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.
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 and second quarters of 2020, net royalties from PegIntron were $1,752 and $7,928, respectively. In the first quarter
of 2019, net royalties from PegIntron were approximately negative $51,000, due to returns and rebates exceeding the amount of royalties
earned and in the second quarter of 2019, the Company earned approximately $142,000 in net royalties from Merck.
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 half of 2020, this amount decreased to approximately $314,000 at June 30,
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 June 30, 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 Vicineum, one of Sesen’s drug candidates. 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 Vicineum with the FDA or the filing of a marketing approval application
for Vicineum with the EMEA; (ii) certain milestone payments with respect to the first commercial sale of Vicineum in the U.S.
or Europe and (iii) certain royalties on net sales for ten years from the first commercial sale of Vicineum 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 had an office facility at 3556 Main Street,
Manchester, VT, 05225 pursuant to an office rental agreement with Equinox Junior, LLC (“Equinox”). The Company did
not renew the office rental agreement with Equinox, which expired at June 30, 2020. See Note 10.
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, 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 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.
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 June 30, 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 six months ended June 30, 2020 and 2019, respectively. There were no interest payments
made during the six months ended June 30, 2020 or 2019.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(6)
|
Loss 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.
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 three and six-month periods ended June 30, 2020 and 2019, 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 six-month periods ended June 30, 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 and six months ended June 30, 2020 and 2019:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Loss Per Common Share – Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(236
|
)
|
|
$
|
(21
|
)
|
|
$
|
(478
|
)
|
|
$
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
For the six-month periods
ended June 30, 2020 and 2019 and the three-month periods ended June 30, 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. There were no dividends declared or paid in the three or six months ended June 30, 2020.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(8)
|
Stock-Based Compensation
|
Stock Options and Restricted Stock Units
(RSUs or Nonvested Shares)
During the six months
ended June 30, 2020, no options were granted, and the Company incurred no stock-based compensation expense. No RSUs were outstanding
as of June 30, 2020.
There were no options
granted during the six months ended June 30, 2019 and no nonvested shares granted or outstanding during the six months ended
June 30, 2019. The Company uses historical data to estimate forfeiture rates.
Activity related to
stock options and nonvested shares during the six months ended June 30, 2020 and related balances outstanding as of that date
are reflected below (in thousands):
|
|
Stock
|
|
|
|
Options
|
|
Outstanding at January 1, 2020
|
|
|
41,787
|
|
Granted
|
|
|
-
|
|
Exercised and vested
|
|
|
-
|
|
Expired and forfeited
|
|
|
-
|
|
Outstanding at June 30, 2020
|
|
|
41,787
|
|
|
|
|
|
|
Options vested at June 30, 2020
|
|
|
41,787
|
|
|
|
|
|
|
Options exercisable at June 30, 2020
|
|
|
41,787
|
|
During the six-month
and three-month periods ended June 30, 2020, the Company recorded approximately $2,000 and $0, respectively, of income tax
expense for New Jersey state income tax.
During the six-month
and three-month periods ended June 30, 2019, the Company recorded approximately $2,000 and $0, respectively, of income tax
expense for New Jersey 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. This amount was received in June 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. Although these restrictions have been
eased in some areas, it is not known whether these lockdowns and other restrictions will be reintroduced, when they will end 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 did not renew 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. Under the Micromet
Marketing Agreement, the parties may pursue infringement actions against third parties if they become aware of any unauthorized
use of the intellectual property portfolio covered by the agreement. In order for the Company to share in any amounts recovered
in such an action, it would be required to contribute to the cost of the related litigation. At the present time, the Company is
unaware of any infringement action that is pending or threatened and cannot reasonably determine its share of the cost of any such
action if and when commenced.
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 period sales of PegIntron. Merck expected to recoup such overpayments through reductions of
future royalties earned by the Company.
In the first and second
quarters of 2020, as reported by Merck, net royalties from PegIntron were approximately $2,000 and $8,000, respectively. As such,
as asserted by Merck, the Company’s liability to Merck was approximately $314,000 at June 30, 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.