The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(1)
|
Description of Business
|
Enzon Pharmaceuticals,
Inc. (together with its subsidiaries, “Enzon” or the “Company,” “we” or “us”),
manages its sources of royalty revenues from existing licensing arrangements with other companies primarily related to sales of
certain drug products that utilize Enzon’s proprietary technology.
Prior to 2017, the
primary source of the Company’s royalty revenues was derived from sales of PegIntron, which is marketed by Merck &
Co., Inc. (“Merck”). The Company currently has no clinical operations and limited corporate operations.
The
Company
has no intention of resuming any clinical development activities or acquiring new sources of royalty revenues. There
were no royalty revenues from sales of PegIntron in each of the quarters ended March 31, 2019 and 2018. In the first quarter of
2019, net royalties from PegIntron were negative $51,000, due to returns and rebates exceeding the amount of royalties earned.
At December 31, 2018,
the Company had a liability to Merck of approximately $439,000, due primarily to product returns and rebates. In March 2019, Merck
notified the Company of an additional recoupment of approximately $51,000. Accordingly, at March 31, 2019, the Company increased
its liability to Merck to $490,000, as discussed in 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 Cash Dividend.) 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 Plan of Liquidation and Dissolution.)
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, has 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 has 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 is not waiving Servier’s obligation to make any applicable milestone payment to the Company upon
EMEA approval, if any, of SC Oncaspar. Servier is 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. The Company expects to receive the $7.0 million milestone payment from Servier by the
third quarter of 2019. Accordingly, the Company recorded that amount as a current receivable at December 31, 2018 and March 31,
2019. However, no assurance can be given as to the timing of the Company’s receipt of the payment.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The
Company has a marketing agreement with Micromet AG (“Micromet”), now part of Amgen, Inc. (the “Micromet Marketing
Agreement”), that was entered into in 2004 under which Micromet is the exclusive marketer of the parties’ combined
intellectual property portfolio in the field of single-chain antibody technology. Under the Micromet Marketing Agreement,
the parties agreed to share, on an equal basis, in any licensing fees, milestone payments and royalty revenue received by Micromet
in connection with any licenses of the patents within the portfolio by Micromet to any third party during the term of the collaboration.
To the Company’s knowledge, Micromet has a license agreement with Viventia Biotech (Barbados) Inc. (“Viventia”),
now part of Sesen Bio, Inc. (“Sesen”), that was entered into in 2005, under which Micromet granted Viventia nonexclusive
rights, with certain sublicense rights, for know-how and patents allowing exploitation of certain single chain antibody products,
which patents cover some key aspects of Vicinium, one of Sesen’s drug candidates that is in Phase 3 clinical trials being
evaluated for the treatment of patients with non-muscle invasive bladder cancer. To the Company’s knowledge, under the terms
of this license agreement between Micromet and Viventia, Micromet is entitled to receive (i) certain milestone payments with respect
to the filing of a new drug application for Vicinium with the FDA or the filing of a marketing approval application for Vicinium
with the EMEA; (ii) certain milestone payments with respect to the first commercial sale of Vicinium in the U.S. or Europe and
(iii) certain royalties on net sales for ten years from the first commercial sale of Vicinium. Pursuant to the Micromet Marketing
Agreement, the Company would be entitled to a 50% share of these milestone payments and royalties received by Micromet. Due to
the challenges associated with developing and obtaining approval for drug products, there is substantial uncertainty whether any
of these milestones will be achieved. The Company also has no control over the time, resources and effort that Sesen may devote
to its programs and limited access to information regarding or resulting from such programs. Accordingly, there can be no assurance
that the Company will receive any of the milestone or royalty payments under the Micromet Marketing Agreement. The Company will
not recognize revenue until all revenue recognition requirements are met.
The Company maintains
its principal executive offices at 20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016 through a lease agreement for space
and services with Regus Management Group, LLC (“Regus”) and also has an office facility at 3556 Main Street, Manchester,
VT, 05225 pursuant to an office rental agreement with Equinox Junior, LLC (“Equinox”). See Note 10.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(2)
|
Basis of Presentation
|
Interim Financial Statements
The accompanying unaudited
condensed consolidated financial statements have been prepared from the books and records of the Company in accordance with United
States generally accepted accounting principles (U.S. GAAP) for interim financial information and Rule 10-01 of Regulation S-X
promulgated by the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, these financial statements do
not include all of the information and footnotes required for complete annual financial statements. Interim results are not necessarily
indicative of the results that may be expected for the full year. Interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018.
Principles of Consolidation
The condensed consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated as part of the consolidation.
Use of Estimates
The preparation of
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. These estimates include legal and contractual contingencies and income taxes. Although management bases its estimates on
historical experience, relevant current information and various other assumptions that are believed to be reasonable under the
circumstances, actual results could differ from these estimates.
Revenue Recognition
Royalty revenues from
the Company’s agreements with third parties are recognized when the Company can reasonably determine the amounts earned.
In most cases, this will be upon notification from the third-party licensee, which is typically during the quarter following the
quarter in which the sales occurred. The Company does not participate in the selling or marketing of products for which it receives
royalties. No provision for uncollectible accounts is established upon recognition of revenues.
Contingent payments
due under the asset purchase agreement for the sale of the Company’s former specialty pharmaceutical business are recognized
as revenue when the milestone has been achieved and collection is assured, such payments are non-refundable and no further effort
is required on the part of the Company or the other party to complete the earning process.
Income Taxes
Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect of
a change in tax rates or laws on deferred tax assets and liabilities is recognized in operations in the period that includes the
enactment date of the rate change. A valuation allowance is established to reduce the deferred tax assets to the amounts that are
more likely than not to be realized from operations.
Tax benefits of uncertain
tax positions are recognized only if it is more likely than not that the Company will be able to sustain a position taken on an
income tax return. The Company has no liability for uncertain tax positions. Interest and penalties, if any, related to unrecognized
tax benefits, would be recognized as income tax expense.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(3)
|
Recent Accounting Pronouncements
|
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 has conformed to this rule in its Form 10-Q
for the quarter ended Marc
h 31, 2019.
During February 2016, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842).
ASU No. 2016-02 requires lessees to recognize the assets and liabilities that arise from leases on the balance sheets. A lessee
should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use
asset representing its right to use the underlying asset for the lease term. During 2018, the FASB also issued ASU No. 2018-01,
Land Easement Practical Expedient, which permits an entity to elect an optional transition practical expedient to not evaluate
land easements that existed or expired before the entity’s adoption of Topic 842 and that were not previously accounted for
under Accounting Standards Codification 840; ASU 2018-10, Codification Improvements to Topic 842, Leases, which addresses narrow
aspects of the guidance originally issued in ASU No. 2016-02; ASU 2018-11, Targeted Improvements, which provides entities with
an additional (and optional) transition method whereby an entity initially applies the new leases standard at the adoption date
and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and also provides
lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease
component and, instead, to account for those components as a single component; and ASU No. 2018-20, Narrow-Scope Improvements for
Lessors, which addresses sales and other similar taxes collected from lessees, certain lessor costs, and the recognition of variable
payments for contracts with lease and nonlease components. The Company adopted these ASUs effective January 1, 2019. Due to the
nature of the Company’s lease obligations (See Note 10), adoption of the standard did not have a material effect on the Company’s
condensed 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, milestone receivable, other current assets, accounts payable, accrued expenses and other current liabilities in the Company’s
condensed consolidated balance sheets approximated their fair values at March 31, 2019 and December 31, 2018 due to their short-term
nature.
(5)
|
Supplemental Cash Flow Information
|
The Company made income
tax payments of $2,000 and $0 during the three months ended March 31, 2019 and 2018, respectively. There were no interest payments
made during the three months ended March 31, 2019 or 2018.
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 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 ended March 31, 2018 and 2017:
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Loss Per Common Share – Basic and Diluted:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(371
|
)
|
|
$
|
(312
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
At March 31, 2019 and
2018, there were 41,787 potentially dilutive securities outstanding that have been excluded from the calculation of dilutive weighted
average shares outstanding, as they would be anti-dilutive.
On January 30, 2019, the Board of Directors
of the Company declared a special cash dividend of $0.06 per share of the Company’s common stock, aggregating approximately
$2,653,000, which was paid on March 21, 2019 to stockholders of record as of the close of business on February 21, 2019.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Stock Options and Restricted Stock Units
(RSUs or Nonvested Shares)
During the quarter
ended March 31, 2019 no options were granted and the Company incurred no stock-based compensation expense. No RSUs were outstanding
as of March 31, 2019.
There were no options
granted during the three months ended March 31, 2018 and no nonvested shares granted or outstanding during the three months ended
March 31, 2018. The Company uses historical data to estimate forfeiture rates.
Activity related to
stock options and nonvested shares during the three months ended March 31, 2019 and related balances outstanding as of that date
are reflected below:
|
|
Stock
|
|
|
|
Options
|
|
Outstanding at January 1, 2019
|
|
|
41,787
|
|
Granted
|
|
|
-
|
|
Exercised and vested
|
|
|
-
|
|
Expired and forfeited
|
|
|
-
|
|
Outstanding at March 31, 2019
|
|
|
41,787
|
|
|
|
|
|
|
Options vested and expected to vest at March 31, 2019
|
|
|
41,787
|
|
|
|
|
|
|
Options exercisable at March 31, 2019
|
|
|
41,787
|
|
During each of the
three-month periods ended March 31, 2019 and 2018, the Company recorded approximately $2,000 and $1,000, respectively, of income
tax expense for NJ state income tax.
The Company continues
to provide a valuation allowance against all of its deferred tax assets, as the Company believes it is more likely than not that
its deferred tax assets will not be realized. Management of the Company will continue to assess the need for this valuation allowance
and will make adjustments when appropriate.
Tax benefits of uncertain
tax positions are recognized only if it is more likely than not that the Company will be able to sustain a position taken on an
income tax return. The Company has no liability for uncertain tax positions. Interest and penalties, if any, related to unrecognized
tax benefits, would be recognized as income tax expense.
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among its numerous changes to the Internal
Revenue Code, the Act allowed companies with existing alternative minimum tax credit (“MTC”) carryforwards as of December
31, 2017 to receive refunds of the credits in tax years after 2017 and before 2022 in an amount equal to 50% (100% in 2021) of
the excess MTC over the amount of the credit allowable for the year against regular tax liability.
As a result of the Act’s
provision allowing for the refund of MTC, the Company has recorded $970,000 as a long-term receivable and $970,000 as a current
receivable as of December 31, 2018 and March 31, 2019.
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.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(10)
|
Commitments and Contingent Liabilities
|
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.
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 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.
(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.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Due to returns, rebates
and other adjustments, at various times, Merck has notified the Company of its recoupment of previously paid royalties. Accordingly,
at December 31, 2018, the Company recorded a net payable to Merck of $439,000. In March 2019, Merck notified the Company of an
additional such recoupment aggregating approximately $51,000. Consequently, the Company recorded a payable to Merck of $490,000
at March 31, 2019.