July 7, 2005
United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth St., N.W.
Washington, DC 20549
Attn: Mr. Jim B. Rosenberg, Sr. Assistant Chief Accountant
Re: Enzo Biochem, Inc.
Form 10-K for the FYE 7/31/04, filed 10/14/04
File no. 001-09974
Comment Letter dated 6/16/05
Ladies and Gentlemen:
In response to your requests made in a letter dated June 16, 2005, we are
pleased to provide you with the following information:
QUESTION 1A. QUANTIFY CHANGES IN ESTIMATES OF PRIOR PERIOD CONTRACTUAL
ADJUSTMENTS
- --------------------------------------------------------------------------------
The process the Company uses to determine its estimate of the contractual
allowances for its laboratory services is based upon a rolling monthly weighted
average of historical reimbursement statistics. The Company calculates the
weighted average of these statistics over a twenty four month period. This
statistics development process captures the aggregate reimbursements (cash
applied) for a given month and compares that to the original gross invoiced
amounts (the gross billing is based upon the same standard fee schedule for all
payers) in the aggregate, by the respective billable party categories (i.e.
Medicare and third party payers). The Company calculates monthly the
relationship between the original aggregate amounts billed and the aggregate
reimbursement amounts and uses this to determine the expected percentage which
will be collected, by billable party. The reciprocal percentage of the expected
percentage is the estimate of contractual allowance percentage used by the
Company.
The Company adjusts for final settlements on a prospective basis by adjusting
the contractual allowance percentage using the aforementioned rolling monthly
weighted average historical reimbursement statistics. The Company's process
captures the actual aggregate settlements on a monthly basis as the
reimbursements are received and applied to the aggregate open accounts
receivable; whereby the above weighted average is consistently being adjusted
for the future period on an on going basis. The Company also reviews these
statistics by billable party quarterly to determine if there are any adverse
trends and for any reimbursement policy changes for any given billable party and
makes the necessary change to the contractual allowance percentage.
During the fiscal years ended July 31, 2004, 2003, and 2002, the contractual
allowance percentages, determined using the rolling monthly weighted average
historical reimbursement statistics, were 60.9%, 56.7%, and 51.4%, respectively.
Q1B. QUANTIFY THE REASONABLY POSSIBLE EFFECTS THAT A CHANGE IN ESTIMATE OF
UNSETTLED AMOUNTS FROM 3RD PARTY PAYERS AS OF THE LATEST BALANCE SHEET DATE
COULD HAVE ON FINANCIAL POSITION AND OPERATIONS
- --------------------------------------------------------------------------------
The Company projects (by using a sensitivity analysis) that each 1% change in
the contractual allowance percentage could result in a change in the net
accounts receivable and clinical laboratory services revenue of $340,000, as of
and for the fiscal year ended July 31, 2004. The Company will disclose a
sensitivity analysis effect in future MD&A discussions.
Q1C. QUANTIFY PAYER MIX CONCENTRATIONS AND RELATED AGING OF ACCOUNTS RECEIVABLE.
- --------------------------------------------------------------------------------
The Company's gross billing for laboratory services is based upon the Company's
standard fee schedule which is used for all patient payers, self payers, third
party payers and Medicare providers. The aging of the accounts receivable is
maintained using the gross billed amount and is aged by the invoice date. See
Table 1: Gross Billing Payer Mix Concentration and Table 2 Aging of Gross
Accounts Receivable for fiscal years ending July 31, 2004, 2003, and 2002.
Q1D. AMOUNTS PENDING APPROVAL FROM THIRD PARTY PAYERS
- -----------------------------------------------------
The Company views its net accounts receivable as the total amount pending future
approval from third party payers. See Table 3: Accounts Receivable Net of
Allowances as of July 31, 2004, 2003, 2002. The Company includes in self pay its
self payers plus amounts that have been denied by third party payers, balance
billing for unpaid amounts from third party payers, and deductibles and
co-payments. The Company does not maintain historical percentages for amounts
that get reclassified into self pay. See Table 4: Bridging Gross Accounts
Receivable to Net for Clinical Lab Operations for the respective fiscal years.
Q2. ALLOWANCE FOR DOUBTFUL ACCOUNTS
- -----------------------------------
The Company utilizes a historical collection analysis to establish allowances
for doubtful accounts for each receivable category, which considers the aging of
the receivables and results in an increase in the allowances as the aging of the
related receivables increases. The Company believes collection of receivables
from self payers is subject to credit risk and the patient's ability to pay.
The allowance for doubtful accounts also includes the uncollectible balances
from third party payers for the insufficient diagnosis information received from
the ordering physician, which result in denials of payment. In addition, the
allowance is increased when a receivable from a third party or HMO remains open
due to a denial of coverage based upon the provider relationships. The Company
writes off 100% of all accounts receivable (for all payers) over 300 days as it
assumes all these accounts are uncollectible. The written off amounts are kept
on the aging for internal purposes. The Company also sets up reserves for
accounts under 300 days old. The Company adjusts the estimate for any recoveries
on an ongoing basis through the above historical collection analysis.
2
Q3 CONTROLS AND PROCEDURES, PAGE 34
- -----------------------------------
We will modify the final paragraph of the Controls and Procedures disclosure in
our future filings, as follows:
Conclusions. Based upon the Controls and Procedures Evaluation, our CEO and CFO
have each concluded that: 1.) our Disclosure Controls and Procedures are
effectively designed to ensure that information required to be disclosed in the
reports the Company files or submits is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms; 2.) our Disclosure Controls and Procedures ensure
that information required to be disclosed is accumulated and communicated to
management, including the CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure; and 3.) our Internal Controls are effective to
provide reasonable assurance that our financial statements are fairly presented
in conformity with generally accepted accounting principles.
Q4 POLICY FOR DETERMINING WHEN AN ALLOWANCE IS RECOGNIZED FOR A RECEIVABLE OR
WHEN ONE IS WRITTEN OFF
- --------------------------------------------------------------------------------
The allowance for doubtful accounts is estimated based on our historical
collection experience using a retrospective collection analysis, and accounts
receivable aging models based on thresholds for age. The Company utilizes
historical uncollectible amounts by payer mix and uses this data to determine
the allowance for doubtful accounts by respective payer mix. The Company writes
off 100% of all accounts receivable (for all payers) over 300 days as it assumes
all these accounts are uncollectible. The written off amounts are kept on the
aging for internal purposes. The Company also provides for accounts under 300
days old.
Q5 - REVENUE RECOGNITION, PAGE F-8
- ----------------------------------
The Company has certain non exclusive supply agreements with distributors. These
distributors report their shipments of products to their customers and their
corresponding manufacturing and processing costs for these shipped products. The
Company records the revenue from these supply agreements net of the
distributors' manufacturing and processing costs.
During the fiscal years ended July 31, 2004, 2003, and 2002, the manufacturing
and processing cost of these products sold was $7.4 million, $7.0 million, and
$6.5 million, respectively.
With respect to EITF 01-9, issues 3-6:
Issue 3--Under what circumstances should up-front nonrefundable consideration
given by a vendor to a customer be recognized as an asset of the vendor rather
than an immediate charge in the vendor's income statement?
We have never paid up-front nonrefundable consideration to any of our
distributors or their customers.
3
Issue 4--If a vendor offers a sales incentive voluntarily and without charge to
customers that is exercisable by a customer as a result of a single exchange
transaction, when should the vendor recognize and how should the vendor measure
the cost of the sales incentive if it will not result in a loss on the sale of a
product or service?
We do not offer sales incentives.
Issue 5--For the sales incentive described in Issue 4, when should the vendor
recognize and how should the vendor measure the cost of the sales incentive if
it will result in a loss on the sale of a product or service?
Not applicable.
Issue 6--If a vendor offers a customer a rebate or refund of a specified amount
of cash consideration that is redeemable only if the customer completes a
specified cumulative level of revenue transactions or remains a customer for a
specified time period, when should the vendor recognize and how should the
vendor measure the cost of the offer?
We don't offer rebates or refunds for any reason.
Q6 NOTE 7 - LITIGATION, PAGES F-13 TO F-15
- -------------------------------------------
The second paragraph of the note describes a shareholder complaint alleging,
among other things, securities fraud, and is entitled Glaser et al. vs. Gross
and officers and directors of Enzo.
As required by Reg 229.103 of Reg S-K, the information provided includes: the
name of the court in which proceedings are pending, date proceedings were
instituted, the principal parties to the proceedings, a description of the facts
underlying the proceedings, and the relief sought, which is in excess of 10% of
our consolidated current assets.
The company believes it has complied with SFAS 5, paragraphs 8-10, because, in
the opinion of management, it is not probable that a liability has been incurred
and therefore no accrual has been made for a loss contingency. It is also the
opinion of management that there is a less than reasonable possibility that a
loss has been incurred and therefore, no estimate of the possible loss or range
of loss has been given.
The sixth paragraph of the note describes a complaint made by Roche against
Enzo. The information provided includes: the name of the court in which
proceedings are pending, date proceedings were instituted, the principal parties
to the proceedings, a description of the facts underlying the proceedings, and
the relief sought.
It is the opinion of management that it is not probable that a liability has
been incurred and therefore no accrual has been made for a loss contingency. It
is also the opinion of management that there is a less than reasonable
possibility that a loss has been incurred and therefore, no estimate of the
possible loss or range of loss has been given.
4
The status of these complaints was updated in Part II, Item 1 of our April 30,
2005 10-Q filing made on June 9, 2005. Developments described in that filing
strengthen management's opinion that there is a less than reasonable possibility
that any losses have been incurred.
In connection to our response to your comments, we acknowledge that:
o The Company is responsible for the adequacy and accuracy of the
disclosures in the Form 10-K.
o Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the 10-K filing.
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Very truly yours,
/s/ Barry W. Weiner
President, Chief Financial Officer and Director
5
Enzo Biochem TABLE 1
Gross Billing Payer Mix Concentration
CATEGORY 7/31/2004 7/31/2003 7/31/2002
- --------------------------------------------------------------------------------------------------------------------------
MEDICARE 31,231,104 32% 29,495,752 32% 26,825,154 28%
THIRD PARTY PAYERS 38,075,053 39% 35,218,146 38% 36,426,400 38%
PATIENT-SELF PAY 10,766,915 11% 10,385,728 11% 10,885,916 11%
HMO'S 18,625,752 19% 17,113,657 19% 22,617,119 23%
--------------------------------------------------------------------------------------------------------
TOTAL 98,698,824 100% 92,213,283 100% 96,754,589 100%
========================================================================================================
TABLE 2 ENZO CLINICAL LABS, INC
AGING OF GROSS ACCOUNTS RECEIVABLE AS OF 07/31/2004
------------------------------------------------------------------------------------------------------------
31 61 91
to to to Greater than
30 60 90 120 120 Grand total As %
CATEGORY ------------------------------------------------------------------------------------------------------------
- --------
MEDICARE 4,485,639 3,282,602 1,279,771 936,898 5,638,539 15,623,449 31%
THIRD PARTY PAYERS 5,692,879 3,608,284 591,901 430,836 223,416 10,547,316 21%
PATIENT-SELF PAY 2,320,132 988,526 609,957 442,580 6,513,234 10,874,429 22%
HMO'S 2,167,120 2,196,744 849,797 1,655,237 5,857,900 12,726,798 26%
-------------------------------------------------------------------------------------------------------------
TOTAL 14,665,770 10,076,156 3,331,426 3,465,551 18,233,089 49,771,992 100%
=============================================================================================================
ENZO CLINICAL LABS, INC
AGING OF GROSS ACCOUNTS RECEIVABLE AS OF 07/31/2003
--------------------------------------------------------------------------------------------------------------
31 61 91
to to to Greater than
30 60 90 120 120 Grand total As %
CATEGORY -------------------------------------------------------------------------------------------------------------
- --------
MEDICARE 3,597,991 1,114,349 728,684 852,398 2,327,078 8,620,500 17%
THIRD PARTY PAYERS 4,987,937 1,855,847 587,766 399,351 1,165,388 8,996,289 17%
PATIENT-SELF PAY 2,593,674 1,411,242 625,837 845,335 8,410,099 13,886,187 27%
HMO'S 1,870,776 2,245,810 1,352,557 1,291,647 13,708,640 20,469,430 39%
--------------------------------------------------------------------------------------------------------------
TOTAL 13,050,378 6,627,248 3,294,844 3,388,731 25,611,205 51,972,406 100%
==============================================================================================================
ENZO CLINICAL LABS, INC
AGING OF GROSS ACCOUNTS RECEIVABLE AS OF 07/31/2002
--------------------------------------------------------------------------------------------------------------
31 61 91
to to to Greater than
30 60 90 120 120 Grand total As %
CATEGORY --------------------------------------------------------------------------------------------------------------
- --------
MEDICARE 3,180,383 679,424 42,814 51,071 585,623 4,539,315 7%
THIRD PARTY PAYERS 5,061,887 1,333,796 701,876 592,602 6,576,426 14,266,587 22%
PATIENT-SELF PAY 1,516,424 779,172 806,427 572,575 11,011,246 14,685,844 22%
HMO'S 1,912,653 1,099,328 1,188,198 963,368 27,018,281 32,181,828 49%
-------------------------------------------------------------------------------------------------------------
TOTAL 11,671,347 3,891,720 2,739,315 2,179,616 45,191,576 65,673,574 100%
=============================================================================================================
Enzo Biochem TABLE 3
Accounts Receivable Net of Allowances
7/31/2004 7/31/2003 7/31/2002
- ------------------------------------------------------------------------------------------------
CATEGORY
- --------
MEDICARE 3,830,010 1,880,098 1,163,661
THIRD PARTY CARRIERS 4,227,131 3,372,415 4,792,067
PATIENT-SELF PAY 4,580,187 6,117,059 5,748,353
HMO'S 479,322 3,025,446 2,119,032
---------------------------------------------------------
Clinical Labs accounts receivable, net 13,116,650 14,395,018 13,823,113
Life Sciences accounts receivable, net 1,677,717 2,871,295 6,444,402
---------------------------------------------------------
Consolidated accounts receivable, net 14,794,367 17,266,313 20,267,515
=========================================================
Enzo Biochem TABLE 4
Bridging Gross Accounts Receivable to Net
IN $000'S
7/31/04 7/31/03 7/31/02
------- ------- -------
Clinical Labs - gross aged accounts receivable 49,772 51,972 65,674
Add: unbilled billable receivable 5,426 4,160 7,595
------ ------ -----
55,198 56,132 73,269
Less: uncollectible accounts written off* (12,539)* (16,908)* (38,524)*
-------- -------- --------
42,659 39,224 34,745
Contractual allowance @ 60.92% (25,988) 56.70% (22,240) 51.35% (17,842)
-------- -------- --------
16,671 16,984 16,903
Allowance for uncollectible (3,554) (2,589) (3,080)
------- ------- -------
Clinical Labs - accounts receivable, net 13,117 14,395 13,823
Life Sciences - accounts receivable, net 1,677 2,871 6,444
------------- ------------ ------------
CONSOLIDATED ACCOUNTS RECEIVABLE, NET 14,794 17,266 20,267
============= ============ ============
* The Company assumes all accounts over 300 days are uncollectible and
therefore written off. The amounts are kept on the aging for internal
purposes