a monthly fee of
$708 until June 30, 2019.
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
(10)
|
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.
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, at least, through the year 2021, consistent with the expiration of the Company’s existing license
arrangements that generate its royalty revenues. The Company has forecasted little or no royalty revenues for the years 2018 through
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, potential
returns and rebates 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
|
During the fourth quarter
of 2017, Merck corrected an error in their previous adjustment of royalties, noting that they owed the Company an additional net
amount of approximately $88,000 and the Company recorded a receivable of that amount. In March 2018, Merck notified the Company
that a downward adjustment of approximately $313,000 in royalties was necessary, primarily due to returns from sales in China in
the fourth quarter of 2017. Accordingly, in December 2017, the Company accrued a liability to Merck of approximately $313,000 and
partially offset that amount by the $88,000 that was due to the Company from Merck. Thus, the Company recorded a net payable to
Merck of approximately $225,000 at December 31, 2017.
In January 2018, Merck
paid the net $88,000 that was due to the Company from the royalties adjustment it had made. Because this amount was included in
March 2018 when Merck calculated and notified the Company of the $313,000 returns adjustment, the $88,000 received in January was
recorded as an additional liability due back to Merck. Therefore, at March 31, 2018 the aggregate amount due to Merck was approximately
$313,000.
During the three month
period ended June 30, 2018, Merck calculated and notified the Company that Enzon earned $61,000 of royalties, which reduced the
aggregate amount due to Merck to approximately $253,000.