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 100% of the Company’s total royalty
revenues for the three months ended September 30, 2017 and approximately 80% (exclusive of downward revenue adjustment of approximately
$280,000 in the third quarter of 2018) and 13% (before adjustment for Merck’s recoupment of previously overpaid royalties
of approximately $564,000) of the Company’s total royalty revenues for the nine-month periods ended September 30, 2018 and
2017, respectively. The effects of such adjustments were recorded as decreases of royalty revenues as discussed in Note 11 to
the Condensed Consolidated Financial Statements.
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 included in accounts payable in the condensed consolidated
balance sheet 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 of 2018, Enzon earned approximately $60,000 of royalties, which reduced the royalty
payable to Merck to $253,000. In the third quarter of 2018, Merck notified the Company of an additional downward adjustment
of approximately $280,000, the net effect of royalty income of $54,000 and chargebacks of $334,000. Such chargebacks
resulted, primarily, from product rebates and returns. Accordingly, the liability to Merck was $533,000 at September 30,
2018, as discussed in Note 11 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. 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 to the Condensed Consolidated
Financial Statements.)
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 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, whether such third party licensees will contest their obligations to make milestone
or royalty payments 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.
Except
for these potential milestone payments, the Company anticipates little or no future revenue.
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 (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, 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 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, 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, in as much as its lease commitments are not material, the new standard
will not have a material effect on its
consolidated financial statements.
In August 2018, the SEC issued the final
rule on Disclosures About Changes in Stockholders’ Equity For filings on Form 10-Q, which extends to interim periods the
annual requirement in SEC Regulation S-X, Rule 3-04,2 to disclose (1) changes in stockholders’ equity and (2) the amount
of dividends per share for each class of shares (as opposed to common stock only, as previously required). Pursuant to the final
rule, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for “the current
and comparative year-to-date [interim] periods, with subtotals for each interim period,” i.e., a reconciliation covering
each period for which an income statement is presented. Rule 3-04 permits the disclosure of changes in stockholders’ equity
(including dividend-per-share amounts) to be made either in a separate financial statement or in the notes to the financial statements.
Th
e final rule is effective
for all filings made on or after November 5, 2018. The staff of the SEC has indicated it would not object if the filer’s
first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after
the effective date of the amendments. Therefore, the Company expects to conform to this rule in its Form 10-Q for the quarter
ending Marc
h 31, 2019. Inasmuch as the Company has paid no dividends nor had any stock-related transactions
during the nine months ended September 30, 2018 and its only change in stockholders’ equity during that period was its net
income (loss), the Company believes that the final rule will not have a material effect on its consolidated financial statements
and disclosures.
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 September 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 nine months ended September 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 nine months ended September 30, 2018 and 2017:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(Loss) Earnings Per Common Share – Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(520
|
)
|
|
$
|
153
|
|
|
$
|
(1,033
|
)
|
|
$
|
4,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.11
|
|
As of September 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. Additionally, as of September 30, 2018 and 2017, there were no dilutive
common stock equivalents that would have affected diluted (loss) earnings per share.
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 nine months
ended September 30, 2018, no options were granted and the Company incurred no stock-based compensation expense. No RSUs were outstanding
as of September 30, 2018.
There were no options
granted during the nine months ended September 30, 2017 and no nonvested shares granted or outstanding during the nine months ended
September 30, 2017. The Company uses historical data to estimate forfeiture rates.
Activity related to
stock options and nonvested shares during the nine months ended September 30, 2018 and related balances outstanding as of that
date are reflected below:
|
|
Stock
|
|
|
|
Options
|
|
Outstanding at January 1, 2018
|
|
|
41,787
|
|
Granted
|
|
|
-
|
|
Exercised and vested
|
|
|
-
|
|
Expired and forfeited
|
|
|
-
|
|
Outstanding at September 30, 2018
|
|
|
41,787
|
|
|
|
|
|
|
Options vested at September 30, 2018
|
|
|
41,787
|
|
|
|
|
|
|
Options exercisable at September 30, 2018
|
|
|
41,787
|
|
During the nine months
ended September 30, 2018, the Company recorded approximately $2,000 of income tax expense for New Jersey state income tax of which
$1,000 was recorded in the three-month period ended September 30, 2018.
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,
2018 was 0.1% as compared to 183% for the three-month period ended September 30, 2017. The change in rate is attributable to changes
in estimates of projected income 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.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 credits (“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.
(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 were 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 included in accounts payable in the condensed
consolidated balance sheet 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.
During the three-month
period ended September 30, 2018, Merck calculated and notified the Company that Merck had an additional downward adjustment of
approximately $280,000, the net effect of royalty income of $54,000 and chargebacks of $334,000. Such chargebacks, of which returns
from Iraq represented approximately $254,000, resulted, primarily, from product rebates and returns. After accounting for this
downward adjustment, the liability to Merck was increased to $533,000 at September 30, 2018.
While it is likely
there will be future downward adjustments from Merck based on product returns and rebates, the Company is unable to predict the
timing and amounts of any such adjustments.