ENZON PHARMACEUTICALS, INC. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "Enzon," the "Company," "we," "us," or "our" and similar terms meanEnzon Pharmaceuticals, Inc. and its subsidiaries. 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 Quarterly Report on Form 10-Q and our 2020 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," "potential," "anticipates," "plans," 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 known and unknown 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 in our 2020 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. As such, no assurance can be given 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
InSeptember 2020 , we initiated a rights offering for our common and preferred stock (see below and Note 12 to our Condensed Consolidated Financial Statements), which closed inOctober 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$103.5 million net operating loss carryforwards ("NOLs") by acquiring potentially profitable businesses or assets. To protect the NOLs, inAugust 2020 , our Board of Directors adopted a Section 382 rights plan (see Note 11 to our Condensed Consolidated Financial Statements). Historically, we 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, we have had no clinical operations and limited corporate operations. We cannot assure you that we will earn material future royalties or milestones. We have a marketing agreement withMicromet 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 Bio, Inc. ("Sesen"), is approved for the treatment of non-muscle invasive bladder cancer. In a press release datedFebruary 16, 2021 , Sesen announced that theU.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 ofAugust 18, 2021 . Accordingly, we earned a milestone of$409,430 in the first quarter of 2021, all of which was received byJune 30, 2021 . However, onAugust 13, 2021 , Sesen announced that it had received a Complete Response Letter ("CRL") from the FDA and that the FDA had determined that it cannot approve the BLA for Vicineum in its present form and had provided recommendations specific to additional clinical/statistical data and analyses in addition to Chemistry, Manufacturing and Controls ("CMA") issues pertaining to a recent preapproval inspection and product quality. In a press release that Sesen issued onNovember 1, 2021 , it noted that onOctober 29, 2021 it had a CMA Type A meeting with the FDA and reviewed issues related to CMC that will be further discussed during the review of the BLA for Vicineum upon potential resubmission. Sesen, also noted that it is preparing for the clinical Type A meeting to discuss the recommendations specific to additional clinical/statistical data and analyses that the FDA raised in the CRL. It expects that meeting to take place later in 2021. In a filing with theU. S. Securities and Exchange Commission ("SEC") inMarch 2021 , Sesen noted that it had received notice from theEuropean Medicines Agency ("EMA") that its Marketing Authorization 12
Application ("MMA") for Vicineum was found to be valid and the review procedure
has officially started. Accordingly, we earned and received an additional
milestone of
Subsequently, onAugust 25, 2021 , Sesen announced that it had withdrawn its application to market Vicineum inEurope . Due to the challenges associated with developing and obtaining approval for drug products, and the lack of involvement by us in the development and approval process, there is substantial uncertainty as to whether we will receive additional milestone or any royalty payments under the Micromet Agreement. We will not recognize revenue until all revenue recognition requirements are met.
Acquisition Activities
Our Board of Directors and our management are actively involved in pursuing, sourcing, reviewing and evaluating various potential acquisition transactions consistent with our long-term strategy. Our management and Board of Directors have made a number of contacts and engaged in discussions with principals of individual companies and financial advisors on behalf of various individual companies, while continuing to evaluate potential transactions. To date, we have not developed any actionable transactions. We will continue to update our stockholders as material developments arise. Throughout this Management's Discussion and Analysis, the primary focus is on our results of operations, cash flows and financial condition. The percentage changes throughout the following discussion are based on amounts stated in
thousands of dollars. Results of Operations Revenues:
Milestones and Royalties (in thousands of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
% %
2021 Change 2020 2021
Change 2020
Milestone and royalty revenues $ - (100) %
In the nine and three-month periods endedSeptember 30, 2021 , we earned approximately$701,000 and$0 , respectively, in milestone revenue from Sesen. Separately, in the nine and three-month periods endedSeptember 30, 2021 , we were notified by Merck of an approximate$29,000 and$0 , respectively, repayment they believe they are owed of previously-paid royalties on PegIntron. Royalty revenues from sales of PegIntron by Merck accounted for 100% of our total milestone and royalty revenues for the nine-month and three-month periods endedSeptember 30, 2020 . Sales of PegIntron-related products will continue their declining trend and we expect to receive little or no future royalties from Merck. Our right to receive royalties onU.S. and European sales of PegIntron expired in 2016 and 2018, respectively, expired inMalaysia in 2020, and will expire inJapan inDecember 2021 andChile inApril 2024 .
Merck has not yet reported royalty revenues earned by us for product sales
and/or recoupments for returns and rebates for the quarter ended
Operating Expenses:
General and Administrative (in thousands of dollars):
Three Months Ended September 30, Nine Months Ended September 30,
% %
2021 Change 2020 2021 Change 2020General and administrative$ 228 (45) %$ 415 $ 910 1 %$ 901
General and administrative expenses remained fairly consistent, increasing by approximately$9,000 , or 1%, to$910,000 for the nine months endedSeptember 30, 2021 from$901,000 for the first nine months of 2020. General and administrative expenses decreased by approximately$187,000 , or 45%, to$228,000 for the three months endedSeptember 30, 2021 from$415,000 for the third quarter of 2020. The decrease in expense is substantially attributable to the 13
disproportionate legal fees and consulting fees that were incurred in connection with the Section 382 Rights Plan during the third quarter of 2020.
Tax Expense:
We incurred no tax expense during the third quarters of 2021 and 2020 and a tax
expense of approximately
Liquidity and Capital Resources
Our current source of liquidity is our existing cash and cash equivalents on hand, which includes the approximately$43.6 million of gross proceeds from our Rights Offering. (See Note 12 to the Condensed 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 received milestone revenue of approximately$701,000 from Sesen during the nine months endedSeptember 30, 2021 . We may become entitled to additional milestone payments as a result of regulatory approvals and initial sales inthe United States andEurope in connection with Vicineum. We may share in royalty payments upon additional sales of Vicineum, We believe that our existing cash and cash equivalents on hand will be sufficient to fund our operations, at least, throughNovember 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 payments or 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 used in operating activities represents a 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 the nine months endedSeptember 30, 2021 was approximately$251,000 , as compared to cash provided by operating activities of approximately$165,000 during the comparable period in 2020. The decrease of approximately$416,000 was significantly attributable to the collection of tax credits of approximately$1.0 million during the comparable period in 2020, as partially offset by the decrease in net loss of approximately$650,000 in the current period. The net effect of the foregoing was a decrease of cash and cash equivalents of approximately$251,000 , from$48.1 million atDecember 31, 2020 to$47.9 million atSeptember 30, 2021 .
Off-Balance Sheet Arrangements
As part of our ongoing business, 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 (SPEs), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually limited
purposes. As of
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 inthe United States ("U.S. GAAP"). All applicableU.S. GAAP accounting standards effective as ofSeptember 30, 2021 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. 14
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 license 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 revenue when the milestone has been achieved, 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
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 ofSeptember 30, 2021 , we believe, based on our projections, that 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$103.5 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 12 to the Condensed 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.
Forward-Looking Information and Factors That May Affect Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements contained in the Quarterly Report on Form 10-Q, 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 the words "believes," "expects," "may," "will," "should," "potential," "anticipates," "plans" 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 known and unknown risks and uncertainties that could cause actual results, events or developments to be materially different from those indicated in such forward-looking statements, including, but not limited to, the following risks and uncertainties:
? We may be unsuccessful in our strategy to fully utilize our NOLs and other tax
assets and enhance stockholder value as a public company acquisition vehicle.
? Our sources of revenue are limited and we may incur losses for the foreseeable
future.
In recent years, we derived most of our royalty revenues from continued sales
? of PegIntron, which have been in sharp decline. In addition, our right to
receive royalties on
2018, respectively, which has negatively impacted our royalty revenues.
15
Our rights to receive royalties on sales of PegIntron and sales of other drug
products have expired in various jurisdictions and, except for Vicineum, will,
? by 2024, expire world-wide. We currently do not anticipate any significant
royalties from other sources, but we may acquire new sources of royalty revenues.
We have an agreement with Sesen from which we have recently received milestone
payments and, potentially, may be entitled to receive future royalty payments
related to sales of Vicineum, a drug being developed by Sesen for the treatment
of non-muscle invasive bladder cancer. In
had received a Complete Response Letter from the FDA and that the FDA had
determined that it cannot approve the BLA for Vicineum in its present form and
had provided recommendations specific to additional clinical/statistical data
and analyses in addition to CMA issues pertaining to a recent preapproval
inspection and product quality. In a press release that Sesen issued on
?
with the FDA and reviewed issues related to CMC that will be further discussed
during the review of the BLA for Vicineum upon potential resubmission. Sesen,
also noted that it is preparing for the clinical Type A meeting to discuss the
recommendations specific to additional clinical/statistical data and analyses
that the FDA raised in the CRL. It expects that meeting to take place later in
2021. Also, in
application to the EMA to market Vicineum in
Sesen will receive approval from the FDA or EMA and, even if so, whether there
will significant sales of Vicineum so as to generate material royalties to us.
The unprecedented actions taken globally to control the spread of COVID 19, as
well as the uncertainty surrounding the success of global vaccination efforts,
? may materially and adversely affect our future right to receive licensing fees,
milestone payments and royalties on product candidates that are being developed
by third parties.
We have reallocated all employment responsibilities and outsourced all
? corporate functions, which makes us more dependent on third parties to perform
these corporate functions.
We may be subject to a variety of types of product liability or other claims
? based on allegations that the use of our product candidates by participants in
our previously conducted clinical trials has resulted in adverse effects, and
our insurance may not cover all product liability or other claims.
? Our revenues largely depend on proprietary rights, which may offer only limited
protection against the development of competing products.
? We are party to license agreements whereby we may receive royalties and or
milestone payments from products subject to regulatory approval.
? The price of our common stock has been, and may continue to be, volatile.
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. The declaration of dividends is within the discretion of our Board of
Directors, subject to any applicable limitations under
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.
? We have adopted a Section 382 rights plan, which may discourage a corporate
takeover.
Anti-takeover provisions in our charter documents and under
? law may make it more difficult to acquire us, even though such acquisitions may
be beneficial to our stockholders.
16
The terms of our outstanding Series C Preferred Stock and the issuance of
? additional series of preferred stock may adversely affect rights of our common
stockholders.
? The interests of our significant stockholders may conflict with the interests
of other stockholders.
A more detailed discussion of these risks and uncertainties and other factors that could affect results is contained in our filings with theU.S. Securities and Exchange Commission , including our Annual Report on Form 10-K for the year endedDecember 31, 2020 . These risks and uncertainties and other factors should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. As such, no assurance can be given that the future results covered by the forward-looking statements will be achieved. All information in this Quarterly Report on Form 10-Q is as of the date of this report, unless otherwise indicated, and we undertake no duty to update this information.
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