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”), 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 quarter of 2019, net royalties from PegIntron were negative $51,000, due to returns and rebates exceeding the amount
of royalties earned and in the second quarter of 2019 the Company earned $142,000 in net royalties from Merck. At December 31,
2018, the Company had a liability to Merck of approximately $439,000, due primarily to product returns and rebates. After the recoupment
by Merck of $51,000 in the first quarter of 2019 and the earnings of $142,000 and $2,000 of net royalty revenues from sales of
PegIntron during the second and third quarters of 2019, respectively, the Company’s liability to Merck was $346,000 at September
30, 2019, as discussed in Note 12 to the Condensed Consolidated Financial Statements. The Company believes that it will receive
no more royalties from Merck, but may incur additional chargebacks from returns and rebates and such chargebacks may be material.
During the second quarter
of 2019, the Company received a one-time, non-refundable, payment of approximately $65,000 from Novartis Pharma AG in payment of
a worldwide, royalty free non-exclusive non-refundable license to certain Canadian patents.
In April 2013, the
Company announced that it intended to distribute excess cash, expected to arise from ongoing royalty and milestone 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
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 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. The Company recorded that amount as a current receivable at December 31, 2018. The Company
received the $7 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 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 and in Phase 1 and 2 clinical trials for the treatment
of head and neck 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 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 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 (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 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. Other payments, such as license fees,
are recorded when they are received, it is determined that 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
|
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 SEC 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 September 30, 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 nine months ended September 30, 2019 and 2018, respectively. There were no interest payments
made during the nine months ended September 30, 2019 or 2018.
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(6)
|
Loss Per Common Share
|
Basic loss per common
share is computed by dividing the net loss 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.
Inasmuch as the Company incurred a loss in each of the periods presented, diluted loss per common share is the same as basic loss
per common share.
For purposes of calculating
diluted loss 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. Because a loss was incurred
in each of the periods presented, common stock equivalents would be anti-dilutive and, accordingly, were excluded from the calculation
of diluted loss per common share. 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). Loss per common share information
is as follows (in thousands, except per share amounts) for the three months and nine months ended September 30, 2019 and 2018:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Loss Per Common Share – Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(325
|
)
|
|
$
|
(520
|
)
|
|
$
|
(717
|
)
|
|
$
|
(1,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
44,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
For the nine-month
periods ended September 30, 2019 and 2018 and the three-month periods ended September 30, 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. On August
22, 2019, the Company’s Board of Directors (the “Board”) declared a special cash dividend of $0.12 per share
of the Company’s common stock, aggregating approximately $5,306,000, which was paid on October 15, 2019 to stockholders of
record at the close of business on October 1, 2019.
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 nine months
ended September 30, 2019, no options were granted and the Company incurred no stock-based compensation expense. No RSUs were outstanding
as of September 30, 2019.
There were no options
granted during the nine months ended September 30, 2018 and no nonvested shares granted or outstanding during the nine months ended
September 30, 2018. The Company uses historical data to estimate forfeiture rates.
Activity related to
stock options and nonvested shares during the nine months ended September 30, 2019 and related balances outstanding as of that
date are reflected below (in thousands):
|
|
Stock
|
|
|
|
Options
|
|
Outstanding at January 1, 2019
|
|
|
41,787
|
|
Granted
|
|
|
-
|
|
Exercised and vested
|
|
|
-
|
|
Expired and forfeited
|
|
|
-
|
|
Outstanding at September 30, 2019
|
|
|
41,787
|
|
|
|
|
|
|
Options vested at September 30, 2019
|
|
|
41,787
|
|
|
|
|
|
|
Options exercisable at September 30, 2019
|
|
|
41,787
|
|
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.
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 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. An additional $970,000,
carried as a current receivable as of December 31, 2018 and September 30, 2019, was collected in October 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 security deposit of $708 and thereafter 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.
In the past, the Company
had been involved in various claims and legal actions arising in the ordinary course of business, the ultimate disposition of which
did not have a material effect on the Company’s consolidated financial position, results of operations, or liquidity. The
Company is involved in no current legal actions and is aware of no pending such actions or claims.
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.
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. During the second and third quarters of 2019, Merck informed the
Company that it had earned net royalties of approximately $142,000 and $2,000, respectively. Consequently, the Company had a liability
to Merck of approximately $346,000 at September 30, 2019. The Company believes that it will no longer earn royalties from Merck,
but may incur additional chargebacks from returns and rebates and such chargebacks may be material.