UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 20182019

OR

For the transition period from _________ to _________

Commission file number 001-36435

Enzon Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

(732) 980-4500

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox

Shares of Common Stock outstanding as of November 2, 2018:1, 2019: 44,214,603

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Enzon Pharmaceuticals, Inc. (together with its subsidiaries, “Enzon” or the “Company,” “we” or “us”“Company”), manages its sources of royalty revenues from existing licensing arrangements with other companies primarily related to sales of certain drug products that utilize Enzon’s proprietary technology. In 2017, the primary source of the Company’s royalty revenues was the revenue received from Nektar Therapeutics, Inc. (“Nektar”) pursuant to the execution of a Second Amendment (“Nektar Second Amendment”) to the Company’s Cross-License and Option Agreement (the “Nektar License Agreement”) with Nektar, which generated non-recurring royalty revenues of $7 million (see below). The receipt of this $7 million satisfied all future obligations of royalty payments pursuant to the Nektar License Agreement.

Prior to 2017, the primary source of the Company’s royalty revenues was derived from sales of PegIntron, which is marketed by Merck & Co., Inc. (“Merck”). Prior to 2013, the Company was dedicated to the research and development of innovative therapeutics for patients with high unmet medical needs. The Company currently has no clinical operations and limited corporate operations.The Company has no intention of resuming any clinical development activities or acquiring new sources of royalty revenues. Royalty revenuesIn the first quarter of 2019, net royalties from salesPegIntron were negative $51,000, due to returns and rebates exceeding the amount of PegIntron accounted for 100% of the Company’s total royalty revenues for the three months ended September 30, 2017royalties earned and approximately 80% (exclusive of downward revenue adjustment of approximately $280,000 in the thirdsecond quarter of 2018) and 13% (before adjustment for Merck’s recoupment of previously overpaid royalties of approximately $564,000) of the Company’s total royalty revenues for the nine-month periods ended September 30, 2018 and 2017, respectively. The effects of such adjustments were recorded as decreases of royalty revenues as discussed in Note 11 to the Condensed Consolidated Financial Statements.

In March 2018, Merck notified2019 the Company that a downward adjustment of approximately $313,000earned $142,000 in net royalties was necessary, resulting primarily from product returns. Accordingly, atMerck. At December 31, 2017,2018, the Company accruedhad a liability to Merck of approximately $313,000$439,000, due primarily to product returns and partially offset that amountrebates. After the recoupment by the $88,000 that was due to the Company from Merck. Thus, the Company recorded a net payable to Merck of approximately $225,000 included in accounts payable$51,000 in the condensed consolidated balance sheet at December 31, 2017. In January 2018, Merck paidfirst quarter of 2019 and the $88,000 to the Company, which increased the liability to $313,000. Duringearnings of $142,000 and $2,000 of net royalty revenues from sales of PegIntron during the second quarterand third quarters of 2018, Enzon earned approximately $60,000 of royalties, which reduced2019, respectively, the royalty payable to Merck to $253,000. In the third quarter of 2018, Merck notified the Company of an additional downward adjustment of approximately $280,000, the net effect of royalty income of $54,000 and chargebacks of $334,000. Such chargebacks resulted, primarily, from product rebates and returns. Accordingly, theCompany’s liability to Merck was $533,000$346,000 at September 30, 2018,2019, as discussed in Note 1112 to the Condensed Consolidated Financial Statements. The Company believes that it will receive no more royalties from Merck, but may incur additional chargebacks from returns and rebates and such chargebacks may be material.

During the second quarter of 2019, the Company received a one-time, non-refundable, payment of approximately $65,000 from Novartis Pharma AG in payment of a worldwide, royalty free non-exclusive non-refundable license to certain Canadian patents.

In April 2013, the Company announced that it intended to distribute excess cash, expected to arise from ongoing royalty and milestone revenues, in the form of periodic dividends to stockholders. On February 4, 2016, the Company’s Board adopted a Plan of Liquidation and Dissolution (the “Plan of Liquidation and Dissolution”), the implementation of which has been postponed. (See Note 10 to the Condensed Consolidated Financial Statements.11 Plan of Liquidation and Dissolution.)

On January 30, 2019, the Company entered into a letter agreement with Servier, a wholly owned indirect subsidiary of Les Laboratoires Servier, in connection with the asset purchase agreement dated as of November 9, 2009 (the “Asset Purchase Agreement”), by and between Klee Pharmaceuticals, Inc., Defiante Farmacêutica, S.A. (“Defiante”) and Sigma-Tau, on the one hand, and the Company, on the other hand. Under the letter agreement, Servier, as successor-in-interest to Defiante, has confirmed its obligation to pay the Company 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 1 month to 21 years. In addition, under the letter agreement, the Company has agreed to waive Servier’s obligations to pursue the development of SC Oncaspar in Europe and the approval of SC Oncaspar by the European Medicines Agency (“EMEA”) under the Asset Purchase Agreement, provided that the Company is not waiving Servier’s obligation to make any applicable milestone payment to the Company upon EMEA approval, if any, of SC Oncaspar. Servier was required to make the $7.0 million milestone payment to the Company within three business days following the parties’ completion of procedures for claiming benefits under the double tax treaty between the United States and the United Kingdom. The Company may berecorded that amount as a current receivable at December 31, 2018. The Company received the $7 million payment in July 2019.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has a marketing agreement with Micromet AG (“Micromet”), now part of Amgen, Inc. (the “Micromet Marketing Agreement”), that was entered into in 2004 under which Micromet is the exclusive marketer of the parties’ combined intellectual property portfolio in the field of single-chain antibody technology.  Under the Micromet Marketing Agreement, the parties agreed to share, on an equal basis, in any licensing fees, milestone payments and royalty revenue received by Micromet in connection with any licenses of the patents within the portfolio by Micromet to any third party during the term of the collaboration. To the Company’s knowledge, Micromet has a license agreement with Viventia Biotech (Barbados) Inc. (“Viventia”), now part of Sesen Bio, Inc. (“Sesen”), that was entered into in 2005, under which Micromet granted Viventia nonexclusive rights, with certain sublicense rights, for know-how and patents allowing exploitation of certain single chain antibody products, which patents cover some key aspects of Vicinium, one of Sesen’s drug candidates that is in Phase 3 clinical trials being evaluated for the treatment of patients with non-muscle invasive bladder cancer and in Phase 1 and 2 clinical trials for the treatment of head and neck cancer. To the Company’s knowledge, under the terms of this license agreement between Micromet and Viventia, Micromet is entitled to receive (i) certain potential future milestone payments contingent upon the achievement of certain regulatory approval-related milestones with respect to Oncaspar. Thethe filing of a new drug application for Vicinium with the FDA or the filing of a marketing approval application for Vicinium with the EMEA; (ii) certain milestone payment obligations were assumedpayments with respect to the first commercial sale of Vicinium in the U.S. or Europe and (iii) certain royalties on net sales for ten years from the first commercial sale of Vicinium on a country by Shire plc (“Shire”), when it acquiredcountry basis. Pursuant to the Oncaspar product portfolio previously owned by Sigma-Tau Finanziaria S.p.A. in July 2015. In February 2018, Shire indicated that it was in theregistration stage and awaiting further regulatory action. If Food and Drug Administration (“FDA”) approval is obtained for SC Oncaspar,Micromet Marketing Agreement, the Company would be entitled to a milestone payment50% share of $7.0 million from Servier S.A.S. (Servier), which entered into an agreement to purchase the oncology business from Shire in 2018. According to Shire, the Prescription Drug User Fee Act (“PDUFA”) date for approval of the Biologics License Application (“BLA”) is December 22, 2018. There can be no assurance that the FDA will approve the BLA. Accordingly, there can be no assurance that the Company will receive any of thethese milestone payments related to SC Oncaspar or any other such milestone payments resulting from its agreements with any of the Company’s other third party licensees. The Company will not recognize revenue from Servier orany of the Company’s other third party licensees until all current revenue recognition requirements are met.

Under the Company’s existing agreements with certain third party licensees, the Company may be entitled to (i) potential future milestone payments contingent upon the achievement of certain milestones with respect to other drug products in various stages of clinical and preclinical development and (ii) potential future royalty payments related to any future sales of these drug products.royalties received by Micromet. Due to the challenges associated with developing and obtaining approval for drug products, there is substantial uncertainty whether any of these milestones will be achieved. The Company also has no control over the time, resources and effort that these third party licenseesSesen may devote to theirits programs whether such third party licensees will contest their obligations to make milestone or royalty payments and limited access to information regarding or resulting from such programs. Accordingly, there can be no assurance that the Company will receive any of the milestone or royalty payments under these agreements. the Micromet Marketing Agreement. The Company will not recognize revenue until all revenue recognition requirements are met.

ExceptThe Company maintains its principal executive offices at 20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016 through a lease agreement for these potential milestone payments, the Company anticipates little or no future revenue.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On June 26, 2017, the Company entered into the Nektar Second Amendment, wherein Nektar agreed to buy-out all remaining payment obligations to the Company under the Nektar License Agreement. In consideration for fully paid-up licenses under the Nektar License Agreementspace and for the dismissalservices with prejudice of all claimsRegus Management Group, LLC (“Regus”) and counterclaims asserted in the litigation with Nektar, Nektar agreed to pay the Company the sum of $7.0 million, which satisfies all future obligations of royalty paymentsalso has an office facility at 3556 Main Street, Manchester, VT, 05225 pursuant to the Nektar License Agreement, the first $3.5 million of which was paid within one business day of the effective date of the Nektar Second Amendment and the remaining $3.5 million was to be paid on January 6, 2018. Accordingly, the Company recorded revenue of $7.0 million and a receivable of $3.5 million in the second quarter of 2017. The $3.5 million receivable was paid in full in December 2017.

an office rental agreement with Equinox Junior, LLC (“Equinox”). See Note 10.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared from the books and records of the Company in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim financial information and Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (SEC). Accordingly, these financial statements do not include all of the information and footnotes required for complete annual financial statements. Interim results are not necessarily indicative of the results that may be expected for the full year. Interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated as part of the consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates include legal and contractual contingencies and income taxes. Although management bases its estimates on historical experience, relevant current information and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ from these estimates.

RevenuesRevenue Recognition

In accordance with Financial Accounting Standards Board (“FASB”)Accounting Standards Update (“ASU”) No. 2014-09 (Topic 606), royaltyRoyalty revenues from the Company’s agreements with third parties are recognized when the Company can reasonably determine the amounts earned. In most cases, this will be upon notification from the third-party licensee, which is typically during the quarter following the quarter in which the sales occurred. The Company does not participate in the selling or marketing of products for which it receives royalties. No provision for uncollectible accounts is established upon recognition of revenues. (See Note 3.)

Contingent payments due under the asset purchase agreement for the sale of the Company’s former specialty pharmaceutical business are recognized as incomerevenue when the milestone has been achieved and collection is assured. Suchassured, 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. Other payments, such as license fees, are recorded when they are received, it is determined that 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 are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect of a change in tax rates or laws on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date of the rate change. A valuation allowance is established to reduce the deferred tax assets to the amounts that are more likely than not to be realized from operations.

Tax benefits of uncertain tax positions are recognized only if it is more likely than not that the Company will be able to sustain a position taken on an income tax return. The Company has no liability for uncertain tax positions. Interest and penalties, if any, related to unrecognized tax benefits, would be recognized as income tax expense.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In May 2014, theFASB issued ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers,” relating to revenue recognition.  This new standard provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts.  Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard.  This ASU, as amended, was effective January 1, 2018.  The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

InDuring February 2016, theFASB Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). ASU No. 2016-02 (Topic 842), “Leases,” which is intendedrequires lessees to improve financial reporting around leasing transactions.  This ASU affects all companies and other organizations that engage in leasing transactions (both lessee and lessor) that lease assets such as real estate and manufacturing equipment. This ASU will require organizations that lease assets – referred to as “leases” – to recognize on the balance sheet the assets and liabilities that arise from leases on the balance sheets. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning January 1, 2019. On January 5,lease term. During 2018, the FASB also issued ASU No. 2018-01, Land Easement Practical Expedient, which permits an exposure draft amending certainentity to elect an optional transition practical expedient to not evaluate land easements that existed or expired before the entity’s adoption of Topic 842 and that were not previously accounted for under Accounting Standards Codification 840; ASU 2018-10, Codification Improvements to Topic 842, Leases, which addresses narrow aspects of the guidance originally issued in ASU No. 2016-02; ASU 2018-11, Targeted Improvements, which provides entities with an additional (and optional) transition method whereby an entity initially applies the new leasing standard. The proposed amendments includeleases standard at the adoption date and recognizes a provisioncumulative-effect adjustment to allow entities to elect not to restate comparable periodsthe opening balance of retained earnings in the period of adoption when transitioningand also provides lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors, which addresses sales and other similar taxes collected from lessees, certain lessor costs, and the recognition of variable payments for contracts with lease and nonlease components. The Company adopted these ASUs effective January 1, 2019. Due to the newnature of the Company’s lease obligations (See Note 10), adoption of the standard and instead permit a modified retrospective approach. The Company believes that, in as much as its lease commitments are not material, the new standard willdid not have a material effect on itsthe Company’s condensed consolidated financial statements.

In August 2018, the SEC issued the final rule on Disclosures About Changes in Stockholders’ Equity For filings on Form 10-Q, which extends to interim periods the annual requirement in SEC Regulation S-X, Rule 3-04,2 to disclose (1) changes in stockholders’ equity and (2) the amount of dividends per share for each class of shares (as opposed to common stock only, as previously required). Pursuant to the final rule, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for “the current and comparative year-to-date [interim] periods, with subtotals for each interim period,” i.e., a reconciliation covering each period for which an income statement is presented. Rule 3-04 permits the disclosure of changes in stockholders’ equity (including dividend-per-share amounts) to be made either in a separate financial statement or in the notes to the financial statements.The final rule is effective for all filings made on or after November 5, 2018. The staff of the SEC has indicated it would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. Therefore, the Company expects to conform to this rule in its Form 10-Q for the quarter ending March 31, 2019. Inasmuch as the Company has paid no dividends nor had any stock-related transactions during the nine months ended September 30, 2018 and its only change in stockholders’ equity during that period was its net income (loss), the Company believes that the final rule will not have a material effect on its consolidated financial statements and disclosures.

Other recent ASU's issued by the FASB and guidance issued by the Securities and Exchange CommissionSEC did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.

The carrying values of cash, milestone receivable, other current assets, accounts payable, accrued expenses and other current liabilities in the Company’s condensed consolidated balance sheets approximated their fair values at September 30, 20182019 and December 31, 20172018 due to their short-term nature.

The Company made income tax payments of $2,000 and $0 during the nine months ended September 30, 2019 and 2018, respectively. There were no income tax or interest payments made during the nine months ended September 30, 20182019 or 2017.

2018.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basic earningsloss per common share is computed by dividing the net incomeloss by the weighted average number of shares of common stock outstanding during the period. Restricted stock awards and restricted stock units (collectively, nonvested shares) are not considered to be outstanding shares until the service or performance vesting period has been completed.

The diluted earnings per share calculation would normally involve adjusting both the denominator and numerator as described here if the effect is dilutive. The denominator would include bothInasmuch as the weighted average numberCompany incurred a loss in each of shares ofthe periods presented, diluted loss per common stock outstanding andshare is the same as basic loss per common stock equivalents. Dilutive common stock equivalents potentially include stock options and nonvested shares using the treasury stock method and shares issuable under the employee stock purchase plan.share.

For purposes of calculating diluted earningsloss per common share, the denominator includes both the weighted-average number of shares of common stock outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Because a loss was incurred in each of the periods presented, common stock equivalents would be anti-dilutive and, accordingly, were excluded from the calculation of diluted loss per common share. Dilutive common stock equivalents potentially include stock options and nonvested shares using the treasury stock method and shares issuable under the employee stock purchase plan (ESPP). EarningsLoss per common share information is as follows (in thousands, except per share amounts) for the three months and nine months ended September 30, 2019 and 2018:

For the nine-month periods ended September 30, 2019 and 2018 and 2017:

As ofthe three-month periods ended September 30, 2019 and 2018, and 2017, options forthere were 41,787 and 41,787 shares, respectively, werepotentially dilutive securities outstanding that have been excluded from the calculation of diluteddilutive weighted average shares outstanding, as they would be anti-dilutive sinceanti-dilutive.

On January 30, 2019, the respective options’ strike price was greater than the current market priceBoard of Directors of the shares. Additionally,Company declared a special cash dividend of $0.06 per share of the Company’s common stock, aggregating approximately $2,653,000, which was paid on March 21, 2019 to stockholders of record as of September 30, 2018 and 2017, there were no dilutivethe close of business on February 21, 2019. On August 22, 2019, the Company’s Board of Directors (the “Board”) declared a special cash dividend of $0.12 per share of the Company’s common stock, equivalents that would have affected diluted (loss) earnings per share.

aggregating approximately $5,306,000, which was paid on October 15, 2019 to stockholders of record at the close of business on October 1, 2019.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock Options and Restricted Stock Units (RSUs or Nonvested Shares)

During the nine months ended September 30, 2018,2019, no options were granted and the Company incurred no stock-based compensation expense. No RSUs were outstanding as of September 30, 2018.2019.

There were no options granted during the nine months ended September 30, 20172018 and no nonvested shares granted or outstanding during the nine months ended September 30, 2017.2018. The Company uses historical data to estimate forfeiture rates.

Activity related to stock options and nonvested shares during the nine months ended September 30, 20182019 and related balances outstanding as of that date are reflected below:below (in thousands):

During the nine-month and three-month periods ended September 30, 2019, the Company recorded approximately $2,000 and $0, respectively, of income tax expense for New Jersey state income tax.

During the nine months ended September 30, 2018, the Company recorded approximately $2,000 of income tax expense for New Jersey state income tax of which $1,000 was recorded in the three-month period ended September 30, 2018. 

The Company incurred tax expense of approximately $2.4 million for the nine months ended September 30, 2017 of which approximately $0.3 million in income tax benefit was incurred during the third quarter of 2017. The effective tax rate for the three-month period ended September 30, 2018 was 0.1% as compared to 183% for the three-month period ended September 30, 2017. The change in rate is attributable to changes in estimates of projected income in future years.

The Company continues to provide a valuation allowance against all of its deferred tax assets, as the Company believes it is more likely than not that its deferred tax assets will not be realized. Management of the Company will continue to assess the need for this valuation allowance and will make adjustments when appropriate.

Tax benefits of uncertain tax positions are recognized only if it is more likely than not that the Company will be able to sustain a position taken on an income tax return. The Company has no liability for uncertain tax positions. Interest and penalties, if any, related to unrecognized tax benefits, would be recognized as income tax expense.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among its numerous changes to the Internal Revenue Code, the Act reduced the U.S. federal corporate tax rate from 35% to 21% for years beginning after December 31, 2017. In addition, the Act repealed the corporate alternative minimum tax (“AMT”) for years beginning after December 31, 2017 and allowsallowed companies with existing alternative minimum tax creditscredit (“MTC”) carryforwards as of December 31, 2017 to receive refunds of the credits in tax years after 2017 and before 2022 in an amount equal to 50% (100% in 2021) of the excess MTC over the amount of the credit allowable for the year against regular tax liability. As a result of the Act’s provision allowing for the refund of MTC, the Company has recorded $970,000 as a long-term receivable. An additional $970,000, carried as a current receivable as of December 31, 2018 and September 30, 2019, was collected in October 2019.

The Act also provides for an indefinite carryforward period for net operating lossesgenerated after 2017 and limits annual utilization to 80% of taxable income. Net operating losses generated prior to 2018 continue to be carried forward for 20 years and have no 80% limitation on utilization. Our accounting is complete as of December 31, 2017 as related to the remeasurement of deferred taxes to the new tax rate of 21%, repeal of the AMT, receipt of MTC refunds and limitation of net operating losses generated after 2017 to 80% of taxable income. No provisional amounts were recorded as a result.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

As a result of the Act’s provision allowing for the refund of MTC beginning with tax year 2018, the Company has recorded MTC as a long-term receivable of approximately $1.9 million.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commencing onEffective March 1, 2016,2018, the Company changed the location ofrenewed its principal executive offices to 20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016. The Company entered into an office service agreement with Regus Management Group, LLC (“Regus”) for use of office spaceits principal executive offices at this location effective March 1, 2016. Under the agreement, in exchange for the Company’s right to use the office space at this location, the Company was required to pay Regus an initial service retainer of $2,418 and thereafter pay Regus a monthly fee of $1,209 until February 28, 2017.20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016. This agreement was renewed for two one-year extensions, until February 28, 2019, for a monthly fee of $1,259. In June 2018, the Company and Regus agreed to end the lease on August 31, 2018, and replace it with an updated office service agreement. TheEffective September 1, 2018, the Company entered into an office service agreement with Regus for mailbox plus, telephone answering, and virtual office services effective September 1, 2018.services. Under the agreement, in exchange for the services provided by Regus, the Company was required to pay Regus an initial service retainer of $259 and thereafter pay Regus a monthly fee of $259 until August 31, 2019.

Effective July 1, 2018, the Company entered into an office rental agreement with Equinox Junior, LLC (“Equinox”) for use of office space at 3556 Main Street, Manchester, VT, 05225. Under this agreement, in exchange for the Company’s right to use the office space at this location, the Company is required to pay Equinox a security deposit of $708 and thereafter pay Equinox a monthly fee of $708 until June 30, 2019. The term of this agreement was extended until June 30, 2020 at a monthly fee of $729.

TheIn the past, the Company hashad been involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management,business, the ultimate disposition of these matters willwhich did not have a material effect on the Company’s consolidated financial position, results of operations, or liquidity.

The Company is involved in no current legal actions and is aware of no pending such actions or claims.

ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On February 4, 2016, the Company’s Board of Directors adopted a Plan of Liquidation and Dissolution (the “Plan of Liquidation and Dissolution”), pursuant to which the Company would, subject to obtaining requisite stockholder approval, be liquidated and dissolved in accordance with Sections 280 and 281(a)281 (a) of the General Corporation Law of the State of Delaware. In approving the Plan of Liquidation and Dissolution, the Company’s Board of Directors had considered, among other factors, the ability of the Company to obtain no-action relief from the SEC to suspend certain of the Company’s reporting obligations under the Securities Exchange Act of 1934, as amended, and the anticipated cost savings if such relief wereis granted by the SEC. After further consideration, the Company’s Board of Directors determined that it would be fair, advisable and in the best interests of the Company and its stockholders to postpone seeking stockholder approval of the Plan of Liquidation and Dissolution until a later time to be determined by the Company’s Board of Directors.

IfFrom time to time, the Company’s Board of Directors reviews the Company’s status and prospects in deciding on the timing of dissolution and liquidation of the Company pursuant to the Plan of Liquidation and Dissolution areDissolution. If the Company’s Board of Directors determines to seek stockholder approval of such plan and such plan is approved by the Company’s stockholders and implemented by management,the Company, it is expected that the Company’s corporate existence will continue for the purpose of winding up its business and affairs for at least through the year 2021, consistent with the expiration of the Company’s existing license arrangements that generate its royalty revenues.three years. The Company has forecasted littleminimal or no royalty or milestone revenues for the years 2018 through 2021. This forecast is based upon a variety of estimates and numerous assumptions made by the Company’s management with respect to, among other matters, forecasted salesforeseeable future. In light of the drug products for whichuncertainty as to whether any of the milestones under the Micromet Marketing Agreement would be achieved, this forecast assumes that the Company haswould not receive any milestone or royalty payments under the right to receive royalties, potential returns and rebates and other matters, many of which are difficult to predict, are subject to significant uncertainties, and are beyond the Company’s control. As a result, there can be no assurance that the estimates and assumptions upon which this forecast is based will prove accurate, that the projected results will be realized or that actual results will not be substantially higher or lower than forecasted.Micromet Marketing Agreement.

During the fourth quarter of 2017,Due to returns, rebates and other adjustments, at various times, Merck corrected an error in their previous adjustment of royalties, noting that they owed the Company an additional net amount of approximately $88,000 and the Company recorded a receivable of that amount. In March 2018, Merckhas notified the Company that a downward adjustment of approximately $313,000 in royalties was necessary, primarily due to returns from sales in China in the fourth quarterits recoupment of 2017.previously paid royalties. Accordingly, inat December 2017, the Company accrued a liability to Merck of approximately $313,000 and partially offset that amount by the $88,000 that was due to the Company from Merck. Thus,31, 2018, the Company recorded a net payable to Merck of approximately $225,000 included in accounts payable in the condensed consolidated balance sheet at December 31, 2017.

$439,000. In January 2018,March 2019, Merck paid the net $88,000 that was due to the Company from the royalties adjustment it had made. Because this amount was included in March 2018 when Merck calculated and notified the Company of the $313,000 returns adjustment, the $88,000 received in January was recorded as an additional liability due back to Merck. Therefore, at March 31, 2018 the aggregate amount due to Merck wassuch recoupment aggregating approximately $313,000.

$51,000. During the three-month period ended June 30, 2018,second and third quarters of 2019, Merck calculated and notifiedinformed the Company that Enzonit had earned $61,000net royalties of royalties, which reduced the aggregate amount due to Merck to approximately $253,000.

During the three-month period ended September 30, 2018, Merck calculated$142,000 and notified$2,000, respectively. Consequently, the Company that Merck had an additional downward adjustment of approximately $280,000, the net effect of royalty income of $54,000 and chargebacks of $334,000. Such chargebacks, of which returns from Iraq represented approximately $254,000, resulted, primarily, from product rebates and returns. After accounting for this downward adjustment, thea liability to Merck was increased to $533,000of approximately $346,000 at September 30, 2018.

While2019. The Company believes that it is likely there will be future downward adjustmentsno longer earn royalties from Merck, based on productbut may incur additional chargebacks from returns and rebates the Company is unable to predict the timing and amounts of any such adjustments.

chargebacks may be material.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 mean Enzon 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 20172018 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 20172018 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

We manage our sources of royalty revenues from existing licensing arrangements with other companies primarily related to sales of certain drug products that utilize our proprietary technology. In 2017, the primary source of our royalty revenues was the revenues received from Nektar Therapeutics, Inc. (“Nektar”) pursuant to the execution of a Second Amendment (“Nektar Second Amendment”) to our Cross-License and Option Agreement (the “Nektar License Agreement”) with Nektar, which generated non-recurring royalty revenues of $7 million (see below). The receipt of this $7 million satisfied all future obligations of royalty payments pursuant to the Nektar License Agreement.

Prior to 2017, the primary source of our royalty revenues was derived from sales of PegIntron, which is marketed by Merck & Co., Inc. (“Merck”). Prior to 2013, we were dedicated to the research and development of innovative therapeutics for patients with high unmet medical needs. We currently have no clinical operations and limited corporate operations.We have no intention of resuming any clinical development activities or acquiring new sources of royalty revenues. RoyaltyWe earned approximately $2,000 and $142,000, of net royalty revenues from Merck during the third and second quarters of 2019, respectively, and approximately $93,000 of net royalty revenues (after recoupment by Merck of $51,000 during the first quarter of 2019) from sales of PegIntron accountedin the nine month-period ended September 30, 2019. In the third quarter of 2018, our net royalties from PegIntron were negative $(280,000) and negative $(205,000) for approximately 7% and 64% of our total royalty revenues for each of the yearsnine months ended December 31, 2017 and 2016, respectively, net of the effects of an adjustment forSeptember 30, 2018. This was due primarily to Merck’s recoupment of previously overpaid royalties. The effectspaid royalties related to returns and rebates.

At December 31, 2018, we had a liability to Merck of such recoupments for overpayments, rebatesapproximately $439,000, due primarily to product returns and returns were recorded as a decreaserebates. After the recoupment by Merck of $51,000 during the first quarter of 2019 and the royalty revenues aggregating approximately $877,000 forof $142,000 and $2,000 during the year ending December 31, 2017,second and third quarters of 2019, respectively, at September 30, 2019, we decreased our liability to Merck to $346,000, as discussed in Note 412 to our Condensed Consolidated Financial Statements.

During the second quarter of 2019, we received a one-time, non-refundable, payment of approximately $65,000 from Novartis Pharma AG in payment of a worldwide, royalty free non-exclusive license to certain Canadian patents.

We wound down our remaining research and development activities during 2013 and we have no intention of resuming any clinical development activities or acquiring new sources of royalty revenues.

In April 2013, we announced that we intended to distribute excess cash, expected to arise from royalty and milestone revenues, in the form of periodic dividends to stockholders. (See Note 7 to our Condensed Consolidated Financial Statements.)

On February 4, 2016, our Board adopted a Plan of Liquidation and Dissolution (the “Plan of Liquidation and Dissolution”), the implementation of which has been postponed. (See Note 1011 to our Condensed Consolidated Financial Statements.)

On January 30, 2019, we entered into a 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 our existing agreements with certain third party licensees,the letter agreement, Servier, as successor-in-interest to Defiante, has 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 1 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 are not waiving Servier’s obligation to make any applicable milestone payment to us upon EMEA approval, if any, of SC Oncaspar. Servier was required to pay 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 million milestone revenue in 2018 and a current milestone receivable at December 31, 2018. The $7 million payment was received in July 2019.

We may be entitled to (i)certain potential future milestone payments and royalties, contingent upon the achievement of certain regulatory approval-related milestones and sales by third-party licensees. There can be no assurance that we will receive any milestone payments resulting from its 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.

We have a marketing agreement with Micromet AG (“Micromet”), now part of Amgen, Inc. (the “Micromet Marketing Agreement”), that was entered into in 2004 under which Micromet is the exclusive marketer of the parties’ combined intellectual property portfolio in the field of single-chain antibody technology.  Under the Micromet Marketing Agreement, the parties agreed to share, on an equal basis, in any licensing fees, milestone payments and royalty revenue received by Micromet in connection with any licenses of the patents within the portfolio by Micromet to any third party during the term of the collaboration. To our knowledge, Micromet has a license agreement with Viventia Biotech (Barbados) Inc. (“Viventia”), now part of Sesen Bio, Inc. (“Sesen”), that was entered into in 2005, under which Micromet granted Viventia nonexclusive rights, with certain sublicense rights, for know-how and patents allowing exploitation of certain single chain antibody products, which patents cover some key aspects of Vicinium, one of Sesen’s drug candidates that is in Phase 3 clinical trials being evaluated for the treatment of patients with non-muscle invasive bladder cancer and in Phase 1 and 2 clinical trials for the treatment of head and neck cancer. To our knowledge, under the terms of this license agreement between Micromet and Viventia, Micromet is entitled to receive (i) certain milestone payments with respect to several otherthe filing of a new drug productsapplication for Vicinium with the FDA or the filing of a marketing approval application for Vicinium with the EMEA; (ii) certain milestone payments with respect to the first commercial sale of Vicinium in various stagesthe U.S. or Europe and (iii) certain royalties on net sales for ten years from the first commercial sale of clinical and preclinical development and (ii) potential future royalty payments relatedVicinium on a country by country basis. Pursuant to any future salesthe Micromet Marketing Agreement, we would be entitled to a 50% share of these drug products.milestone payments and royalties received by Micromet. Due to the challenges associated with developing and obtaining approval for drug products, there is substantial uncertainty whether any of these milestones will be achieved. We also have no control over the time, resources and effort that these third party licenseesSesen may devote to theirits programs and limited access to information regarding or resulting from such programs. Accordingly, there can be no assurance that we will receive any of the milestone or royalty payments under these agreements.  

 Except for these potential milestone payments, we anticipate little or no future revenue.

As part of the our sale of our former specialty pharmaceutical business that was completed in January 2010, we may be entitled to certain potential future milestone payments contingent upon the achievement of certain regulatory approval-related milestones with respect to Oncaspar. The milestone obligations were assumed by Shire plc (“Shire”), when it acquired the Oncaspar product portfolio previously owned by Sigma-Tau Finanziaria S.p.A. In February 2018, Shire indicated that it was in the registration stage and awaiting further regulatory action. If Food and Drug Administration (“FDA”) approval is obtained for SC Oncaspar, under its agreement, we would be entitled to a milestone payment of $7.0 millionfrom Servier S.A.S. (Servier), which entered into an agreement to purchase the oncology business from Shire in 2018. There can be no assurance that the FDA will approve the Biologics License Application (“BLA”). Accordingly, there can be no assurance that we will receive any of the milestone payments related to SC Oncaspar or any other such milestone payments resulting from our agreements with any of our other third party licensees.Micromet Marketing Agreement. We will not recognize revenue from Servier or any of our other third party licensees until all current revenue recognition requirements are met.

On June 26, 2017, we entered into the Nektar Second Amendment, wherein Nektar agreed to buy-out all remaining payment obligations to us under the Nektar License Agreement. In consideration for fully paid-up licenses under the Nektar License Agreement and for the dismissal with prejudice of all claims and counterclaims asserted in the litigation with Nektar, Nektar agreed to pay us the sum of $7.0 million, which satisfies all future obligations of royalty payments pursuant to the Nektar License Agreement, the first $3.5 million of which was paid within one business day of the effective date of the Nektar Second Amendment and the remaining $3.5 million was to be paid within one business day of January 5, 2018. Accordingly, we recorded revenue of $7.0 million and a receivable of $3.5 million in the second quarter of 2017. The remaining payment of $3.5 million was received in December 2017.

Commencing onEffective March 1, 2016,2018, we changed the location ofrenewed our principal executive offices to 20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016. We entered into an office service agreement with Regus Management Group, LLC (“Regus”) for use of office spaceour principal executive offices at this location effective March 1, 2016. Under the agreement, in exchange for our right to use the office space at this location, the Company was required to pay Regus an initial service retainer of $2,418 and thereafter pay Regus a monthly fee of $1,209 until February 28, 2017.20 Commerce Drive, Suite 135, Cranford, New Jersey, 07016. This agreement was renewed for two one-year extensions until February 28, 2019, for a monthly fee of $1,259. In June 2018, Reguswe and weRegus agreed to end the lease on August 31, 2018, and replace it with an updated office service agreement. WeEffective September 1, 2018, we entered into an office service agreement with Regus for mailbox plus, telephone answering and virtual office services effective September 1, 2018.services. Under the agreement, in exchange for the services provided by Regus, we were required to pay Regus an initial service retainer of $259 and thereafter pay Regus a monthly fee of $259 until August 31, 2019.

Effective July 1, 2018, we entered into an office rental agreement with Equinox Junior, LLC (“Equinox”) for use of office space at 3556 Main Street, Manchester, VT, 05225. Under this agreement, in exchange for our right to use the office space at this location, we arewere required to pay Equinox a security deposit of $708 and thereafter pay Equinox a monthly fee of $708 until June 30, 2019. This agreement has been extended to June 30, 2020 at a monthly fee of $729.

Plan of Dissolution

On February 4, 2016, our Board of Directors adopted a Plan of Liquidation and Dissolution (the “Plan of Liquidation and Dissolution”), 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. In approving the Plan of Liquidation and Dissolution, our Board of Directors had considered, among other factors, our ability to obtain no-action relief from the Securities and Exchange Commission (the “SEC”) to suspend certain of our reporting obligations under the Securities Exchange Act of 1934, as amended, and the anticipated cost savings if such relief is granted by the SEC. Upon further review, our Board of Directors determined that it would be fair, advisable and in our best interests and our stockholders to postpone seeking stockholder approval of the Plan of Liquidation and Dissolution until a later time to be determined by our Board of Directors.

IfFrom time to time, our Board of Directors reviews the Company’s status and prospects in deciding on the timing of dissolution and liquidation of the Company pursuant to the Plan of Liquidation and Dissolution areDissolution. If our Board of Directors determines to seek stockholder approval of such plan and such plan is approved by our stockholders and implemented by us, we expectit is expected that our corporate existence towill continue for the purpose of winding up our business and affairs for at least through the year 2021, consistent with the expiration of our existing license arrangements that generate our royalty revenues.three years. We have forecasted minimal or no royalty or milestone revenues for the years 2018 through 2021. This forecast is based upon a variety of estimates and numerous assumptions made by our management with respect to, among other matters, forecasted salesforeseeable future. In light of the drug products for which we haveuncertainty as to whether any of the right to receive royalties, potential returns and rebates and other matters, many of which are difficult to predict, are subject to significant uncertainties, and are beyond our control. As a result, there canmilestones under the Micromet Marketing Agreement would be no assurance that the estimates and assumptions upon whichachieved, this forecast is based will prove accurate,assumes that we would not receive any milestone or royalty payments under the projected results will be realized or that actual results will not be substantially higher or lower than forecasted. Micromet Marketing Agreement.

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:

Royalties (in thousands of dollars):

We received no royaltyRoyalty revenues duringfrom sales of PegIntron by Merck amounted to approximately $2,000 for the three months ended September 30, 2018,2019, as compared to $151,000$0 during the corresponding quarterperiod in the prior year. Royalty revenues from sales ofThese PegIntron royalties accounted for 100% and 0% of the Company’s total royalty revenues for the three months ended September 30, 20172019 and 2018, respectively, and approximately 58% (inclusive of downward revenue adjustment of approximately $51,000, related to the amounts of returns and rebates exceeding the amounts of royalties earned in the first quarter of 2019) and 80% (exclusive of downward revenue adjustment of approximately $280,000 in the third quarter of 2018) and 13% (before adjustment for Merck’s recoupment of previously overpaid royalties aggregating approximately $564,000) of the Company’s total royalty revenues for the nine-month periods ended September 30, 20182019 and 2017,2018, respectively. The effects of such downward revenue adjustments were recorded as decreases of royalty revenues as discussed in Note 111 to the Condensed Consolidated Financial Statements.

 During the nine months ended September 30, 2017, royalty revenues related to the Nektar Second Amendment aggregated $7.0 million.

During the fourth quarter of 2017, Merck corrected an error in their previous adjustment of royalties, noting that they owed us an additional net amount of approximately $88,000 and we recorded a receivable of that amount. In March 2018, Merck notified us that a downward adjustment of approximately $313,000 in royalties was necessary, primarily, due to returns from sales in China in the fourth quarter of 2017. Accordingly, in December 2017, we accrued a liability to Merck of approximately $313,000 and partially offset that amount by the $88,000 that was due to the Company from Merck. Thus, we recorded a net payable to Merck of approximately $225,000 included in accounts payable in the condensed consolidated balance sheet at December 31, 2017.

In January 2018, Merck paid us the net $88,000 that was due to us from the adjustment they had made. Because this amount was included in March 2018 when Merck calculated and notified us of the $313,000 returns adjustment, the $88,000 of cash received in January was recorded as an additional liability due back to Merck. In June 2018, Merck calculated and notified us that Enzon earned $60,000 of royalties, which reduced the aggregate amount due to Merck at June 30, 2018 to approximately $253,000.

During the third quarter of 2018, Merck notified us that they were recouping an additional approximately $280,000, the net effect of royalty income of approximately $54,000 and chargebacks of approximately $334,000. Such chargebacks, of which returns from Iraq represented approximately $254,000, resulted, primarily, from product rebates and returns. After accounting for this downward adjustment, the liability to Merck was increased to approximately $533,000 at September 30, 2018.

While it is likely there will be future downward adjustments from Merck based on product returns and rebates, we are unable to predict the timing and amounts of any such adjustments.

In addition to the negative effects of the downward adjustments due to substantial product returns and rebates in recent periods, royalty Royalty revenues from Merck have been declining sharply. Our right to receive royalties on U.S. sales of PegIntron expired in 2016.  Our rights to receive royalties on sales of PegIntron will expire in 2018 in substantially all of the licensed territories. There are multiple oral drug therapies, both available and in development, that have been effective for treatment of hepatitis C that do not require interferon. As a result, it is likely that sales of PegIntron-related products will continue their declining trend.  

Accordingly,cease and we are predicting little orwill receive no future royalty revenues from Merck.  Our right to receive royalties on U.S. sales of PegIntron.PegIntron expired in 2016, expired in Europe in 2018 and will expire in Malaysia in 2020, Japan in 2021 and Chile in 2024.

Royalty revenues for the nine months ended September 30, 2019, include a one-time, non-refundable, payment of approximately $65,000 from Novartis Pharma AG in payment of a worldwide, royalty free non-exclusive license to certain Canadian patents. There was no such payment during the prior year’s comparable period.

Operating Expenses:

General and Administrative (in thousands of dollars):

General and administrative expenses inincreased by approximately $47,000, or 6%, to $873,000 for the nine months ended September 30, 2018 decreased by approximately $192,000, or 19%, to2019 from $826,000 from $1,021,000 for the nine-month period ended September 30, 2017.first nine months of 2018. The decreaseincrease in expenseexpenses is substantially attributable to the decreaseincrease in filing fees, general insurance expense in connection with our lease termination, as well as a decrease in professional fees, primarilyaccounting, consulting and legal fees, incurred in 2017 in connection with the Nektar Second Amendment.fees.

General and administrative expenses inincreased by approximately $88,000, or 37%, to $327,000 for the three months ended September 30, 2018 declined by approximately $96,000, or 29%, to2019 from $239,000 from $335,000 for the three-month period ended September 30, 2017.third quarter of 2018. The decreaseincrease in expenseexpenses is substantially attributable to the decreaseincrease in accounting, consulting, and filing fees, general insurance expense in connection with our lease termination, as well as a decrease in professional fees.

Tax Expense:

We incurred a tax expense of approximately $2,000 duringin the first nine months ended September 30,of 2019 and 2018 to reflect state minimum taxes as compared with tax expense of approximately $2.7 million for the corresponding period in the prior year. The effective tax rate for the nine months ended September 30, 2018 was 0%, compared with 36% for the corresponding period in the prior year. The reduction in the effective tax rate is attributable to decreases in projected income for the current year and future years.taxes.

Liquidity and Capital Resources

 Our current sources of liquidity are (i) our existing cash on hand and (ii)de minimus anticipated royalty revenues from third-party sales refunds of marketed drug products that utilize our proprietary technology.alternative minimum tax credits aggregating approximate $1.9 million. 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 believe that our existing cash on hand and limited anticipated royalty revenuestax refunds and milestone payment will be sufficient to fund our operations, at least, through November 2019.2020. However, our future diminishing royalty revenues are expected to end duringbede minimis over the next several years and in recognition of the recoupment that we owe to Merck, there can be no assurance that we will receive any future cash royalty or other revenues. We may incur additional chargebacks from Merck related to returns and rebates and such chargebacks may be material.

Cash was approximately $6.7$10.0 million as of September 30, 2018,2019, as compared to $7.5$6.5 million as of December 31, 2017.2018. The decreaseincrease of approximately $752,000$3.5 million was primarily attributable to the collection of a $7.0 million royalty receivable during the third quarter of 2019 as partially offset by payment of a dividend aggregating $2.7 million in March 2019 and a net decrease in cash of approximately $0.2 million used in our operating activities.

On August 22, 2019, the Company’s Board of Directors (the “Board”) declared a special cash dividend of $0.12 per share of our common stock, aggregating approximately $5.3 million, which was paid on October 15, 2019 to stockholders of record at the close of business on October 1, 2019. 

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 September 30, 2018,2019, we were not involved in any SPE transactions.

Critical Accounting Policies and Estimates

A critical accounting policy is one that is both important to the portrayal of a company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our consolidated financial statements are presented in accordance with accounting principles that are generally accepted in the United States (“U.S. GAAP”). All applicable U.S. GAAP accounting standards effective as of September 30, 20182019 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 of September 30, 2018,2019, 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 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:

A more detailed discussion of these risks and uncertainties and other factors that could affect results is contained in our filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2017.2018. 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide information required by this item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, under the direction of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2018.2019. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. The Company’sOur Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018, the Company’s2019, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended September 30, 20182019 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1A. Risk Factors.

Other than as set forth below, there have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 filed on MarchFebruary 21, 2018.2019.

We have recently incurred net losses andbelieve that we may continue to incur net losses in the future.

We incurred a net loss of approximately $1,026,000 for the nine months ended September 30, 2018. In addition, our cash decreased from approximately $7.5 million as of December 31, 2017 to approximately $6.7 million as of September 30, 2018, primarily as a result of such loss. The Company expects to continue to incur net losses, subject to the Company becoming entitled to milestone or royalty payments under existing agreements with third party licensees. However, there can be no assurance that the Company will receive any milestone or royalty payments under these agreements.no more royalties from Merck, but may incur additional chargebacks from returns and rebates and such chargebacks may be material.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None. 

Item 6. Exhibits.

(a) Exhibits required by Item 601 of Regulation S-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX