ENZN Enzon Inc (QX)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Enzon Pharmaceuticals, Inc. (together with its subsidiaries, “Enzon” or the “Company,” “we” or “us”), is positioned as a public company acquisition vehicle, where the Company can become an acquisition platform and more fully utilize our net operating loss carryforwards (“NOLs”) and enhance stockholder value.

The Company initiated a Rights Offering for common and preferred stock of the Company in September 2020 (see below and Note 15), which closed in October 2020, and realized $43.6 million in gross proceeds for the Company. This has enabled the Company to embark on its plan to realize the value of its more than $100 million NOLs by acquiring potentially profitable businesses or assets. To protect the NOLs, in August 2020, the Company’s Board of Directors adopted a Section 382 rights plan (see Note 14).

Historically, the Company has received royalty revenues from licensing arrangements with other companies primarily related to sales of certain drug products that utilized Enzon’s proprietary technology. In recent years, the Company has had no clinical operations and limited corporate operations. The Company does have a series of licensing agreements in the drug Vicineum, which, if approved, will potentially generate milestone and royalty payments to the Company in the future.

Prior to 2017, the Company received royalty revenues from sales of PegIntron, which is marketed by Merck & Co., Inc. (“Merck”). In 2020 net royalties from PegIntron have not been significant. There is a dispute with Merck regarding royalties (see Note 12). The Company has certain royalty agreements regarding SC Oncaspar and certain other drugs.

The Company had, since 2013, planned to distribute excess cash to stockholders from its royalty revenues. In 2016, the Company’s Board of Directors adopted a Plan of Liquidation and Dissolution (the “Plan”). Following each subsequent periodic assessment, the Company’s Board of Directors postponed seeking shareholder approval of the Plan, and on November 9, 2020, the Company’s Board of Directors withdrew and terminated the Plan as the result of its successful rights offering (see above and Notes 11 and 15).

The Company maintains its principal executive offices at 20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Deferred Stock Offering Expenses

The Company classifies amounts related to the Rights Offering (see Note 13) not completed as of the balance sheet date as Deferred Stock Offering Expenses. Such costs will be reclassified as an offset to Additional Paid-in-Capital upon termination of the Rights Offering.

During the nine months ended September 30, 2020, the Company incurred approximately $457,000 of offering related costs, all of which was incurred during the three months ended September 30, 2020.

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

Recent Accounting Standards Updates issued by the Financial Accounting Standards Board 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.

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, 2020 and December 31, 2019 due to their short-term nature.

The Company made no income tax payments during the nine months ended September 30, 2020 and paid $2,000 to the State of New Jersey during the nine-month period ended September 30, 2019.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 nine-month periods ended September 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. During each of the nine-month periods ended September 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 nine months ended September 30, 2020 and 2019:

For each of the nine-month periods ended September 30, 2020 and 2019 and the three-month periods ended September 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 nine-month periods ended September 30, 2020.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock Options and Restricted Stock Units (RSUs or Nonvested Shares)

During the nine months ended September 30, 2020, no options were granted, and the Company incurred no stock-based compensation expense. No RSUs were outstanding as of September 30, 2020.

There were no options granted during the nine months ended September 30, 2019 and no nonvested shares granted or outstanding during the nine months ended September 30, 2019. The Company uses historical data to estimate forfeiture rates.

Activity related to stock options and nonvested shares during the nine months ended September 30, 2020 and related balances outstanding as of that date are reflected below (in thousands):

During the nine-month and three-month periods ended September 30, 2020, the Company recorded approximately $2,000 and $0, respectively, of income tax expense for New Jersey state income tax.

During the nine-month and three-month periods ended September 30, 2019, the Company recorded approximately $2,000 and $0, respectively, of income tax expense for New Jersey state income tax.

As of September 30, 2020, 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. However, although there can be no certainty of such, if the Company’s acquisition strategy is successful and future taxable income is projected, among other things, the valuation allowance will be reevaluated. Management of the Company will continue to assess the need for this valuation allowance and will make adjustments if and when appropriate. Additionally, management of the Company believes that the Company’s net operating loss carryforwards will not be limited by any changes in the Company’s ownership as a result of the successful Completion of the Rights Offering (see Note 15).

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 was signed into law. Among its numerous changes to the Internal Revenue Code, the Tax Cut and Jobs 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 Tax Cuts and Jobs 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 five-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

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 or other regulatory approval could be delayed if the agency is required to shift resources to the review and approval of candidates for treatment of COVID-19.

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.

On February 4, 2016, the Company’s Board of Directors adopted the Plan of Liquidation and Dissolution (the “Plan”), 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. Following each subsequent periodic assessment, the Company’s Board of Directors postponed seeking stockholder approval of the Plan. On November 9, 2020, the Company’s Board of  Directors withdrew and terminated the Plan as a result of the completion of the Rights Offering. See Note 15.

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, second and third quarters of 2020, as reported by Merck, net royalties from PegIntron were approximately $2,000, $8,000 and $8,000, respectively. As such, as asserted by Merck, the Company’s liability to Merck was approximately $306,000 at September 30, 2020. The Company believes that it will receive no more significant 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.

Board of Directors

On August 4, 2020, the Company’s Board of Directors appointed Mr. Jordan Bleznick and Mr. Randolph C. Read as directors to the Board, effective August 4, 2020, to fill the vacancies created by the resignations of Mr. Jonathan Christodoro and Dr. Odysseas Kostas (neither, as the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices) as of the same date. Messrs. Bleznick and Read will each serve until the next annual meeting of our stockholders and until such director’s successor is elected and qualified, subject to such director’s earlier death, resignation, disqualification or removal.

Mr. Bleznick was appointed by the Company’s Board of Directors after discussions with Carl C. Icahn, one of the Company’s largest stockholders, and after consideration by the Governance and Nominating Committee. There are no arrangements or understandings between Mr. Bleznick and any other persons pursuant to which Mr. Bleznick was selected as a director. Mr. Read was appointed by the Board after consideration by the Governance and Nominating Committee. There are no arrangements or understandings between Mr. Read and any other persons pursuant to which Mr. Read was selected as a director.

Following the new Board appointments, Mr. Read was elected as Chairman of the Board. The Board also appointed Messrs. Bleznick and Read to its Finance and Audit Committee, replacing Mr. Christodoro and Dr. Kostas, having determined that each meets the requirements for financial literacy and independence that the Board has used to select members of that committee. Jennifer McNealey, who also serves as a director on the Board, is the other member of the Finance and Audit Committee. Messrs. Bleznick and Read were each determined by the Board to qualify as an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K. Mr. Read was elected as the Chairman of the Audit Committee. In November 2020, Mr. Bleznick resigned from the Finance and Audit Committee, but maintains his position on the Company’s Board of Directors.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On August 14, 2020, the Company’s Board of Directors adopted a Section 382 rights plan and declared a dividend distribution of one right for each outstanding share of the Company’s common stock to stockholders of record at the close of business on August 24, 2020. Accordingly, holders of the Company’s common stock own one preferred stock purchase right for each share of common stock owned by such holder. The rights are not immediately exercisable and will become exercisable only upon the occurrence of certain events as set forth in the Section 382 rights plan. If the rights become exercisable, each right would initially represent the right to purchase from the Company one one-thousandth of a share of the Company’s Series A-1 Junior Participating Preferred Stock, par value $0.01 per share, for a purchase price of $1.20 per right. If issued, each fractional share of Series A-1 Junior Participating Preferred Stock would give the stockholder approximately the same dividend, voting and liquidation rights as does one share of the Company’s common stock. However, prior to exercise, a right does not give its holder any rights as a stockholder of the Company, including any dividend, voting or liquidation rights. The rights will expire on the earliest of (i) the close of business on August 13, 2021 (unless that date is advanced or extended by the Board), (ii) the time at which the rights are redeemed or exchanged under the Section 382 rights plan, (iii) the close of business on the day of repeal of Section 382 or any successor statute or (iv) the close of business on the first day of a taxable year of the Company to which the Company’s Board of Directors determines that no net operating loss carryforwards may be carried forward.

On September 1, 2020, the Company’s Board of Directors approved a Rights Offering, by which the Company distributed, at no charge to all holders of its common stock on September 23, 2020 (the “Record Date”), transferable subscription rights to purchase Units at a subscription price per Unit of $1,090. In the Rights Offering each stockholder received one subscription right for every share of common stock owned at 5:00 p.m., New York City time, on the Record Date. For every 1,105 subscription rights held, a stockholder was entitled to purchase one Unit at the subscription price. Each Unit consisted of newly designated Series C preferred stock, par value $0.01, and 750 shares of the Company’s common stock. It is the intention of the Company to use the approximately $43 million of net proceeds from the Rights Offering, to position the Company as a public company acquisition vehicle, where it can become an acquisition platform and more fully utilize its net operating loss carryforwards and enhance stockholder value. The Company does not, however, have any current plans, arrangements or understandings with respect to any acquisitions or investment and is, currently, not involved in any negotiations with respect to any such transactions.

On an annual basis, the Company’s Board of Directors may, at its sole discretion, cause a dividend with respect to the Series C Preferred Stock to be paid in cash to the holders in an amount equal to 3% of the liquidation preference as in effect at such time (initially $1,000 per share). If the dividend is not so paid in cash, the liquidation preference will be adjusted and increased annually by an amount equal to 5% of the liquidation preference per share as in effect at such time, that is not paid in cash to the holders on such date. Holders of Series C preferred stock do not have any voting rights and the Series C preferred stock is not convertible into shares of the Company’s common stock. The initial liquidation value of the Series C preferred stock is $1,000 per share. On or after November 1, 2022, the Company may redeem the Series C preferred stock at any time, in whole or in part, based on the liquidation preference per share as in effect at such time. Holders of Series C preferred stock have the right to demand that the Company redeem their shares in the event that the Company undergoes a change of control.

On September 1, 2020, the Company entered into an Investment Agreement with Icahn Capital LP (the “Investment Agreement”) in connection with the Rights Offering. Icahn Capital LP, together with its affiliates, owned approximately 15% of the Company’s then outstanding shares of common stock and is one of the Company’s largest stockholders.

Subject to the terms and conditions of the Investment Agreement, Icahn Capital LP agreed to subscribe for its pro-rata share of the Rights Offering and to purchase all units that remain unsubscribed for at the expiration of the Rights Offering to the extent that other holders elected not to exercise all of their respective subscription rights. No fees were paid by the Company to Icahn Capital LP in consideration of such investment commitment. In connection with the execution of the Investment Agreement, the parties agreed to terminate the Standstill Agreement, dated December 18, 2016, by and between the Company, Icahn Capital LP and the other affiliated parties identified therein, so that it shall be of no further force or effect; and waive the applicability of Section 203 of the Delaware General Corporation Law of the State of Delaware to Icahn Capital LP and its affiliates. In addition, the Company agreed to use its best efforts to register for resale all of the shares of the Company’s common stock then held by Icahn Capital LP and its affiliates following the closing of the Rights Offering.

The subscription period for the Rights Offering ended on October 9, 2020. On October 14, 2020, the Company reported that stockholders exercised subscription rights to purchase 6,694 units. Pursuant to the Investment Agreement, Icahn Capital LP subscribed for 5,971 of such units (its pro-rata share of the Rights Offering). In addition, pursuant to its investment commitment  Icahn Capital LP to purchased all 33,306 units that remained unsubscribed for at the expiration of the Rights Offering. As a result of such purchases, Icahn capital LP and its affiliates own 48.6% of the Company’s common stock.

As a result of the sale of all 40,000 units available for purchase in the Rights Offering, the Company currently has 40,000 shares of Series C preferred stock outstanding and an aggregate of 74,214,603 shares of common stock outstanding following the Rights Offering and realized gross proceeds of $43.6 million.

The Company believes that the completion of the Rights Offering will not limit the use of its net operating loss carryforwards due to any Section 382 limitations.

Assuming the Rights Offering closed on September 30, 2020, the Series C preferred shares were issued, the common shares were issued and the gross proceeds of $43.6 million had been received as of that date, the following are the pro forma balance sheet and calculation of pro forma loss per share:

Enzon Pharmaceuticals, Inc. and Subsidiaries

Pro Forma Condensed Consolidated Balance Sheet

As of September 30, 2020

(In thousands)

(Unaudited)

Pro FormaAdjustments

Pro Forma Adjustments