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.
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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.
17
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.
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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.
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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.
20
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.)
21
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.
22
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.
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