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.
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 $103.4 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. Despite recent progress in the administration of
vaccines, both the outbreak of recent variants, including Delta and Omicron, and
the related containment measures that have been put in place across the globe,
have had and are likely to continue to have a serious adverse impact on the
global economy and may adversely affect our business operations. The ongoing
global health crisis (including resurgences) resulting from the pandemic have
disrupted, and continue to disrupt, the normal operations of many businesses,
including restrictions such as the temporary closure or scale-back of business
operations and/or the imposition of either quarantine or remote work
requirements for employees, either by government order or on a voluntary basis.
It is impossible to predict the effect and ultimate impact of the COVID-19
pandemic, as the situation is continually evolving. The COVID-19 pandemic may
continue to disrupt the global supply chain and may cause disruptions to our
operations, 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 may negatively impact our search
for a target company, 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
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any clinical development activities. Royalty revenues from sales of PegIntron
accounted for (4)% and 42% of our total revenues for the years ended
December 31, 2021 and 2020, 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 certain milestone
and royalty payments if Vicineum, a drug being developed by Sesen, Inc., 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") had 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 Accordingly, we earned a milestone of $409,430 in the first
quarter of 2021, all of which was received by June 30, 2021. However, on August
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 on December
9, 2021, it noted that on December 8, 2021 it had a Clinical Type A meeting with
the FDA and received greater clarity regarding the requirements for resubmission
of the BLA and trial design, which may include a randomized clinical trial
assessing the safety and efficacy of Vicineum compared to investigators' choice
of intravesical chemotherapy. In a filing with the U. S. Securities and Exchange
Commission ("SEC") in March 2021, Sesen noted that it had received notice from
the European Medicines Agency ("EMA") that its Marketing Authorization
Application ("MMA") for Vicineum was found to be valid and the review procedure
had officially started. Accordingly, we earned and received an additional
milestone of $292,284 in the second quarter of 2021. Subsequently, on August 25,
2021, Sesen announced that it had withdrawn its application to market Vicineum
in Europe.
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.
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.
Results of Operations (in thousands of dollars):
For the
Year Ended December 31,
2021 2020
Revenues:
Royalties and milestones, net $ 701 $ 52
Total revenues 701 52
Operating expenses:
General and administrative 1,170 1,357
Operating loss (469) (1,305)
Other income 7 1
Income tax expense (7) (7)
Net loss $ (469) $ (1,311)
Overview
The following table summarizes our royalties earned in 2021 and 2020:
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Royalties and Milestones Revenues (in thousands of dollars):
For the Year Ended December 31,
%
2021 Change 2020
Royalties and milestones revenues 701 1,248 52
In 2021 and 2020, we earned total net royalties and milestones revenues of
approximately $729,000 and $0, respectively, in milestone revenue from Sesen.
Separately, in 2021, we were notified by Merck of an approximate $28,000
repayment they believe they are owed of previously-paid royalties on PegIntron.
The revenues in 2021 and 2020 were $28,000 and $30,000, respectively, from
license fees from Amgen, Inc. in payment of a worldwide, royalty-free
non-exclusive right to license Vicineum. In 2020, we also earned $22,000 from
royalty revenues from Merck related to sales of PegIntron. Our right to receive
royalties on U.S. and European sales of PegIntron expired in 2016 and 2018,
respectively, expired in Malaysia in 2020, expired in Japan in 2021 and will
expire in Chile in 2024.
At December 31, 2020, we recorded a liability to Merck of approximately $302,000
based primarily on Merck's assertions regarding recoupments related to prior
returns and rebates. During the year ended December 31, 2021, additional
recoupments claimed by Merck related to PegIntron were approximately $29,000. As
such, as asserted by Merck, the Company's liability to Merck was $331,000 at
December 31, 2021, 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.
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 thousands of dollars):
For the Year Ended December 31,
%
2021 Change 2020
General and administrative expenses $ 1,170 (14) $ 1,357
For the year ended December 31, 2021, general and administrative expenses were
approximately $1,170,000, a decrease of approximately $187,000 (14%) from
$1,357,000 in the prior year. The change in 2021 from 2020 was primarily from a
decrease in legal, consulting, and contracted services fees, as partially offset
by an increase in insurance 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 general and
administrative expenses.
In 2021 and 2020, general and administrative expenses consisted primarily of
insurance expenses, consulting fees for executive services, outside professional
services for accounting, audit, tax and legal services.
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Income Taxes
As a result of our expenses exceeding our royalty and milestone income for the
year ended December 31, 2021, we incurred approximately $468,000 in taxable loss
before utilization of NOLs. We utilized none of our NOLs due to the taxable loss
position. 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, 2021. We are projecting future tax losses and have recorded a
full valuation allowance against our remaining deferred tax assets as of
December 31, 2021, 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 $103.4 million NOLs. While we anticipate
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 13 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 June 2. 2024 (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 Series C Preferred Stock 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 13 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
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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 is 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. No dividends have been declared or paid on
the Series C Preferred Stock. 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, 2021 or 2020. Accordingly, the liquidation
value at December 31, 2021 and 2020 was $1,062 and $1,012 per share,
respectively. (See Note 14 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 13 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 2023. Our future royalty revenues are expected to be de minimis
over the next several years 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 2021 was $501,000, as
compared to cash used in operating activities of $380,000 in 2020. The decrease
of approximately $121,000 was primarily attributable to our collection of a
$970,000 tax refund receivable during 2020, offset by an approximately $843,000
decrease in our net loss.
No cash was provided by financing activities in 2021, as compared to
approximately $43.1 million provided by financing activities 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 a decrease of cash of approximately $0.5
million, from $48.1 million at December 31, 2020 to $47.6 million at
December 31, 2021.
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, 2021, 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.
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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, 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.
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, 2021, 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 $103.4 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 13 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.
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ENZON PHARMACEUTICALS, INC. 
