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 2021 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 2021 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 the 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 more than$100 million 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 certain milestone and royalty payments if Vicineum, a drug being developed bySesen, Inc. , 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") 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 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" 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 issues pertaining to a recent preapproval inspection and product quality. In its public filings, Sesen stated that it made the strategic decision to voluntarily pause further development of Vicineum inthe United States . Sesen also stated that the decision was based on a thorough reassessment of Vicineum following recent discussions with the FDA, which had implications on the size, timeline and costs of an additional Phase 3 clinical trial, which the FDA previously confirmed would be required for a potential resubmission of a BLA for Vicineum. Sesen further stated that it continued to believe Vicineum has benefits for patients and healthcare providers that can be maximized through a company with a larger infrastructure, and as such, intended to seek a partner that could execute further development to realize the full potential of Vicineum. As a result of this decision, Sesen stated that it turned its primary focus to the careful assessment of potential strategic alternatives. OnSeptember 21, 2022 , Sesen announced that it had entered into a definitive merger agreement withCarisma Therapeutics Inc. ("Carisma") and that the combined 14 company will focus on the advancement ofCarisma's proprietary cell therapy for the treatment of cancer and other disorders. Sesen also stated that it intends to seek a partner for the further development of Vicineum. In a filing with theSEC inMarch 2021 , Sesen noted that it had received notice from theEuropean Medicines Agency that its Marketing Authorization Application 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, 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 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.
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
In the three-month and nine-month periods endedSeptember 30, 2021 , we earned approximately$0 and$672,000 , respectively, in milestone revenue from Sesen. There were no comparable revenues in the three-month and nine-month periods endedSeptember 30, 2022 . Separately, in the three-month and nine-month periods endedSeptember 30, 2021 , we were notified by Merck of an approximate$0 and$29,000 repayment, respectively, they believe they are owed of previously-paid royalties on PegIntron. Sales of PegIntron-related products in the area in which our patents have not expired are de minimis and we expect to earn 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 inJapan inDecember 2021 . Such rights will expire inChile 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
Other Income (in thousands of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
% %
2022 Change 2021 2022 Change 2021
Other income $ 208 10,300 % $ 2 $ 300 4,900 % $ 6 Other income is attributable to the interest and dividends received on the invested cash we received from the$43.6 million of proceeds from our rights offering (see Note 12 to our Condensed Consolidated Financial Statements). Other income increased by approximately$294,000 , or 4,900%, to$300,000 for the nine months endedSeptember 30, 2022 from$6,000 for the first nine months of 2021. The increase in other income is attributable to the higher rate of interest in 2022 and the nature of the account in which the proceeds were invested. Other income increased by approximately$206,000 , or 10,300%, to$208,000 for the three months endedSeptember 30, 2022 from$2,000 for the three months endedSeptember 30, 2021 . The increase in other income is attributable to the higher rate of interest in 2022 and the nature of the account in which the proceeds were invested. 15 Operating Expenses:
General and Administrative (in thousands of dollars):
Three Months Ended September 30, Nine Months Ended September 30,
% %
2022 Change 2021 2022 Change 2021General and administrative$ 221 (3) %$ 228 $ 821 (10) %$ 910 General and administrative expenses decreased by approximately$89,000 , or 10%, to$821,000 for the nine months endedSeptember 30, 2022 from$910,000 for the first nine months of 2021. The decrease in expense is substantially attributable to the decrease in consulting fees. General and administrative expenses decreased by approximately$7,000 , or 3%, to$221,000 for the three months endedSeptember 30, 2022 from$228,000 for the third quarter of 2021. The decrease in expense is substantially attributable to the decrease in consulting and accounting fees, as partially offset by an increase in legal and contracted services fees.
Tax Expense:
We incurred a tax (benefit) expense of approximately ($2,000 ) in the first nine months of 2022 and$2,000 in the first nine months of 2021 for theNew Jersey state minimum taxes and a true-up adjustment for the over accrual of theNew Jersey tax in prior years.
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 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. We may become entitled to additional milestone payments as a result of regulatory filings inthe United States andEurope in connection with Vicineum. We may share in royalty payments upon the approval and sale of Vicineum, However, Sesen has announced that it has paused development of Vicineum in theU.S. and any such milestone or royalty payments are unlikely in the near future. We believe that our existing cash on hand will be sufficient to fund our operations, at least, throughNovember 2023 . 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, 2022 was approximately$789,000 , as compared to cash used in operating activities of approximately$251,000 during the comparable period in 2021. This net increase of approximately$538,000 was primarily attributable to the increase in net loss of approximately$285,000 and a net increase of approximately$253,000 in cash used in changes in operating assets and liabilities that was primarily attributable to an increase in prepaid insurance of approximately$333,000 during the nine months endedSeptember 30, 2022 . The net effect of the foregoing was a decrease of cash and cash equivalents of approximately$789,000 , from$47.6 million atDecember 31, 2021 to$46.9 million atSeptember 30, 2022 .
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
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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, 2022 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 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, 2022 , 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$104 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). 17
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.
Our rights to receive royalties on sales of PegIntron and sales of other drug
products have expired in various jurisdictions and, except for Vicineum (the
? development of which has been discontinued by Sesen), 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.
The unprecedented actions taken globally to control the spread of COVID 19 and
its related variants, 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.
18
? 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.
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. If we experience an "ownership change," as defined in Section 382 of the
Internal Revenue Code of 1986, as amended, our ability to fully utilize our
? NOLs on an annual basis will be substantially limited, and the timing of the
usage of the NOLs could be substantially delayed, which could therefore
significantly impair the value of those benefits.
If we experience a "Change of Control," as defined in Certificate of
Designation of the Series C Preferred Stock, the holders of the Series C
? Preferred Stock shall have the right, at such holder's option, to require the
Company to redeem at the Liquidation Preference then in effect all or a portion
of such holder's shares of Series C Preferred Stock, which would negatively
impact our available cash.
A more detailed discussion of these risks and uncertainties and other factors that could affect results is contained in our filings with theSEC , including in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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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