Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
The aggregate market value of the Common
Stock, $0.01 par value per share (“Common Stock”), held by non-affiliates of the registrant was approximately $6,394,672
as of June 30, 2020, based upon the closing sale price quoted on the OTCQX market of the OTC Markets Group, Inc. of $0.17
per share reported for such date. Shares of Common Stock held by each executive officer and director and certain beneficial owners
of 10% or more of the Common Stock of the registrant as of June 30, 2020 have been excluded in that such shares may be deemed
to be owned by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
There were 74,214,603 shares of Common
Stock issued and outstanding as of February 12, 2021.
If the registrant files a definitive proxy
statement relating to its 2021 Annual Meeting of Stockholders with the Commission not later than 120 days after December 31,
2020, portions of such definitive proxy statement will be incorporated by reference into Part III of this Annual Report on
Form 10-K where indicated. However, if such definitive proxy statement is not filed with the Commission in such 120-day period,
the registrant will file an amendment to this Annual Report on Form 10-K with the Commission not later than the end of such
120-day period to include the information required by Part III of Form 10-K.
Unless the context
requires otherwise, references in this Annual Report on Form 10-K to “Enzon,” the “Company,” “we,”
“us,” or “our” and similar terms mean Enzon Pharmaceuticals, Inc. and its subsidiaries.
This Annual Report
on Form 10-K contains forward-looking statements within the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K, other than statements that are
purely historical, are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology
such as “believes,” “expects,” “may,” “will,” “should,” “could,”
“potential,” “anticipates,” “estimates,” “plans,” “would,” or “intends”
or the negative thereof, or other variations thereof, or comparable terminology, or by discussions of strategy. Forward-looking
statements are based upon management’s present expectations, objectives, anticipations, plans, hopes, beliefs, intentions
or strategies regarding the future and are subject to risks and uncertainties that could cause actual results, events or developments
to be materially different from those indicated in such forward-looking statements, including the risks and uncertainties set forth
in Item 1A. Risk Factors of this Annual Report on Form 10-K. These risks and uncertainties should be considered carefully
and readers are cautioned not to place undue reliance on such forward-looking statements. We cannot assure that the future results
covered by the forward-looking statements will be achieved. All information in this Annual Report on Form 10-K speaks only
as of the date of the filing of this report, unless otherwise indicated. We do not intend to update this information to reflect
events after the date of this report.
PART I.
Item 1. Business
OVERVIEW
Enzon Pharmaceuticals, Inc.
(together with its subsidiaries, the “Company,” “Enzon,” “we” or “us”) is positioned
as a public company acquisition vehicle, where we can become an acquisition platform and more fully utilize our net operating loss
carryforwards (“NOLs”) and enhance stockholder value.
In September 2020,
we initiated a rights offering (the “Rights Offering”) for our common and preferred stock (see below and Note 14 to
our Condensed Consolidated Financial Statements), which closed in October 2020, and we realized $43.6 million in gross proceeds.
This has enabled us to embark on our plan to realize the value of our approximately $103 million NOLs by acquiring potentially
profitable businesses or assets. To protect the NOLs, in August 2020, our Board of Directors adopted a Section 382 rights
plan (see Note 13 to our Condensed Consolidated Financial Statements).
Historically, we have
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, we have had no clinical operations and limited corporate operations.
We have a marketing agreement relating to the drug Vicineum, which, if approved, will potentially generate milestone and royalty
payments to us in the future. We cannot assure you that we will earn material future royalties or milestones.
Corporate Events
On August 4, 2020,
our 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 as of the
same date. At the annual stockholders’ meeting held on December 18, 2020, Messrs. Bleznick and Read and Ms. McNealey
were elected as directors to the Board and 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. Currently,
our Finance and Audit Committee consists of Mr. Read, as chairman, and Ms. McNealey. Mr. Read was determined by
the Board of Directors to qualify as an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation
S-K.
Mr. Bleznick was
appointed by our Board of Directors after discussions with Mr. Carl C. Icahn, who, with his affiliates, is currently the Company’s
largest stockholder, 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.
On January 4, 2021, we announced that
Mr. Andrew Rackear had, on December 30, 2020, communicated to the Board his intent to retire from his role as our Chief
Executive Officer (“CEO”) effective February 26, 2021. On December 30, 2020, we also announced that Mr. Richard
L. Feinstein, Enzon’s Chief Financial Officer (“CFO”), was appointed as CEO and Secretary, effective February 26,
2021, and would remain as the Company’s CFO.
Patents and Intellectual Property Rights
We have a portfolio
of issued U.S. patents, many of which have foreign counterparts. Of the patents owned or exclusively licensed by us, one relates
to PegIntron. The patent related to PegIntron (peginterferon alfa-2b) expired in the United States in 2016 and expired outside
of the United States in 2018 (including any patent term extensions), except for Japan, where the patent was extended until 2021,
Malaysia, where the patent expired in 2020, and Chile, where it will expire in 2024. Although we believe that our patents provide
certain protection from competition and we may be entitled to potential royalty rights and/or milestone payments, we cannot assure
you that such patents will be of substantial protection or commercial benefit to us, will afford us adequate protection from competing
products, or will not be challenged or declared invalid. In addition, we cannot assure you that additional U.S. patents or foreign
patent equivalents will be issued to us. At this time, we do not expect to apply for or receive any additional patents.
Patents for individual
products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various
countries where patent protection is obtained. Many of our patents have expired or are nearing the end of their patent protection
period. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the
scope of its coverage and the availability of legal remedies in the country.
Prior to 2017, we received
royalty revenues from sales of PegIntron, which is marketed by Merck & Co., Inc. (“Merck”). In 2019 and
2020 net royalties from PegIntron have not been significant. There is a dispute with Merck regarding royalties (see Note 10 to
our Condensed Consolidated Financial Statements). We have a licensing agreement regarding SC Oncaspar and certain other drugs.
EMPLOYEES AND EXECUTIVE OFFICERS
We currently have no
employees. Our executive officers provide services to us on a consulting basis.
Item 1A. Risk Factors
Our business, financial
condition and results of operations may be impacted by one or more of the following factors, any of which could cause actual results
to vary materially from historical and current results or anticipated future results.
Risks Relating to
the Company and its Operations
Our search for a business, company or
assets to acquire or in which to invest may be unsuccessful, and we may fail to maximize our return on the proceeds of our Rights
Offering and/or realize the value of our NOLs.
We are positioned as
a public company acquisition vehicle, where we can become an acquisition platform and more fully utilize our NOLs and enhance stockholder
value. We intend to acquire profitable businesses, entities or revenue streams that will generate sufficient income so that we
can utilize our approximately $103 million NOLs. However, we do not have any current plans, arrangements or understandings with
respect to any acquisitions or investments, and we have not identified any actionable acquisition candidates. We will have significant
discretion in the use of the net proceeds of our Rights Offering, and it is possible that we will fail to maximize our return on
such proceeds. While we expect that, ultimately, we will be successful in realizing the value of our NOLs, we cannot assure you
that we will be able to do so.
The COVID-19 pandemic may disrupt the
approval and manufacture of products for which we share the right to receive licensing fees, milestone payments and royalties and
may negatively impact our search for an acquisition target, and the business and/or results of operations of any target business
that we acquire or in which we invest.
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, especially in light of the uncertainty regarding cases in the United States, when they will end or the ultimate
impact these unprecedented actions will have on our financial condition and prospects.
At the present time,
our own business activities have been largely unaffected by COVID-19 restrictions as our 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,
our right to receive licensing fees, milestone payments or royalties could be materially and adversely affected. Additionally,
the development timeline for product candidates 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.
In addition, the business
and/or results of operations of any potential target business, that we acquire or in which we invest, could be materially and adversely
affected. Furthermore, we may be unable to complete any such acquisitions or investments if continued concerns relating to COVID-19
restrict travel, limit the ability to have meetings with potential investors or the target company’s personnel, vendors and
service providers are unavailable to negotiate and consummate a transaction in a timely manner or if COVID-19 causes a prolonged
economic downturn, including the duration of the ongoing economic conditions. The extent to which COVID-19 impacts our search for
a business to acquire or in which to invest will depend on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its
impact, among others. If the disruptions posed by COVID-19 or other matters of global concern continue for an extensive period
of time, our ability to consummate a business acquisition or investment, or the business and/or results of operations of a target
business with which we ultimately consummate an acquisition or investment, may be materially adversely affected.
The degree to which
the COVID-19 pandemic ultimately impacts our business and results of operations, including our ability to acquire profitable businesses,
entities or revenue streams, will depend on future developments beyond our control, including the severity of the pandemic, the
extent of actions to contain the virus, availability of a vaccine or other treatment, how quickly and to what extent normal economic
and operating conditions can resume and the severity and duration of the global economic challenges resulting from the pandemic.
Our sources of revenue are limited and
we expect to incur losses for the foreseeable future; while we increased our cash reserve by completing the Rights Offering, unanticipated
liabilities and expenses could adversely affect our ability to engage in a public company acquisition or investment, as currently
intended, or to continue operations.
We have incurred losses
in the current period and have limited sources of revenues. Although we received approximately $43.1 million of net proceeds from
the Rights Offering, which we intend to use to position us as a public company acquisition vehicle, unless and until we can consummate
an acquisition or investment that generates income, or unless and until we begin receiving significant milestone and royalty payments
that may become due from the sale of Vicineum by Sesen Bio, Inc. (“Sesen”), we do not anticipate generating any additional
cash or revenues. We have been informed by Merck that there will likely be no or minimal additional sales of PegIntron and we would
likely receive no further significant royalties, although we may remain potentially liable to Merck for product returns and rebates.
Based on current estimates, we do not expect any liability for those returns and rebates to be material. Moreover, our right to
receive royalty revenues from other products is limited and we currently do not intend to acquire new sources of royalty revenues.
For those remaining existing or potential sources of royalty revenue, our licensees may be unable to maintain regulatory approvals
for currently licensed products or obtain regulatory approvals for new products. Safety issues could also result in the failure
to maintain regulatory approvals or decrease revenues.
While we have substantially
reduced our operating expenses in anticipation of the decline in revenues, including ceasing our research and development activities,
eliminating our workforce in favor of independent contractors, and discontinuing our significant lease commitments, we may incur
unanticipated liabilities or expenses, including expenses to defend unasserted product liability claims or greater than expected
liabilities for PegIntron and expenses incurred in our search for a target business to acquire or in which to invest. Any such
expenses or liabilities could impact the availability of assets that we expect to use to fund future operations or adversely affect
our ability to pay dividends or make distributions to shareholders upon a liquidation of the Company.
We have outsourced all corporate functions,
which makes us more dependent on third parties to perform these corporate functions.
We have outsourced
all corporate functions, which makes us more dependent on third parties for the performance of these functions. To the extent that
we are unable to effectively reallocate employee responsibilities, retain key officers as consultants, maintain effective internal
control over financial reporting and effective disclosure controls and procedures, establish and maintain agreements with competent
third-party contractors on terms that are acceptable to us, or effectively manage the work performed by any retained third-party
contractors, our ability to manage the operations effectively could be compromised. Our current CEO intends to retire from such
role effective February 26, 2021, at which time our current CFO will also become our CEO.
While we intend to acquire profitable
businesses, entities or revenue streams that will generate sufficient income so that we can utilize our NOLs, we may be unable
to do so and, accordingly, we may be unable to realize our deferred income tax assets.
The ultimate realization
of our deferred income tax assets is dependent upon generating future taxable income, executing tax planning strategies, and reversals
of existing taxable temporary differences. We have recorded a full valuation allowance against our deferred income tax assets,
which may fluctuate as conditions change. While we are positioned as a public company acquisition vehicle and intend to acquire
profitable businesses, entities or revenue streams that will generate sufficient income so that we can utilize our NOLs, we cannot
provide any assurance that we will be able to do so.
In addition, our ability
to utilize our NOLs to offset our future taxable income and/or to recover previously paid taxes would be limited if we were to
undergo an “ownership change” within the meaning of Section 382 of the Internal Revenue Code. In general, an “ownership
change” occurs whenever the percentage of the stock of a corporation owned by “5-percent shareholders” (within
the meaning of Section 382 of the Internal Revenue Code) increases by more than 50 percentage points over the lowest percentage
of the stock of such corporation owned by such “5-percent shareholders” at any time over the testing period.
An ownership change
under Section 382 of the Internal Revenue Code would establish an annual limitation to the amount of NOLs we could utilize
to offset our taxable income in any single year. The application of these limitations might prevent full utilization of the deferred
tax assets attributable to our NOLs. Although we have adopted a Section 382 rights plan in an effort to protect stockholder
value by attempting to protect against a possible limitation on our ability to use our NOLs, we cannot assure you that we will
not undergo an ownership change within the meaning of Section 382. (See Notes 9 and 13 to the Consolidated Financial Statements.)
Risks Relating to Our Common Stock
Our common stock ranks junior to our
Series C Preferred Stock.
With respect to the
payment of cash dividends and amount payable in the event our liquidation, dissolution or winding up, our common stock will rank
junior to our Series C Preferred Stock. This means that, unless full dividends
(i) have been paid, (ii) redeemed in an amount in excess of the initial liquidation value of $1,000 or (iii) set
aside for payment on all outstanding Series C Preferred Stock for all dividends or increases in the liquidation value in excess
of the initial liquidation amount of $1,000 of such Series C Preferred Stock, no cash dividends may be declared or paid on
our common stock. Likewise, in the event of our voluntary or involuntary liquidation, dissolution or winding up, no distribution
of our assets may be made to holders of our common stock until we have paid to the holders of our Series C Preferred Stock
the liquidation preference related to such Series C Preferred Stock, plus in each case any accrued and unpaid dividends.
The interests of our significant stockholders
may conflict with the interests of other stockholders.
Mr. Carl C. Icahn,
directly and indirectly, beneficially owns approximately 49% of the outstanding shares of our common stock, as well as approximately
98% of the outstanding Series C Preferred Stock. Mr. Icahn may have interests that are different from, in addition to
or not always consistent with our interests or with the interests of our other common or preferred stockholders. To the extent
that conflicts of interest may arise between us and Mr. Icahn and his affiliates, those conflicts may be resolved in a manner
adverse to us or our other stockholders. In addition, the existence of significant stockholders may have the effect of making it
difficult for, or may discourage or delay, a third party from seeking to acquire a majority of our outstanding common stock, which
may adversely affect the market price of our common stock. In addition, such stockholders may exert significant influence over
our operations.
The price of our common stock has historically
been volatile and may decline significantly if we are unable to consummate a business acquisition or investment or for other reasons.
Historically, the market
price of our common stock has fluctuated over a wide range for a variety of reasons, including Company-specific factors and global
and industry-wide conditions and events such as the COVID-19 pandemic and resulting recession, as well as the fact that only a
few stockholders, in the aggregate, hold more than a majority of our common stock, and, therefore, there is a small public float
with limited trading activity in our common stock. In the future, the value of our common stock may be impacted by the amount of
our royalty revenues or anticipation thereof, our ability to monetize our remaining assets, including our NOLs, and any unexpected
liabilities or expenses that impact our continued operations, our ability to pay dividends or make distributions to our stockholders
and the success of any future activities which we undertake, including, but not limited to, our ability to consummate a business
acquisition or investment.
In addition, equity
financings that may be available to us under current market conditions frequently involve sales at prices below the prices at which
our common stock currently trades on the OTCQX, as well as the issuance of warrants or convertible equity that require exercise
or conversion prices that are calculated in the future at a discount to the then market price of our common stock.
Our common stock is quoted on the OTCQX
market of the OTC Markets Group, Inc., which has a very limited trading market and, therefore, market liquidity for our common
stock is low and our stockholders’ ability to sell their shares of our common stock may be limited.
Our common stock is
quoted on the OTCQX market of the OTC Markets Group, Inc. and the quotation of our common stock on the OTCQX market does not
assure that a liquid trading market exists or will develop. Stocks traded on the OTCQX market generally have very limited trading
volume and exhibit a wider spread between the bid/ask quotations than stocks traded on national exchanges. Moreover, a significant
number of institutional investors have investment policies that prohibit them from trading in stocks on the OTCQX marketplace.
As a result, investors may find it difficult to dispose of, or to obtain accurate quotations of the price of, our common stock.
This significantly limits the liquidity of our common stock and may adversely affect the market price of our common stock.
We do not currently,
and are not expected in the future to, meet the listing standards of any national exchange. We presently anticipate that our common
stock will continue to be quoted on the OTCQX market. As a result, investors must bear the economic risk of holding their shares
of our common stock for an indefinite period of time. In the future, our common stock could become subject to “penny stock”
rules which impose additional disclosure requirements on broker-dealers and could further negatively impact market liquidity
for our common stock and our stockholders’ ability to sell their shares of our common stock.
The declaration of common stock dividends
is within the discretion of our Board, subject to any applicable limitations under Delaware corporate law, as well as the requirements
of the Series C Preferred Stock. Our ability to pay dividends in the future depends on, among other things, our fulfillment
of the conditions of the Series C Preferred Stock, fluctuating royalty revenues, our ability to acquire other revenue sources
and our ability to manage expenses, including costs relating to our ongoing operations.
The declaration of
dividends is within the discretion of our Board, subject to any applicable limitations under Delaware corporate law, and, therefore,
our Board could decide in the future not to declare dividends. In addition, as described elsewhere, our common stock ranks junior
to the Series C Preferred Stock, and we cannot declare or pay cash dividends on our common stock unless we satisfy the dividend
requirements of such Series C Preferred Stock. Also, our ability to pay dividends in the future depends on, among other things,
our future revenues, including any revenues from existing and any future royalties and/or milestone payments, our ability to acquire
other revenue sources and our ability to manage expenses, including costs relating to our ongoing operations. We expect little
or no future royalties from existing previously approved products for which we have the right to receive royalties. In addition,
while we intend to acquire or invest in profitable businesses, entities or revenue streams and we may be entitled to a share of
milestone and royalty payments from the approval and sale of Vicineum, we cannot assure you that we will be able to do so or that
we will have sufficient royalty or milestone revenues to be able to pay dividends in the future.
We have adopted a Section 382 rights
plan, which may discourage a corporate takeover.
On August 14,
2020, our Board of Directors adopted a Section 382 rights plan and declared a dividend distribution of one right for each
outstanding share of our common stock to stockholders of record at the close of business on August 24, 2020. Each share of
our common stock issued thereafter will also include one right. Each right entitles its holder, under certain circumstances, to
purchase from us one one-thousandth of a share of our Series A-1 Junior Participating Preferred Stock at an exercise price
of $1.20 per right, subject to adjustment.
The Board adopted the
Section 382 rights plan in an effort to protect stockholder value by attempting to protect against a possible limitation on
our ability to use our NOLs. We may utilize these NOLs in certain circumstances to offset future United States taxable income and
reduce our United States federal income tax liability. Because the Section 382 rights plan could make it more expensive for
a person to acquire a controlling interest in us, it could have the effect of delaying or preventing a change in control even if
a change in control was in our stockholders’ interest.
Anti-takeover provisions in our charter
documents and under Delaware corporate law may make it more difficult to acquire us, even though such acquisitions may be beneficial
to our stockholders.
In addition to our
Section 382 rights plan, provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware corporate
law, could make it more difficult for a third party to acquire us, even though such acquisitions may be beneficial to our stockholders.
These anti-takeover provisions include:
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lack of a provision for cumulative voting in the election of directors;
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the ability of our Board to authorize the issuance of “blank check” preferred stock to increase the number of outstanding shares and thwart a takeover attempt;
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advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
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limitations on who may call a special meeting of stockholders.
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The provisions described
above, our Section 382 rights plan and provisions of Delaware corporate law relating to business combinations with interested
stockholders, along with the significant amount of common stock beneficially owned by Mr. Icahn, may discourage, delay or
prevent a third party from acquiring us. These provisions may also discourage, delay or prevent a third party from acquiring a
large portion of our securities, or initiating a tender offer, even if our stockholders might receive a premium for their shares
in the acquisition over the then current market price.
Risks Related to the Series C Preferred
Stock
In the event of any dissolution, liquidation,
or winding up of our Company, we may not be able to make distributions or payments in full to all the holders of the Series C
Preferred Stock or, if required, we may not be able to redeem such shares.
The Series C Preferred
Stock ranks senior to our common stock, but we may in the future issue one or more series of preferred stock that ranks senior
to, junior to or pari passu with our Series C Preferred Stock. In the event of any dissolution, liquidation,
winding up or change of control of our Company, we may not be able to make distributions or payments in full to all the holders
of the Series C Preferred Stock or, if required, to redeem the Series C Preferred Stock, in which case holders of the
Series C Preferred Stock could lose all or a portion of the value of their investment.
The dividends on our Series C Preferred
Stock can be paid in kind by increasing the liquidation value of the shares of Series C Preferred Stock.
The terms of the Series C
Preferred Stock allow dividends on the shares of Series C Preferred Stock to be paid in kind by increasing the liquidation
value of the shares of Series C Preferred Stock and, therefore, allow the repayment of the initial liquidation value and accrued
dividends on the Series C Preferred Stock to be deferred until the earliest of the redemption of the Series C Preferred
Stock or upon our dissolution, liquidation or winding up. We may not have enough capital to repay the full amount of the initial
liquidation value and accrued dividends if the payment of initial liquidation value and accrued dividends on the Series C
Preferred Stock becomes due.
The Series C
Preferred Stock is equity and is subordinate to our existing and future indebtedness and other liabilities, and your interests
may be diluted in the event we issue additional shares of preferred stock.
Shares
of the Series C Preferred Stock represent equity interests and do not constitute indebtedness. As such, the Series C
Preferred Stock will rank junior to all of our indebtedness and other non-equity claims of our creditors with respect to assets
available to satisfy our claims, including in our liquidation, dissolution or winding up. Our future debt may include restrictions
on our ability to pay distributions to preferred stockholders. Unlike indebtedness, where principal and interest would customarily
be payable on specified due dates, in the case of preferred stock such as the Series C Preferred Stock, dividends are payable
only if declared by our Board of Directors (or a duly authorized committee thereof). Our ability to pay dividends on the Series C
Preferred Stock may be limited by the terms of our agreements governing future indebtedness and by the provisions of other future
agreements.
Subject
to limitations prescribed by Delaware law and our charter, our Board of Directors is authorized to issue, from our authorized but
unissued shares of capital stock, preferred stock in such classes or series as our Board of Directors may determine and to establish
from time to time the number of shares of preferred stock to be included in any such class or series. The issuance of additional
shares of Series C Preferred Stock or additional shares of preferred stock designated as ranking on parity with the Series C
Preferred Stock would dilute the interests of the holders of shares of the Series C Preferred Stock, and the issuance of shares
of any class or series of our capital stock expressly designated as ranking senior to the Series C Preferred Stock or the
incurrence of additional indebtedness could affect our ability to pay distributions on, redeem or pay the liquidation preference
on the Series C Preferred Stock.
The Series C
Preferred Stock is not convertible into common stock.
The
Series C Preferred Stock is not convertible into shares of common stock and, therefore, holders of Series C Preferred
Stock have no rights with respect to shares of our common stock. In addition, the Series C Preferred Stock accrues dividends
at a fixed rate. Accordingly, an increase in market price of our common stock will not necessarily result in an increase in the
value of the Series C Preferred Stock. The value of the Series C Preferred Stock may depend more on dividend and interest
rates for other preferred stock, commercial paper and other investment alternatives and our actual and perceived ability to pay
dividends on, and in the event of dissolution satisfy the liquidation preference with respect to, the Series C Preferred Stock.
Holders of
shares of Series C Preferred Stock have no voting rights.
Except
as otherwise provided by law, the holders of Series C Preferred Stock have no special voting rights and their consent will
not be required for taking any corporate action. As a result, all matters submitted to stockholders will be decided by the vote
of holders of our common stock. Holders of Series C Preferred Stock have no ability to influence corporate matters and, as
a result, we may take actions that holders of our Series C Preferred Stock do not view as preferable.
There is no
public market for the Series C Preferred Stock.
There
is no established public trading market for the Series C Preferred Stock, and we do not expect a market to develop. We do
not currently intend to apply for listing of the Series C Preferred Stock on any securities exchange or recognized trading
system. Purchasers of the Series C Preferred Stock may be unable to resell their shares of Series C Preferred Stock or
sell them only at an unfavorable price for an extended period of time, if at all.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We maintain our principal
executive offices at 20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016 through a services agreement with Regus Management
Group, LLC (“Regus”).
Item 3. Legal Proceedings
From time to time,
we are engaged in litigation arising in the ordinary course of our business. There is currently no pending material litigation
to which we are a party or to which any of our property is subject.
Item 4. Mine Safety Disclosures
Not applicable.
PART II.
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Since August 9,
2016, our common stock has been quoted for trading on the OTCQX market of the OTC Markets Group, Inc. under the trading symbol
“ENZN.”
Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.
Holders
As
of February 12, 2021, there were 783 holders of record of our common stock, which does not reflect persons or entities
that hold the common stock in nominee or “street” name through various brokerage firms and financial institutions.
Dividends
The declaration of
dividends is within the discretion of our Board, subject to any applicable limitations under Delaware corporate law, and therefore
our Board could decide in the future not to declare dividends. We did not pay any cash dividends to our common stockholders in
2020 and can provide no assurance that our Board will declare any cash dividends payable to our common stockholders in the future.
In addition, as our common stock ranks junior to the Series C Preferred Stock, unless full dividends (i) have been paid,
(ii) redeemed in an amount in excess of the initial liquidation value of $1,000 or (iii) set aside for payment on all
such outstanding Series C Preferred Stock for all dividends or increases in the liquidation value in excess of the initial
liquidation amount of $1,000 of such Series C Preferred Stock, no cash dividends may be declared or paid on our common stock.
On December 31st of each year, our Board 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.
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. Also,
our ability to pay dividends in the future depends on, among other things, our future revenues from existing royalties and/or milestone
payments, our ability to acquire other revenue sources and our ability to manage expenses, including costs relating to our ongoing
operations.
Repurchase of Equity Securities
Not applicable.
Item
6. Selected Financial Data
As a smaller reporting
company, we are not required to provide the information required by this item.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion
of our financial condition and results of operations should be read together with our consolidated financial statements and notes
to those statements included elsewhere in this Annual Report on Form 10-K.
Forward-Looking Information and Factors That May Affect
Future Results
The following discussion
contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform
Act of 1995. All statements contained in the following discussion, other than statements that are purely historical, are forward-looking
statements. Forward-looking statements can be identified by the use of forward-looking terminology such as “believes,”
“expects,” “may,” “will,” “should,” “could,” “potential,”
“anticipates,” “estimates,” “plans,” “would,” or “intends” or the negative
thereof, or other variations thereof, or comparable terminology, or by discussions of strategy. Forward-looking statements are
based upon management’s present expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies
regarding the future and are subject to risks and uncertainties that could cause actual results, events or developments to be materially
different from those indicated in such forward-looking statements, including the risks and uncertainties set forth in Item 1A.
Risk Factors. These risks and uncertainties should be considered carefully and readers are cautioned not to place undue reliance
on such forward-looking statements. As such, we cannot assure you that the future results covered by the forward-looking statements
will be achieved.
The percentage changes
throughout the following discussion are based on amounts stated in thousands of dollars and not the rounded millions of dollars
reflected in this section.
Overview
During
2020, the Company adopted a Section 382 rights plan and completed a Rights Offering, each as further described below. As a
result of the successful completion of the Rights Offering, we are positioned as a public company acquisition vehicle, where
we can become an acquisition platform and more fully utilize our NOLs and enhance stockholder value. We intend to acquire profitable
businesses, entities or revenue streams that will generate sufficient income so that we can utilize our approximately $103 million
NOLs. To date, we have not identified any actionable acquisition candidates and, while we expect that, ultimately, we will be successful
in realizing the value of our NOLs, we cannot assure you that we will be able to do so.
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, especially in light of the uncertainty regarding cases in the United States, 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
the Company shares 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. In addition, the effects of the COVID-19 pandemic, including
the current global challenges, may negatively impact our search for a business acquisition or investment, as well as the business
and/or results of operations of any target business that we acquire or in which we invest.
Prior to 2017, the
primary source of our royalty revenues was derived from sales of PegIntron, which is marketed by Merck. We currently have no clinical
operations and limited corporate operations. We have no intention of resuming any clinical
development activities. Royalty revenues from sales of PegIntron accounted for 42% and 55% of our total revenues for the years
ended December 31, 2020 and 2019, respectively, net of the effects of Merck’s adjustments for recoupment of previously
overpaid royalties.
We
have a marketing agreement with Micromet AG, now part of Amgen, Inc. (the “Micromet Agreement”), pursuant to which
we may be entitled to a share of certain milestone and royalty payments if Vicineum, a drug being developed by Sesen,,is approved
for the treatment of non-muscle invasive bladder cancer. In a press release dated February 16, 2021, Sesen announced that the U.S.
Food and Drug Administration (the “FDA”) has accepted for filing Sesen’s Biologic License Application (“BLA”)
for Vicineum. The FDA further granted Priority Review, with a target Prescription Drug User Fee Act (“PDUFA”) date
for a decision on the BLA of August 18, 2021. Due to the challenges associated with developing and obtaining approval for drug
products, and the lack of our involvement in the development and approval process, there is substantial uncertainty as to whether
we will receive any milestone or royalty payments under the Micromet Agreement. We
will not recognize revenue until all revenue recognition requirements are met.
At December 31,
2018, according to Merck, we had a liability to Merck of approximately $439,000 based primarily on Merck’s assertions regarding
recoupments related to prior returns and rebates. During the year ended December 31, 2019, net royalties from PegIntron were
approximately $115,000. As such, as asserted by Merck, the Company’s liability to Merck was $324,000 at December 31,
2019, as discussed in Note 4 to the Consolidated Financial Statements. During the year ended December 31, 2020, net
royalties from PegIntron were approximately $22,000. Accordingly, as asserted by Merck, the Company’s liability to Merck
was $302,000 at December 31, 2020, as discussed in Note 4 to the Consolidated Financial Statements.
During the second quarter
of 2019, we received a one-time, non-refundable, payment of approximately $66,000 from Novartis Pharma AG in payment of a worldwide,
royalty free non-exclusive license to certain Canadian patents.
During the fourth quarter
of 2019 and 2020, we received a license maintenance fee of approximately $27,000 and $30,000, respectively, from Amgen, Inc.
in payment of a worldwide, royalty-free non-exclusive right to license Vicineum. The fee represents half of the amount paid
by Viventia on an annual basis for the continued right to license Vicineum.
During 2019, we
distributed to our shareholders cash dividends in the aggregate amount of approximately $8.0 million. (See Note 6 to the Consolidated
Financial Statements.)
In 2018, the primary
source of our royalty revenues was related to a milestone payment of $7.0
million due from Servier. On January 30, 2019, we entered into the Letter Agreement
with Servier, in connection with the Asset Purchase Agreement, by and between Klee Pharmaceuticals, Inc., 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 us 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 one month to 21 years. In addition,
under the Letter Agreement, we agreed to waive Servier’s obligations to pursue the development of SC Oncaspar in Europe and
the approval of SC Oncaspar by the EMEA under the Asset Purchase Agreement, provided that we did not waive Servier’s obligation
to make any applicable milestone payment to us upon EMEA approval, if any, of SC Oncaspar. Servier was required to make the $7.0
million milestone payment to us 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. We recorded the $7.0 million milestone revenue in
2018 and a current milestone receivable at December 31, 2018. The $7.0 million payment was received in July 2019.
We
may be entitled to certain potential future milestone payments contingent upon the achievement of certain regulatory approval-related
milestones by third-party licensees. We cannot assure you that we will receive any milestone payments resulting from our agreements
with any of our third-party licensees or that any sales of related products will be made. We will not recognize revenue
from any of our third-party licensees until all revenue recognition requirements are met.
Former Plan of Dissolution
On February 4,
2016, our Board adopted a Plan of Liquidation and Dissolution (the “Plan”), pursuant to which we 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, our Board of Directors postponed seeking
shareholder approval for the Plan, and on November 9, 2020, our Board of Directors withdrew and terminated the Plan as a result
of its successful Rights Offering. See below and Notes 12 and 14 to the Consolidated Financial Statements.
Results
of Operations (in millions of dollars):
|
|
For
the Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Royalties and milestones, net
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Total revenues
|
|
|
0.1
|
|
|
|
0.2
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1.4
|
|
|
|
1.2
|
|
Operating loss
|
|
|
(1.3
|
)
|
|
|
(1.0
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
$
|
(1.3
|
)
|
|
$
|
(1.0
|
)
|
Overview
The following
table summarizes our royalties earned in 2020 and 2019:
Royalties
and Milestones Revenues (in millions of dollars):
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2020
|
|
|
Change
|
|
|
2019
|
|
Royalties and milestones revenues
|
|
|
0.1
|
|
|
|
(50
|
)
|
|
|
0.2
|
|
In 2020 and 2019, we
earned total net royalties and milestones revenues of approximately $0.1 million and $0.2 million, respectively. The revenues in
2020 were from royalty revenues from Amgen, Inc. in payment of a worldwide, royalty-free non-exclusive right to license Viventia
and from royalty revenues from Merck related to sales of PegIntron. Royalty revenues from Viventia and PegIntron accounted for
58% and 42%, respectively, of our total royalty revenues in 2020. The revenues in 2019 were primarily from royalty revenues from
Merck related to sales of PegIntron. Royalty revenues from sales of PegIntron accounted for approximately 55% of our total royalty
revenues in 2019. Our right to receive royalties on U.S. and European sales of PegIntron expired in 2016 and 2018, respectively,
expired in Malaysia in 2020, and will expire in Japan in 2021 and Chile in 2024.
At December 31,
2018, according to Merck, we had a liability to Merck of approximately $439,000 based, primarily, on Merck’s assertions regarding
recoupments related to prior returns and rebates. During 2019, net royalties from PegIntron were approximately $115,000. As such,
as asserted by Merck, the Company’s liability to Merck was $324,000 at December 31, 2019, net of a 25% royalty interest
held by DRI Capital Inc., as discussed in Note 4 to the Consolidated Financial Statements.
Net royalty revenues
in 2020 from sales of PegIntron were approximately $22,000. Accordingly, as asserted by Merck, the Company’s net liability
to Merck was $302,000 at December 31, 2020, as discussed in Note 4 to the Consolidated Financial Statements.
We believe that we
will receive little or no additional royalties from Merck and may incur additional chargebacks from returns and rebates in amounts
that, based on current estimates, are not believed to be material. As reported by Merck, in recent years, sales declines were driven
by lower volumes in nearly all regions, as the availability of new therapeutic options resulted in continued loss of market share.
General
and Administrative Expenses (in millions of dollars):
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2020
|
|
|
Change
|
|
|
2019
|
|
General and administrative expenses
|
|
$
|
1.4
|
|
|
|
15
|
|
|
$
|
1.2
|
|
For the year ended
December 31, 2020, general and administrative expenses were $1.4 million, up approximately $200,000 (15%) from $1.2 million
in the prior year. The change in 2020 from 2019 was primarily from an increase in legal, consulting, and reporting fees, as partially
offset by a decrease in contracted services and filing fee expenses. In particular, legal and other fees associated with the Section 382
rights plan and issues surrounding proxy filings and the annual meeting contributed significantly to the 2020 increase in general
and administrative expenses.
In 2020 and 2019, general
and administrative expenses consisted primarily of consulting fees for executive services, outside professional services for accounting,
audit, tax and legal services.
Income Taxes
As a result of expenses
exceeding revenue for the year ended December 31, 2020, we generated approximately $1.3 million in taxable loss before utilization
of NOLs. We utilized none of our NOLs due to the taxable loss position. In 2020, due to the valuation allowance placed on our deferred
tax assets, the deferred tax expense resulting from the usage and/or expiration of deferred tax assets was offset by a corresponding
deferred tax benefit from a reduction in valuation allowance, and we recorded no deferred tax expense during the year ended December 31,
2020. Absent an acquisition of a profitable business, we are projecting future tax losses and have recorded a full valuation allowance
against our remaining deferred tax assets as of December 31, 2020, as we currently believe it is more likely than not that
these assets will not be realized. However, we intend to acquire profitable businesses, entities or revenue streams that will generate
sufficient income so that we can utilize our approximately $103 million NOLs. To date, we have not identified any actionable acquisition
candidates and, while we expect that, ultimately, we will be successful in realizing the value of our NOLs, we cannot assure you
that we will be able to do so.
Our management will
continue to assess the need for this valuation allowance and will make adjustments when appropriate. Additionally, our management
believes that our NOLs 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 14 to the Consolidated Financial Statements.)
These projections and
beliefs are based upon a variety of estimates and numerous assumptions made by our management with respect to, among other things,
forecasted sales of the drug products for which we have the right to receive royalties, our ability to acquire profitable businesses,
entities or revenue streams that will generate sufficient income so that we can utilize our NOLs and other matters, many of which
are difficult to predict, are subject to significant uncertainties and are beyond our control. As a result, we cannot assure you
that the estimates and assumptions upon which these projections and beliefs are based will prove accurate, that the projected results
will be realized or that the actual results will not be substantially higher or lower than projected.
Section 382 Rights Plan
On August 14,
2020, in an effort to protect stockholder value by attempting to protect against a possible limitation on our ability to use our
NOLs, our 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 us one one-thousandth of a share of our 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 of Directors), (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 of the Internal Revenue Code or any successor statute and (iv) the close of business on the
first day of a taxable year of the Company to which our Board of Directors determines that no NOLs may be carried forward.
Rights Offering
On September 1,
2020, our Board of Directors approved the Rights Offering consisting of shares of newly designated Series C Preferred Stock,
par value $0.01 per share, and shares of the Company’s common stock. On October 9, 2020, the Rights Offering was completed
and, as a result, we realized gross proceeds of approximately $43.6 million, issued 40,000 shares of Series C Preferred Stock
and 30,000,000 shares of common stock such that there is currently an aggregate of 40,000 shares of Series C Preferred Stock
and 74,214,603 shares of common stock outstanding. (See Note 14 to the Consolidated Financial Statements.)
With regard to the
Series C Preferred Stock, 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 our common stock. The initial liquidation value of the Series C
Preferred Stock was $1,000 per share. The liquidation value at December 31, 2020 was $1,012 per share. On or after November 1,
2022, we may redeem the Series C Preferred Stock at any time, in whole or in part, for an amount 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 we redeem
their shares in the event that we undergo a change of control.
We believe that the
completion of the Rights Offering will not limit the use of our NOLs due to any Section 382 limitations.
The Company’s
Board of Directors did not declare a dividend on the Series C Preferred Stock as of December 31, 2020. (See Note 15 to
the Consolidated Financial Statements.)
Liquidity and Capital Resources
Our current source
of liquidity is our existing cash on hand, which includes the approximately $43.6 million of gross proceeds from our Rights Offering.
(See Note 14 to the Consolidated Financial Statements.) While we no longer have any research and development activities, we continue
to retain rights to receive royalties and milestone payments from existing licensing arrangements with other companies and, accordingly,
we may be entitled to a share of milestone and royalty payments from the approval and sale of Vicineum, We believe that our existing
cash on hand will be sufficient to fund our operations, at least, through February 2022. Our future royalty revenues may be
de minimis over the next several years unless and until we receive a share of milestone and royalty payments resulting from
the approval and sale of Vicineum, and we cannot assure you that we will receive any royalty, milestone or other revenues.
While
we are positioned as a public company acquisition vehicle, where we can become an acquisition platform and more fully utilize
our NOLs and enhance stockholder value, we cannot assure you that we will succeed in making acquisitions that are profitable and
that will enable us to utilize our NOLs.
Cash provided by operating
activities represents net loss, as adjusted for certain non-cash items including the effect of changes in operating assets and
liabilities. Cash used in operating activities during 2020 was $0.4 million, as compared to cash provided by operating activities
of $6.9 million in 2019. The decrease of approximately $7.3 million was primarily attributable to our collection of a $7.0 million
milestone receivable during 2019 and an approximately $0.3 million increase in our net loss.
Cash provided by financing
activities was approximately $43.1 million in 2020, attributable entirely to the net proceeds from the Rights Offering in October 2020,
offset by the payment of $0.5 million of offering-related costs.
The net effect of the
foregoing was an increase of cash of approximately $42.7 million, from $5.4 million at December 31, 2019 to $48.1 million
at December 31, 2020.
Off-Balance Sheet Arrangements
We do not participate
in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow limited purposes. As of December 31, 2020, we were not involved in any off-balance
sheet special purpose entity transactions.
Critical Accounting Policies and Estimates
A critical accounting
policy is one that is both important to the portrayal of a company’s financial condition and results of operations and requires
management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain.
Our consolidated financial
statements are presented in accordance with accounting principles that are generally accepted in the U.S. (“U.S. GAAP”).
All applicable U.S. GAAP accounting standards effective as of December 31, 2020 have been taken into consideration in preparing
the consolidated financial statements. The preparation of the consolidated financial statements requires estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Some of those estimates are
subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies
and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies
could affect our consolidated financial statements.
We base our estimates,
to the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors
and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and
liabilities. We evaluate our estimates on an ongoing basis and make changes when necessary. Actual results could differ from our
estimates.
Revenues
Royalties under our
agreements with third parties and pursuant to the sale of our former specialty pharmaceutical business are recognized when reasonably
determinable and earned through the sale of the product by the third party and collection is reasonably assured. Notification from
the third-party licensee of the royalties earned under the license agreement is the basis for royalty revenue recognition. This
information generally is received from the licensees in the quarter subsequent to the period in which the sales occur.
Contingent payments
due under the Asset Purchase Agreement for the sale of our former specialty pharmaceutical business are recognized as income when
the milestone has been achieved and collection is assured, such payments are non-refundable and no further effort is required on
our part or the other party to complete the earning process.
Income Taxes
Under the asset
and liability method of accounting for income taxes, 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 recovered or settled. A valuation allowance on net deferred tax assets is provided for when it
is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31,
2020, we believe, based on our projections, that at this time it is more likely than not that our net deferred tax assets,
including our net operating losses from operating activities, will not be realized. We are positioned as a public company
acquisition vehicle, where we can become an acquisition platform and more fully utilize our NOLs. We intend to acquire
profitable businesses, entities or revenue streams that will generate sufficient income so that we can utilize our
approximately $103 million NOLs. At this time, however, we cannot assure you that we will be successful in doing so.
Accordingly, our management will continue to assess the need for this valuation allowance and will make adjustments when
appropriate. Additionally, our management believes that our NOLs will not be limited by any changes in our ownership as a
result of the successful Completion of the Rights Offering (See Note 14 to the Consolidated Financial Statements).
We recognize the benefit
of an uncertain tax position that we have taken or expect to take on the income tax returns we file if it is more likely than not
that we will be able to sustain our position.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
As a smaller reporting
company, we are not required to provide the information required by this item.
Item 8. Financial Statements and Supplementary
Data
Financial statements
and notes thereto appear on pages F-1 to F-20 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a)
|
Evaluation of Disclosure Controls and Procedures
|
Our management, under
the direction of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act), as of December 31,
2020. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and Principal
Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, our Principal Executive
Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31,
2020.
(b)
|
Changes in Internal Control Over Financial Reporting
|
There were no changes
in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) under
the Exchange Act, during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
(c)
|
Management’s Report on Internal Control over Financial Reporting
|
It is the responsibility
of the management of Enzon Pharmaceuticals, Inc. and Subsidiaries to establish and maintain adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting
is a process designed by, or under the supervision of, our Principal Executive Officer and Principal Financial Officer to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of Enzon; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Enzon are
being made only in accordance with authorizations of management and directors of Enzon; and (iii) provide reasonable assurance
regarding the prevention or timely detection of unauthorized acquisition, use or disposition of Enzon’s assets that could
have a material effect on the consolidated financial statements of Enzon.
Under the supervision
and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on criteria established in “Internal Control—Integrated Framework - 2013” issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Our management concluded that as of December 31, 2020 our internal
control over financial reporting was effective based on those criteria.
(d)
|
Limitations on the Effectiveness of Controls
|
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
/s/ Andrew Rackear
|
|
/s/ Richard L. Feinstein
|
Andrew Rackear
|
|
Richard L. Feinstein
|
Chief Executive Officer and Secretary
|
|
Vice President-Finance and Chief Financial Officer
|
(Principal Executive Officer)
|
|
(Principal Financial Officer)
|
|
|
|
February 23, 2021
|
|
February 23, 2021
|
Item 9B. Other Information
On
February 22, 2021, the Board of Directors of the Company determined that the 2021 annual meeting of stockholders (the “2021
Annual Meeting”) will be held on June 2, 2021. The record date for the determination of stockholders of the Company entitled
to receive notice of and to vote at the 2021 Annual Meeting shall be the close of business on April 12, 2021.
Because
the date of the 2021 Annual Meeting has changed more than 30 days after the anniversary of the Company’s 2020 annual meeting
of stockholders (the “2020 Annual Meeting”), the Company is informing its stockholders of the revised deadlines for
the submission of stockholder proposals. Stockholder proposals intended to be considered for inclusion in the Company’s proxy
statement and form of proxy for presentation at the 2021 Annual Meeting must comply with Rule 14a-8 of the Securities Exchange
Act of 1934, as amended (“Rule 14a-8”). Any stockholder proposal to be considered for inclusion in the Company’s
proxy materials for the 2021 Annual Meeting must be submitted to the Company a reasonable time before the Company begins to print
and send the proxy materials. The submission of a stockholder proposal does not guarantee that it will be included in the Company’s
proxy materials.
Stockholders
wishing to submit proposals for the 2021 Annual Meeting outside the process of Rule 14a-8 or nominate individuals to the Company’s
Board of Directors must comply with the advance notice and other provisions of Article II, Section 2.15 of the Company’s
Second Amended and Restated Bylaws. Since the date of the 2021 Annual Meeting has moved more than 25 days from the anniversary
date of the 2020 Annual Meeting, to be timely, a notice by the stockholder must be delivered to the Corporate Secretary of the
Company at the address set forth below not later than Friday, March 5, 2021.
Any
proposals or director nominations submitted outside of Rule 14a-8 must be in proper form and delivered to or mailed and received
at the following address not later than the deadline discussed above: Attn: Corporate Secretary, Enzon Pharmaceuticals, Inc., 20
Commerce Drive, Suite 135, Cranford, New Jersey 07016. To be in proper form, a stockholder proposal, including any director nomination,
must include all of the information required for such proposal or nomination by the Company’s Second Amended and Restated
Bylaws.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
Description of Business
|
Enzon Pharmaceuticals, Inc.
(together with its subsidiaries, the “Company,” “Enzon,” “we” or “us”) is positioned
as a public company acquisition vehicle, where it can become an acquisition platform and more fully utilize its net operating loss
carryforwards (“NOLs”) and enhance stockholder value.
In September 2020,
the Company initiated a rights offering for its common and preferred stock (see below and Note 14 to our Condensed Consolidated
Financial Statements), which closed in October 2020, and it realized $43.6 million in gross proceeds. This has enabled the
Company to embark on its plan to realize the value of its approximately $103 million net operating losses (“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 13 to our Condensed Consolidated Financial Statements).
Historically, the Company
had 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. Enzon has a marketing agreement in the drug Vicineum, which, if approved, will, potentially, generate milestone and
royalty payments to it in the future. Enzon cannot assure you that it will earn material future royalties or milestones.
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 U.S.
Food and Drug Administration’s (“FDA”) 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 one 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. The Company recorded that amount as a current receivable at December 31, 2018. The Company received
the $7.0 million payment in July 2019.
The
Company has a marketing agreement with Micromet AG, now part of Amgen, Inc. (the “Micromet Agreement”), pursuant
to which the Company may be entitled to a share of certain milestone and royalty payments if Vicineum, a drug being developed by
Sesen Bio, Inc. (“Sesen”), is approved for the treatment of non-muscle invasive bladder cancer. In a press release
dated February 16, 2021, Sesen announced that the U.S. Food and Drug Administration (the “FDA”) has accepted for filing
Sesen’s Biologic License Application (“BLA”) for Vicineum. The FDA further granted Priority Review, with a target
Prescription Drug User Fee Act (“PDUFA”) date for a decision on the BLA of August 18, 2021. Due to the challenges associated
with developing and obtaining approval for drug products, and the lack of involvement by the Company in the development and approval
process, there is substantial uncertainty as to whether the Company will receive any milestone or royalty payments under the Micromet
Agreement. The Company will not recognize revenue until all revenue recognition requirements
are met.
In August 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. (See Note 13 to the Consolidated Financial Statements.)
In September 2020,
the Company’s Board of Directors approved a Rights Offering (the “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 (“Units”) at a subscription price per Unit of $1,090. In the Rights Offering, each stockholder
on the Record Date received one subscription right for every share of common stock owned 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 one share of newly
designated Series C Preferred Stock, par value $0.01 per share, and 750 shares of the Company’s common stock. The subscription
period for the Rights Offering ended on October 9, 2020.
As a result of the
sale of all 40,000 Units available for purchase in the Rights Offering, the Company received approximately $43.6 million of gross
proceeds and had 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. (See Note 14 to the Consolidated Financial Statements.)
On December 31st
of each year, 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. The Company’s Board of Directors did not declare a dividend as of December 31, 2020 and,
at December 31, 2020, the liquidation value of the Series C Preferred Stock was $1,012 per share. (See Note 15 to the
Consolidated Financial Statements.)
The Company maintains
its principal executive offices at 20 Commerce Drive, Suite 135, Cranford, New Jersey 07016 through a service agreement with
Regus Management Group, LLC.
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2)
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The consolidated financial
statements include the accounts of Enzon Pharmaceuticals, Inc. 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.
Deferred Stock Offering Expenses
The Company classified
expenses related to the Rights Offering (See Note 14 to the Consolidated Financial Statements) not completed as of the balance
sheet date as Deferred Stock Offering Expenses. Such expenses, aggregating approximately $524,000, were reclassified as an offset
to Additional Paid-in-Capital upon completion of the Rights Offering.
Financial Instruments and Fair Value
The carrying values
of cash and cash equivalents, royalty receivable, other current assets, accounts payable, accrued expenses and other current liabilities
in the Company’s consolidated balance sheets approximated their fair values at December 31, 2020 and 2019 due to their
short-term nature. As of December 31, 2020, the Company held cash equivalents aggregating approximately $43.6 million.
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. As a result, 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 income when the milestone has been achieved and collection is assured, such payments are non-refundable and no further effort
is required on the part of the Company or the other party to complete the earning process.
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 CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3)
|
Recent Accounting Pronouncements
|
The Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic
842) and several related ASUs on practical expedient and targeted improvements. These ASUs require 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. The Company adopted these ASUs on accounting for leases effective January 1, 2019. Due to the current
nature of the Company’s lease obligations, adoption of the standard did not have a material effect on the Company’s
consolidated financial statements.
The
Company adopted, ASU 2016-13, "Financial Instruments-Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments,” effective January 1, 2020. The
amendments of ASU 2016-13 are intended to provide information related to expected credit losses on financial instruments and
other commitments to extend credit. Due to the current nature of the Company’s financial instruments and other
commitments, adoption of the standard did not have a material effect on the Company’s consolidated financial
statements.
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4)
|
Accounts Payable and Accrued Expenses
|
Prior to 2017, the
Company’s primary source of royalty revenues was derived from sales of PegIntron, which is marketed by Merck & Co.,
Inc. (“Merck”). As of December 31, 2018, according to Merck, the Company had a net liability to Merck (net of
a 25% royalty interest held by DRI Capital, Inc.) aggregating approximately $439,000. This was based on Merck’s assertions
regarding the net result of overpayments, rebates and returns related to prior periods’ sales of PegIntron. Merck expected
to recoup such overpayments through reductions of future royalties earned by the Company. In the year ended December 31, 2019,
net royalties from PegIntron were approximately $115,000. As such, as asserted by Merck, the Company’s net liability to Merck
was $324,000 at December 31, 2019.
During the year ended
December 31, 2020, net royalty revenues from Merck aggregated approximately $22,000. Accordingly, as asserted by Merck, the
Company’s net liability to Merck was approximately $302,000 at December 31, 2020.
The Company believes
that it will receive little or no future 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.
Accrued expenses and
other current liabilities consisted of the following as of December 31, 2020 and 2019 (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Professional and consulting fees
|
|
$
|
92
|
|
|
$
|
81
|
|
Other
|
|
|
18
|
|
|
|
18
|
|
|
|
$
|
110
|
|
|
$
|
99
|
|
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Preferred Stock
The Company has authorized
3,000,000 shares of preferred stock in one or more series of which, at December 31, 2020, 40,000 shares have been issued,
are outstanding and are designated as Series C in connection with the Rights Offering discussed in Note 14 and 100,000 shares
have been designated as Series A-1 Junior Participating Preferred Stock in connection with the August 2020 Section 382
rights plan discussed in Note 13.
Common Stock
As of December 31,
2020, the Company reserved 9,818,392 shares of its common stock for the non-qualified and incentive stock plans.
On January 30,
2019, the Board 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 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.
(7)
|
Loss Per Common Share
|
Basic earnings (loss)
per common share (EPS) is calculated by dividing net income (loss), less any dividends, accretion or reduction or redemption on
our Series C Preferred Stock, by the weighted average number of common shares outstanding during the reported 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 common 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 years ended December 31, 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 years ended December 31, 2020 and 2019, there were no common stock equivalents. Loss per
common share information was as follows (in thousands, except per share amounts) for the years ended December 31, 2020 and
2019:
|
|
2020
|
|
|
2019
|
|
Loss per Common Share – Basic and Diluted
|
|
|
|
|
|
|
|
|
Net loss for year
|
|
$
|
(1,311
|
)
|
|
$
|
(979
|
)
|
Dividends on Series C preferred stock
|
|
|
(460
|
)
|
|
|
-
|
|
Net loss available to common shareholders
|
|
$
|
(1,771
|
)
|
|
$
|
(979
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
51,100
|
|
|
|
44,215
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
At December 31,
2020 and 2019, options for 25,000 and 41,787 shares, respectively, were outstanding that have been excluded from the calculation
of diluted weighted-average number of shares outstanding, as they would be anti-dilutive, since the respective options’ strike
price was greater than the market price of the respective shares.
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Through the Compensation
Committee of the Board, the Company administers the 2011 Stock Option and Incentive Plan (the “2011 Plan”), which provides
incentive and non-qualified stock option benefits for employees, officers, directors and independent contractors providing services
to Enzon. Options granted to employees generally vest over four years from date of grant and options granted to directors vest
after one year. The exercise price of the options granted must be at least 100 percent of the fair value of the Company’s
common stock at the time the options are granted. Options may be exercised for a period of up to ten years from the grant date.
As of December 31, 2020, the 2011 Plan authorized equity-based awards for 5.0 million common shares of which approximately
4.6 million shares remained available for grant. However, there will be no further grants made pursuant to this plan.
In connection with
the special cash dividends that were paid on March 21, 2019 to stockholders of record as of February 21, 2019 and on
October 15, 2019 to stockholders of record as of October 1, 2019 (See Note 6 to the Consolidated Financial Statements),
the Compensation Committee of the Board approved equitable adjustments to the Company’s outstanding stock options and restricted
stock units.
The following summary
of the activity in the Company’s outstanding stock option plans, includes the 2011 Stock Option and Incentive Plan, the 2001
Incentive Stock Plan, and the 1987 Non-Qualified Stock Option Plan and reflects the equitable adjustments approved by the Board
(options in thousands):
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Price Per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Option
|
|
|
Term (years)
|
|
|
Value ($000)
|
|
Outstanding at December 31, 2020 and 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
42
|
|
|
$
|
2.93
|
|
|
|
1.23
|
|
|
$
|
-
|
|
Expired and forfeited
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
25
|
|
|
$
|
1.31
|
|
|
|
1.05
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2020 and 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
42
|
|
|
$
|
2.93
|
|
|
|
1.23
|
|
|
$
|
-
|
|
Expired and forfeited
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
25
|
|
|
$
|
1.31
|
|
|
|
1.05
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020 and 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
42
|
|
|
$
|
2.93
|
|
|
|
1.23
|
|
|
$
|
-
|
|
Expired and forfeited
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
25
|
|
|
$
|
1.31
|
|
|
|
1.05
|
|
|
$
|
-
|
|
As of December 31,
2020, there was no unrecognized compensation cost related to unvested options that the Company expects to recognize.
No options were granted
during the years ended December 31, 2020 and 2019.
During the years ended
December 31, 2020 and 2019, the Company recorded no stock-based compensation related to stock options. The Company’s
policy is to use newly issued shares to satisfy the exercise of stock options.
The Company received
no cash from exercises of stock options during either of the years ended December 31, 2020 and 2019.
ENZON PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The components of the
income tax provision are summarized as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State and foreign
|
|
|
7
|
|
|
|
6
|
|
Total current
|
|
|
7
|
|
|
|
6
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal and state
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
7
|
|
|
$
|
6
|
|
The following table
represents the reconciliation between the reported income taxes and the income taxes that would be computed by applying the federal
statutory rate (21% for years ended December 31, 2020 and 2019) to income before taxes (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Income tax provision at federal statutory rate
|
|
$
|
(274
|
)
|
|
$
|
(204
|
)
|
Add (deduct) effect of:
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax
|
|
|
(86
|
)
|
|
|
(65
|
)
|
Expiration of federal research and development credits
|
|
|
1,039
|
|
|
|
416
|
|
Expiration of capital loss carryforwards
|
|
|
-
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(672
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
7
|
|
|
$
|
6
|
|
No federal income tax
expense was incurred in relation to normal operating results.
As of December 31,
2020 and 2019, the cumulative tax effects of temporary differences that give rise to the deferred tax assets were as follows (in
thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryforward
|
|
$
|
23,398
|
|
|
$
|
23,030
|
|
Research and development credits carryforward
|
|
|
14,795
|
|
|
|
15,835
|
|
Total gross deferred tax assets
|
|
|
38,193
|
|
|
|
38,865
|
|
Less valuation allowance
|
|
|
(38,193
|
)
|
|
|
(38,865
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ASC 740 requires the
reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. For the period ended December 31, 2019, the Company
believed that it was more likely than not that future taxable income would not exist to utilize some or all of its deferred tax
assets. Accordingly, it recorded a valuation allowance in the amount of its total deferred tax assets for the period ended December 31,
2019. In 2020, the Company generated approximately $1.3 million in taxable loss before utilization of NOLs. The Company utilized
none of the NOLs due to the taxable loss position. Due to the valuation allowance placed on its deferred tax assets, the deferred
tax expense resulting from the usage and/or expiration of deferred tax assets was offset by a corresponding deferred tax benefit
from a reduction in valuation allowance, and the Company recorded no deferred tax expense at December 31, 2020. The Company
intends to acquire profitable businesses, entities or revenue streams that will generate sufficient income so that it can utilize
its approximately $103 million NOLs. To date, no actionable acquisition candidates have been identified and, while the Company
expects that, ultimately, it will be successful in realizing the value of its NOLs, the Company cannot provide assurance that it
will be able to do so.
Management of the Company
will continue to assess the need for this valuation allowance and will make adjustments when appropriate.
At December 31,
2020, the Company had federal NOLs of approximately $103 million, of which approximately $100.6 million will expire in the years
2025 through 2036, and New Jersey state NOLs of approximately $25.2 million that expire in the years 2031 through 2040. Under the
Tax Cuts and Jobs Act, net operating losses generated in tax years beginning after December 31, 2017 have an unlimited carryforward
period, and the amount of net operating loss allowed to be utilized each year is limited to 80% of taxable income.
The Coronavirus Aid,
Relief and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 and provides
for a five-year carryback period for net operating losses generated after 2017, but before 2021. The CARES Act also 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 in 2018 and later have an indefinite carryforward period and net operating losses generated
prior to 2018 continue to be carried forward for 20 years and have no 80% limitation on utilization.
The Company had federal
and state capital loss carryforwards of approximately $1.2 million that expired in 2018. The Company also had federal research
and development (“R&D”) credit carryforwards of approximately $1.0 million that expired in 2020. The Company has
remaining R&D credit carryforwards of approximately $14.8 million that expire in the years 2021 through 2029. These deferred
tax assets were subject to a valuation allowance such that the deferred tax expense incurred as a result of the expiration of the
capital loss and R&D credit carryforwards was offset by a corresponding deferred tax benefit for the related reduction in valuation
allowance.
The Company’s
ability to use the NOLs and R&D tax credit carryforwards may be limited, as they are subject to certain limitations due to
ownership changes as defined by rules pursuant to Section 382 of the Internal Revenue Code of 1986, as amended. However,
management of the Company believes that the Company’s NOLs 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 14 to the Consolidated Financial Statements.) Additionally,
in an effort to protect stockholder value by attempting to protect against a possible limitation on the Company’s ability
to use its NOLs, the Board adopted a Section 382 rights plan. (See Note 13 to the Consolidated Financial Statements.)
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
recorded $485,000 as a long-term receivable and $485,000 as a current receivable as of December 31, 2019. As a result of provisions
in the CARES Act, both the current and long-term amounts were received in 2020.
The Company has not
recorded a liability for unrecognized income tax benefits.
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(10)
|
Significant Agreements
|
Merck Agreement
See Note 4 to the
Consolidated Financial Statements regarding Merck royalty revenues.
Servier Agreement
See Note 1 to the Consolidated
Financial Statements regarding the Servier milestone obligation to the Company.
(11)
|
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, especially in light of the uncertainty regarding cases in the United States, 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
the Company shares 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. In addition, the effects of the COVID-19 pandemic, including
the current global challenges, may negatively impact the Company’s search for a business acquisition or investment, as well
as negatively impacting the business and/or results of operations of any target business which the Company acquires or in which
it invests.
The Company has been
involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company’s consolidated financial position, results of
operations, or liquidity.
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(12)
|
Other Corporate Event
|
Former Plan of Liquidation and Dissolution
On February 4,
2016, the Company’s Board of Directors adopted a Plan of Liquidation and Dissolution, pursuant to which the Company would,
subject to obtaining requisite stockholder approval, be liquidated and dissolved. On November 9, 2020, the Company’s
Board of Directors withdrew and terminated the Plan of Liquidation and Dissolution as a result of the completion of the Rights
Offering. (See Note 14 to the Consolidated Financial Statements.)
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(13)
|
Section 382 Rights Plan
|
On August 14,
2020, in an effort to protect stockholder value by attempting to protect against a possible limitation on the Company’s ability
to use its NOLs, 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 of the Internal Revenue Code 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
NOLs may be carried forward.
On September 1,
2020, the Company’s Board of Directors approved a Rights Offering. For every 1,105 subscription rights held, a stockholder
was entitled to purchase one Unit at the subscription price of $1,090. Each Unit consisted of one share of newly designated Series C
Preferred Stock, par value $0.01 per share, and 750 shares of the Company’s common stock. On October 9, 2020, the Rights
Offering expired and, as a result of the sale of all 40,000 Units, the Company received approximately $43.6 million in gross proceeds
and issued shares of Series C Preferred Stock and shares of common stock such that, following the closing of the Rights Offering,
there was an aggregate of 40,000 shares of Series C Preferred Stock outstanding and 74,214,603 shares of common stock outstanding.
On December 31st
each year, 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 was $1,000 per share. At December 31, 2020, the liquidation value of the Series C Preferred Stock was $1,012 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, for an amount 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
as defined in the Certificate of Designation of the Series C Preferred Stock.
ENZON PHARMACEUTICALS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(15)
|
Series C Preferred Stock
|
In October 2020,
the Company issued 40,000 shares of Series C Preferred Stock for an aggregate purchase price of $40.0 million.
As of December 31,
2020, the Company’s Board of Directors had not declared a cash dividend on the Series C Preferred Stock. Accordingly,
the Company recorded a 5% increase (computed on a pro rata basis) to the liquidation preference of approximately $12 per share
of Series C Preferred Stock, aggregating approximately $460,000, for a cumulative liquidation value of approximately $40,460,000
as of December 31, 2020.
After November 1, 2022,
there is no prohibition on the repurchase or redemption of Series C Preferred Shares while there is any arrearage in the payment
of dividends.
Since the redemption
of the Series C Preferred Stock is contingently or optionally redeemable, the Series C Preferred Stock has been classified
in mezzanine equity on the Consolidated Balance Sheets.
On January 4,
2021, the Company announced that Andrew Rackear had, on December 30, 2020, communicated to the Board his intent to retire
from his role as the Company’s Chief Executive Officer (“CEO”) effective February 26, 2021. On January 4,
2021, the Company also announced that Richard L. Feinstein, Enzon’s Chief Financial Officer (“CFO”), was appointed
as CEO and Secretary, effective February 26, 2021, and would remain as the Company’s CFO.