UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number 001-09974
ENZO BIOCHEM, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2866202
- -------------------- ----------------
(State or Other Jurisdiction (IRS. Employer
of Incorporation or Organization) Identification No.)
60 Executive Blvd., Farmingdale, New York 11735
- ----------------------------------------- ------------
(Address of Principal Executive office) (Zip Code)
(631-755-5500)
- --------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
- ----------------------------- -----------------------
(Title of Class) (Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12(g) 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 has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
X Yes No
---
As of December 1, 2005 the Registrant had 32,189,740 shares of Common Stock
outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
October 31, 2005
INDEX
-----
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets
October 31, 2005 (unaudited) and July 31, 2005 3
Consolidated Statements of Operations
For the three months ended October 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows
For the three months ended October 31, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
Part II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 19
Item 6. Exhibits 19
Signatures 19
2
ENZO BIOCHEM, INC.
PART 1 - FINANCIAL INFORMATION
ITEMS 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
October 31, July 31,
ASSETS 2005 2005
(unaudited)
-----------------------------------------
Current assets: In thousands)
Cash and cash equivalents ............................................................... $ 75,242 $ 76,981
Marketable securities ................................................................... 6,168 6,714
Accounts receivable, net of allowances .................................................. 12,114 13,421
Inventories ............................................................................. 2,767 2,876
Prepaid expenses ........................................................................ 1,884 2,580
Recoverable income taxes ................................................................ 1,874 1,329
Deferred taxes .......................................................................... -- 900
--------- ---------
Total current assets ....................................................................... 100,049 104,801
Property and equipment, net of accumulated depreciation
and amortization ....................................................................... 2,603 2,669
Goodwill ................................................................................... 7,452 7,452
Patent costs, net of accumulated amortization .............................................. 1,315 1,333
Other ...................................................................................... 211 211
--------- ---------
$ 111,630 $ 116,466
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued legal fees ...................................................................... $ 2,114 $ 2,717
Trade accounts payable .................................................................. 1,832 2,414
Other accrued expenses .................................................................. 977 1,348
Accrued payroll ......................................................................... 834 515
Deferred revenue ........................................................................ -- 359
Accrued research and development expenses ............................................... 270 286
Installment payable ..................................................................... -- 150
--------- ---------
Total current liabilities .................................................................. 6,027 7,789
Deferred taxes ............................................................................. -- 260
Long term installment payable .............................................................. 150 150
Commitments
Stockholders' equity:
Preferred Stock, $.01 par value; authorized 25,000,000 shares; no
shares issued or outstanding
Common Stock, $.01 par value; authorized 75,000,000 shares; shares
issued: 32,754,600 at October 31, 2005 and 32,526,800 at July 31, 2005 .............. 328 325
Additional paid-in capital .............................................................. 233,569 230,644
Less treasury stock at cost: 564,860 shares at October 31, 2005
and 384,400 shares at July 31, 2005 ................................................ (8,428) (5,994)
Accumulated deficit ..................................................................... (119,863) (116,577)
Accumulated other comprehensive loss .................................................... (153) (131)
--------- ---------
Total stockholders' equity ................................................................. 105,453 108,267
--------- ---------
$ 111,630 $ 116,466
========= =========
3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
October 31,
2005 2004
--------------------------
(In Thousands)
Revenues:
Research product revenues and royalty income .... $ 2,147 $ 2,456
Clinical laboratory services .................... 8,018 7,845
-------- --------
10,165 10,301
Costs and expenses and other (income):
Cost of research product revenues ............... 541 575
Cost of clinical laboratory services ............ 3,481 2,914
Research and development expense ................ 1,550 2,212
Selling, general, and administrative expense .... 5,456 4,137
Provision for uncollectible accounts receivable . 1,145 1,477
Legal expense ................................... 1,862 1,143
Interest income ................................. (707) (330)
Gain on patent litigation settlement ............ -- (14,000)
-------- --------
13,328 (1,872)
(Loss) income before income taxes .................. (3,163) 12,173
Provision for income taxes ......................... (123) (5,152)
-------- --------
Net (loss) income .................................. ($ 3,286) $ 7,021
======== ========
Net (loss) income per common share:
Basic ........................................... ($ 0.10) $ 0.22
======== ========
Diluted ......................................... ($ 0.10) $ 0.21
======== ========
Weighted average common shares outstanding:
Basic ........................................... 32,158 32,416
======== ========
Diluted ......................................... 32,158 32,907
======== ========
4
See accompanying notes.
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
October 31,
2005 2004
--------------------------------
OPERATING ACTIVITIES ($ in thousands)
Net (loss) income ................................................... ($ 3,286) $ 7,021
Adjustments to reconcile net (loss) income to net cash
(used in)/ provided by operating activities:
Depreciation and amortization of property and equipment ........ 263 260
Amortization of patent costs ................................... 18 330
Provision for uncollectible accounts receivable ................ 1,145 1,477
Deferred taxes ................................................. 640 643
Stock option compensation charge ............................... 420 --
Deferred rent .................................................. -- (61)
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectible amounts ....................................... 162 (659)
Inventories ................................................. 109 126
Income taxes receivable ..................................... -- 533
Prepaid expenses ............................................ 696 213
Recoverable income taxes .................................... (545) (66)
Trade accounts payable and other accrued expenses ........... (953) (596)
Accrued research and development expenses ................... (16) (115)
Deferred revenue ............................................ (359) 2,000
Income taxes payable ........................................ -- 4,496
Accrued legal fees .......................................... (603) (386)
Accrued payroll ............................................. 319 262
Installment payable ......................................... (150) --
-------- --------
Total adjustments ........................................... 1,146 8,457
-------- --------
Net cash (used in)/ provided by operating activities...... (2,140) 15,478
-------- --------
INVESTING ACTIVITIES
Capital expenditures ............................................ (197) (300)
Patent costs deferred ........................................... -- (21)
Sales of marketable securities .................................. 577 --
Purchases of marketable securities .............................. (53) (1,098)
Security deposits ............................................... -- (4)
-------- --------
Net cash provided by/ (used in) investing activities...... 327 (1,423)
-------- --------
FINANCING ACTIVITIES
Proceeds from the exercise of stock options ..................... 74 65
-------- --------
Net cash provided by financing activities ................ 74 65
-------- --------
Net (decrease) increase in cash and cash equivalents ................ (1,739) 14,120
Cash and cash equivalents at the beginning of the period ............ 76,981 54,499
-------- --------
Cash and cash equivalents at the end of the period .................. $ 75,242 $ 68,619
======== ========
SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
In October 2005, certain officers of the Company exercised incentive stock
options in a non-cash transaction. The officers surrendered 180,411 shares of
previously acquired common stock in exchange for 221,116 shares. The Company
recorded approximately $2.4 million, the market value of the surrendered shares,
as treasury stock.
5
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2005
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements for the
year ended July 31, 2005 and notes thereto contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
results of operations for the three months ended October 31, 2005 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending July 31, 2006.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current year
presentation.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS - SFAS NO. 123(R) ACCOUNTING FOR SHARE
BASED PAYMENT
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 "Accounting for Share Based Payment" ("SFAS 123(R)"), which requires
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. Accordingly, pro forma disclosure of the
compensation effect of share based payment transactions with employees on net
income and earnings per share is no longer an alternative to recognition in the
statement of operations. The compensation cost recognized is to be measured
based on the fair value of the equity or liability instrument issued. The
statement covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The Company was required
to adopt SFAS 123(R) as of August 1, 2005, which was the first day of its fiscal
year ending July 31, 2006 and its first fiscal quarter that ended October 31,
2005. The Company adopted the provisions of SFAS 123(R) using the modified
prospective transition method, which allows for recognition of compensation
expense for awards that vest after August 1, 2005 and awards granted subsequent
to that date.
In November 2005, the FASB issued FSP No. FAS 123(R) - 3, "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards", to
provide an alternate transition method for the implementation of SFAS No.
123(R). Because some entities do not have, and may not be able to re-create,
information about the net excess tax benefits that would have qualified as such
had those entities adopted SFAS No. 123(R) for recognition purposes, this FSP
provides an elective alternative transition method. That method comprises (a) a
computational component that establishes a beginning balance of the additional
paid in capital pool ("APIC pool") related to employee compensation and (b) a
simplified method to determine the subsequent impact on the APIC pool of
employee awards that are fully vested and outstanding upon the adoption of SFAS
No. 123(R). The Company is considering applying the principles set forth in this
FSP to determine its APIC pool.
Upon the adoption of SFAS 123(R) in the consolidated financial statements of the
Company as of and for the three months ended October 31, 2005, the Company
recognized approximately $420,000 of expenses relating to the fair value of
employee stock options that vested during the quarter then ended.
6
The following table sets forth the amount of expense related to share-based
payment arrangements included in specific line items in the statements of
operations:
Three months ended
------------------------------------------------------------------------
(in thousands) October 31, 2005
-------------- ----
------------------------------------------------------------------------
Cost of research product revenues $8
------------------------------------------------------------------------
Research and development 71
------------------------------------------------------------------------
Selling, general and administrative 341
----
------------------------------------------------------------------------
$420
====
------------------------------------------------------------------------
The aggregate intrinsic value of options exercised during the three months ended
October 31, 2005 and 2004 was $1.7 million and $0.1 million, respectively. As of
October 31, 2005, there was $2.6 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Company's stock option plans, which will be recognized over a weighted average
life of approximately 2 years. During the three months ended October 31, 2005,
the Company did not grant any stock options or other stock awards.
On June 3, 2005, the Board of Directors approved the acceleration of vesting of
unvested "out of the money" stock options held by employees, including executive
officers, and directors. The stock options considered as out of the money were
those with an exercise price that was $1.50 or more than the closing price of
the Company's common stock on June 3, 2005 of $14.82. All other terms and
conditions of these "out of the money" options remain unchanged. As a result of
the acceleration, options to purchase approximately 666,000 shares of the
Company's common stock (which represents approximately 21% of the Company's then
outstanding stock options) became exercisable immediately. The accelerated
options ranged in exercise prices from $16.39 to $19.02 and the weighted average
exercise price of the accelerated options was $17.55 per share. The total number
of options subject to acceleration included options to purchase 575,000 shares
held by executive officers and directors of the Company. This action was taken
to avoid expense recognition in future financial statements upon adoption of
SFAS 123(R). The accelerated vesting of the "out of the money" options did not
result in a charge in the Company's statement of operations for the fiscal year
ended July 31, 2005 based on U.S. generally accepted accounting principles. The
Company reported approximately $10.1 million of pro forma compensation expense
for the fiscal year ended July 31, 2005, of which $6.0 million was applicable to
the "out of the money" options.
Up to and including the fiscal year that ended July 31, 2005, the Company
accounted for stock option grants to employees under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Under APB No. 25, because the exercise
price of the Company's employee stock options equaled the market price of the
underlying stock on the date of grant, no compensation expense was recorded. Pro
forma information regarding net income (loss) applicable to common stockholders
was required by FASB Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which also required that the information be determined as if the
Company has accounted for its stock options under the fair value method of that
statement.
7
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based compensation for the period ended October 31, 2004:
Three months
ended
October 31,
2004
(In thousands, except for share data)
Reported net income $7,021
Pro forma compensation expense (981)
------
Pro forma net income $6,040
======
Earnings per share:
Basic - as reported $.22
Basic - pro forma $.19
Diluted - as reported $.21
Diluted - pro forma $.18
NOTE 3 (LOSS) EARNINGS PER SHARE
The Company applies SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes
standards for computing and presenting earnings per share. Basic net (loss)
income per share represents net (loss) income divided by the weighted average
number of common shares outstanding during the period. The dilutive effect of
potential common shares, consisting of outstanding stock options, is determined
using the treasury stock method in accordance with SFAS No. 128. Diluted
weighted average shares outstanding for the three months ended October 31, 2005
does not include the effect of dilutive employee and director stock options
because to do so would have been antidilutive. Accordingly, basic and diluted
net loss per share for that period is the same. The following table sets forth
the computation of basic and diluted net (loss) income per share pursuant to
SFAS 128.
Three months
(In thousands, except for share data) ended October 31,
2005 2004
Numerator:
Net (loss) income for numerator for basic and diluted
earnings per common share ($ 3,286) $ 7,021
======== ========
Denominator:
Denominator for basic earnings per common equivalent
share during the period 32,158 32,416
Effect of dilutive employee and director
stock options -- 491
-------- --------
Denominator for diluted (loss) earnings per common
equivalent share and assumed conversions 32,158 32,907
======== ========
Basic net (loss) income per share ($ .10) $ 0.22
======== ========
Diluted net (loss) income per share ($ .10) $ 0.21
======== ========
8
The following table summarizes, for each period presented, the number of shares
excluded from the computation of diluted earnings per share, as their effect,
upon potential issuance after assuming repurchase with the proceeds from
exercise, was anti-dilutive.
Three months ended
October 31,
(In thousands)
2005 2004
---- ----
Employee and director stock options 539 --
==== ====
For the three months ended October 31, 2005 and 2004, the effect of
approximately 818,300 and 519,100 out of the money stock options were also
excluded from the computation of diluted (loss) earnings per share as their
effect would be anti-dilutive.
The Company declared a 5% stock dividend on October 5, 2004 which was paid on
November 15, 2004 to shareholders of record as of October 25, 2004. The Company
recorded a charge to accumulated deficit and a credit to common stock and
additional paid-in-capital in the amount of $23.4 million which reflected the
fair value of the dividend on the date of declaration.
Note 4. Inventories
Inventories consist of the following, as of:
October 31, July 31,
(in thousands) 2005 2005
-------------- ----- -----
Raw Materials $35 $52
Work in process 1,785 1,767
Finished products 947 1,057
------ ------
$2,767 $2,876
====== ======
NOTE 5 - STOCKHOLDERS' EQUITY
INCENTIVE STOCK OPTION PLANS
A summary of the information relating to the Company's stock option plans for
the three months ended October 31, 2005 and 2004 is as follows:
October 31, 2005 October 31, 2004
----------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Options Exercise
Options Price ------- Price
------- ----- -----
Outstanding at
beginning
of period 3,154,125 $11.86 2,856,801 $11.86
Granted --- na 123,375 $14.05
Exercised (227,816) $11.01 (8,144) $ 7.60
Cancelled (5,250) $14.05 --
--------- ---------
Outstanding at
end of period 2,921,059 $12.74 2,972,032 $11.95
========= =========
Exercisable at
end of period 1,896,626 $11.32 2,244,461 $11.11
========= =========
Weighted average fair -- $10.42
value of options ====== ======
granted during period
9
The following table summarizes information for stock options outstanding at
October 31, 2005:
- -------------------------------------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
- -------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Contractual Exercise Exercise
Exercise prices Shares Life Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------------
$5.45-8.08 291,451 2.9 years $ 5.64 291,451 $ 5.64
- -------------------------------------------------------------------------------------------------------------------------------
$8.33-12.25 1,602,275 5.0 years $11.06 1,312,250 $10.89
- -------------------------------------------------------------------------------------------------------------------------------
$12.93-19.02 947,456 8.1 years $16.73 215,050 $16.60
- -------------------------------------------------------------------------------------------------------------------------------
$20.20-24.42 61,644 6.75 years $21.42 61,644 $21.42
- -------------------------------------------------------------------------------------------------------------------------------
$36.05 18,233 4.2 years $36.05 18,233 $36.05
--------- ---------
- -------------------------------------------------------------------------------------------------------------------------------
2,921,059 1,898,628
========= =========
- -------------------------------------------------------------------------------------------------------------------------------
As of October 31, 2005, there were approximately 806,800 shares available for
grant under the Company's stock option plans. There were no stock option grants
during the three months ended October 31, 2005
NOTE 6. INCOME TAXES
For the three months ended October 31, 2005, the Company's provision for income
taxes was $0.1 million, which includes a benefit for income taxes of $1.0
million of which $0.5 million will be carried back against federal taxes paid
for fiscal 2005, offset by an increase in the valuation allowance of $1.1
million to equal net deferred tax assets as of October 31, 2005. In computing
the $0.5 million federal tax carryback benefit, the effective rate used
considered limitations on the Company's ability to carryback its estimated net
operating loss for the full fiscal year ending July 31, 2006. Pursuant to SFAS
109 "Accounting for Income Taxes", the Company recorded a valuation allowance
for its net deferred tax assets during the quarter ended October 31, 2005. The
Company believes that the valuation charge is necessary as it is more likely
than not that the deferred tax assets will not be realized in the foreseeable
future based on positive and negative evidence available at this time. This
conclusion was reached because of uncertainties relating to future taxable
income, in terms of both its timing and its sufficiency, which would enable the
Company to realize the deferred tax assets.
The provision for income taxes is as follows:
(000's)
Three months ended
October 31,
Current benefit (provision): 2005 2004
---- ----
Federal $ 533 $ (4,210)
State and local (16) (299)
Deferred provision (640) (643)
------- --------
Provision for income taxes $ (123) $ (5,152)
======= ========
The components of deferred tax assets (liabilities)
as of October 31, 2005 and July 31, 2005 are as follows:
(000's)
October 31, July 31,
Current deferred tax assets (liabilities): 2005 2005
---- ----
Provision for uncollectible accounts receivable $ 766 $ 889
State and local tax carry forward losses 377 245
Other, net (121) (234)
Realized and unrealized losses on marketable securities 137 129
Federal carry forward losses 333 -
------- --------
Current deferred tax assets 1,492 1,029
------- --------
NON CURRENT DEFERRED TAX ASSETS (LIABILITIES):
Deferred patent costs (290) (293)
Research and development tax credit carryforward 24 -
Depreciation 63 33
------- --------
Non current deferred tax (liabilities), net (203) (260)
------- --------
Net deferred tax assets - before valuation allowance 1,289 769
Less: Valuation allowance (1,289) (129)
------- --------
Deferred tax assets - net $ - $ 640
======= ========
NOTE 7. GAIN ON PATENT LITIGATION SETTLEMENT
In fiscal 2004, the Company as plaintiff finalized and executed a settlement and
license agreement with Digene Corporation to settle a patent litigation lawsuit
(the "Digene agreement"). Under the terms of the agreement, the Company received
an initial payment of $16.0 million, would earn in the first "annual period"
(October 1, 2004 to September 30, 2005) a minimum royalty payment of $2.5
million, and receive a minimum royalty of $3.5 million in each of the next four
annual periods. In addition, the agreement provides for the Company to receive
quarterly running royalties on the net sales of Digene products subject to the
license until the expiration of the patent on April 24, 2018. These quarterly
running royalties will be fully creditable against the minimum royalty payments
due in the first five years of the agreement. The balance, if any, of the
minimum royalty payment will be recognized in the final quarter of the
applicable annual royalty period.
As a result of the Digene agreement, the Company recorded a gain on patent
litigation settlement of $14.0 million during the three months ended October 31,
2004 and deferred $2 million which would be earned from net sales of the
Company's licensed products covered by the agreement during the first annual
period. During the three months ended October 31, 2005, the Company recognized
royalty income of approximately $859,000, representing the balance of deferred
revenue plus the balance of the minimum royalty payment earned in the final
quarter of the first annual royalty period, which ended September 30, 2005.
10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2005
(UNAUDITED)
Note 8--Segment Reporting
The Company applies SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas. The chief operating decision maker, or decision-making group, in making
decision how to allocate resources and assess performance, identifies operating
segments as components of an enterprise about which separate discrete financial
information is available for evaluation.
The Company has two reportable segments: research and development and clinical
laboratories. The Company's research and development segment conducts research
and development activities and sells products derived from these activities. The
clinical laboratories segment provides diagnostic services to the health care
community. The Company evaluates segment performance based on segment income
(loss) before taxes. Costs excluded from segment income (loss) before taxes and
reported as other consist of corporate general and administrative costs which
are not allocable to the two reportable segments. Management of the Company
assesses assets on a consolidated basis only and therefore, assets by reportable
segment have not been included in the reportable segments below. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies
The following financial information (in thousands) represents the reportable
segments of the Company:
RESEARCH AND DEVELOPMENT CLINICAL LABORATORIES OTHER CONSOLIDATED
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ---- ---- ----
Operating revenues:
Research product revenues and royalty income $ 2,147 $ 2,456 -- -- -- -- $ 2,147 $ 2,456
Clinical laboratory services ............... -- -- $ 8,018 $ 7,845 -- -- 8,018 7,845
Cost and expenses (income):
Cost of research product revenues .......... 541 575 -- -- -- -- 541 575
Cost of clinical laboratory services ....... -- -- 3,481 2,914 -- -- 3,481 2,914
Research and development expense ........... 1,550 2,212 -- -- -- -- 1,550 2,212
Provision for uncollectible accounts ....... -- -- 1,145 1,477 -- -- 1,145 1,477
Depreciation and amortization .............. 49 26 221 221 11 13 281 260
Other costs and expenses ................... 476 608 3,109 2,587 3,452 1,825 7,037 5,020
Gain on patent litigation settlement ....... -- (14,000) -- -- -- -- -- (14,000)
Interest income ............................ -- -- -- -- (707) (330) (707) (330)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes .......... $ (469) $ 13,035 $ 62 $ 646 ($ 2,756) ($ 1,508) $ (3,163) $ 12,173
======== ======== ======== ======== ======== ======== ======== ========
Stock based compensation
included in above cost and expenses:
Cost of research product revenues ....... $ 8 -- -- -- -- -- $ 8 --
Research and development expense ........ 71 -- -- -- -- -- 71 --
Other costs and expenses ................ 18 -- $ 153 -- $ 170 -- 341 --
-------- -------- -------- -------- -------- --------
Totals .................................. $ 97 -- $ 153 -- $ 170 -- $ 420 --
======== ======== ======== ======== ======== ======== ======== ========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and related notes.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements. See "Forward-Looking and Cautionary
Statements" in our Form 10-K for the year ended July 31, 2005. Because of those
factors, you should not rely on past financial results as an indication of
future performance. We believe that period-to-period comparisons of our
financial results to date are not necessarily meaningful and expect that our
results of operations might fluctuate from period to period in the future.
Enzo Biochem, Inc. (the "Company" or "Enzo") is a leading life sciences and
biotechnology company focused on harnessing genetic processes to develop
research tools, diagnostics and therapeutics. Enzo also provides clinical
laboratory services to the medical community. In addition, our work in gene
analysis has led to our development of significant therapeutic product
candidates, several of which are currently in clinical trials, and several are
in preclinical studies.
The business activities of the Company are performed by the Company's three
wholly owned subsidiaries. These activities are: (1) research and development,
manufacturing and marketing of biomedical research products and tools through
Enzo Life Sciences and research and development of therapeutic products through
Enzo Therapeutics, and (2) the operation of a clinical reference laboratory
through Enzo Clinical Labs. For information relating to the Company's business
segments, see Note 7 of the Notes to Consolidated Financial Statements.
The Company's source of revenue has been from the direct sales of research
products of labeling and detection reagents for the genomics and sequencing
markets, as well as through non-exclusive distribution agreements. The other
source of revenue has been from the clinical laboratory service market. Clinical
laboratory services are provided to patients covered by various third party
insurance programs, including Medicare, and to patients who are self payers.
Revenues from the clinical laboratory are recognized upon completion of the
testing process for a specific patient and reported to the ordering physician.
These revenues and the associated accounts receivable are based on gross amounts
billed or billable for services rendered, net of a contractual allowance, which
is the difference between amounts billed to payers and the expected receipts
from such payers. The clinical laboratory is subject to seasonal fluctuations in
operating results. Volume of testing generally declines during the summer
months, the year-end holiday period and other major holidays. In addition,
volume declines due to inclement weather may reduce net revenues. Therefore,
comparison of the results of successive quarters may not accurately reflect
trends or results for the full year. For the three months ended October 31, 2005
and 2004, respectively, approximately 21% and 24% of the Company's operating
revenues were derived from research product sales and royalty income and
approximately 79% and 76% were derived from clinical laboratory services.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2005, our cash and cash equivalents and marketable securities
totaled $81.4 million, a decrease of $2.3 million from July 31, 2005. We had
working capital of $94.0 million at October 31, 2005 compared to $97.0 million
at July 31, 2005.
12
Net cash used in operating activities for the three month period ended October
31, 2005 was approximately $2.1 million as compared to net cash provided by
operating activities of $15.5 million for the three months ended October 31,
2004. The decrease in net cash provided by operating activities was primarily
due to the 2005 period's net loss as compared to net income resulting from the
$14 million settlement and license agreement with Digene Corporation recognized
in the 2004 period. During the three months ended October 31, 2004, the Company
finalized and executed a settlement and license agreement with Digene
Corporation to settle its patent litigation lawsuit. Under the terms of the
agreement, the Company received an initial payment of $16.0 million, of which
$2.0 million was to be used to offset royalty income payments based upon net
sales of licensed products covered by the agreement during the first year. As a
result of this settlement and license agreement with Digene (the "Digene
agreement"), the Company recorded a gain on patent litigation settlement of
$14.0 million during the quarter ended October 31, 2004.
Net cash provided by investing activities was approximately $0.3 million during
the three months ended October 31, 2005, as compared to net cash used in
investing activities of ($1.4) million during the three months ended October 31,
2004. The increase during the 2005 period was primarily the result of the net
sales of marketable securities of approximately $0.5 million, versus purchases
of approximately $1.0 million during the 2004 period.
Net cash provided by financing activities was comparable in both periods and was
primarily from the exercise of stock options.
We believe that our current cash position is sufficient for our foreseeable
liquidity and capital resource needs, although there can be no assurance that
future events will not alter such view. Management is not aware of any material
claims, disputes or settled matters concerning third-party reimbursements that
would have a material effect on our financial statements.
CRITICAL ACCOUNTING POLICIES
GENERAL
The Company's discussion and analysis of its financial condition and results of
operations are based upon Enzo Biochem, Inc. consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses; these estimates and
judgments also affect related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to
contractual allowance, allowance for uncollectible accounts, intangible assets
and income taxes. The Company bases its estimates on experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
REVENUE RECOGNITION
RESEARCH PRODUCT REVENUES
Revenues from research product sales are recognized when the products are
shipped, the sales price is fixed or determinable and collectibility is
reasonably assured. During fiscal 2004, the Company had certain non-exclusive
distribution agreements, which provided for consideration to be paid to the
distributors for the manufacture of certain products. The Company recorded such
consideration provided to distributors under these non-exclusive
13
distribution agreements as a reduction to research product revenues. Revenues
from these non-exclusive distribution agreements were recognized when shipments
were made to a distributor's respective customers and reported by the
distributor to the Company.
CLINICAL LABORATORY SERVICES - REVENUES AND ACCOUNTS RECEIVABLE
Revenues from the clinical laboratory are recognized upon completion of the
testing process for a specific patient and reported to the ordering physician.
These revenues and the associated accounts receivable are based on gross amounts
billed or billable for services rendered, net of a contractual allowance, which
is the difference between amounts billed to payers and the expected approved
reimbursable settlements from such payers. The Company believes that the net
revenues for the clinical labs segment meet the requirements of SAB 104.
The following is a table of the clinical laboratory segment's net billings and
billing percentages by billing category:
- --------------------------------------------------------------------------------
Net billings Net billings
Three months ended Three months ended
October 31, 2005 October 31, 2004
- -------------------------------------------------------------------------------
Billing Category (in 000's) (in %) (in 000's) (in %)
- -------------------------------------------------------------------------------
Medicare $1,835 23% $1,451 19%
- -------------------------------------------------------------------------------
Third party carriers 4,713 59% 3,543 45%
- -------------------------------------------------------------------------------
Patient self-pay 1,003 12% 2,581 33%
- -------------------------------------------------------------------------------
HMO's 467 6% 270 3%
------ ---- ------ ----
- -------------------------------------------------------------------------------
Total $8,018 100% $7,845 100%
====== ==== ====== ====
- -------------------------------------------------------------------------------
The following is a table of the Company's net accounts receivable by segment.
The clinical laboratory segment's net receivables are detailed by billing
category and as a percent to its total net receivables:
- --------------------------------------------------------------------------------
Net receivables Net receivables
as of as of
October 31, 2005 October 31, 2004
- --------------------------------------------------------------------------------
Billing Category (in 000's) (As %) (in 000's) (As %)
- --------------------------------------------------------------------------------
Medicare $ 1,721 15% $ 1,594 13%
- --------------------------------------------------------------------------------
Third party carriers 5,496 49% 6,742 54%
- --------------------------------------------------------------------------------
Patient self-pay 3,323 30% 3,819 30%
- --------------------------------------------------------------------------------
HMO's 623 6% 394 3%
------- ---- ------- ----
- --------------------------------------------------------------------------------
Total clinical laboratory 11,163 100% 12,549 100%
- --------------------------------------------------------------------------------
Research and development 951 872
------- -------
- --------------------------------------------------------------------------------
Accounts receivable, net $12,114 $13,421
======= =======
- --------------------------------------------------------------------------------
CONTRACTUAL ALLOWANCES
The Company's estimate of contractual allowances is based on significant
assumptions and judgments, such as its interpretation of the applicable payer's
reimbursement policies, and bears the risk of change. The estimation process is
based on a rolling monthly analysis of the experience of amounts approved as
reimbursable and ultimately settled by payers, versus the corresponding gross
amount billed to the respective payers. The difference between the gross billing
and the reimbursement percentage is the contractual allowance percentage and
represents the proportion of the gross billed amounts the Company does not
expect to become approved reimbursable settlements. In summary, the contractual
allowance is an estimate that reduces gross revenue, based on gross billing
rates, to amounts expected to be approved and reimbursable. The Company adjusts
revenues in the period that approved settlements are received. The Company
adjusts the contractual allowance estimate periodically, based on its evaluation
of historical settlement experience with payers, industry reimbursement trends,
and other relevant factors.
14
If the Company experiences a significant change in reimbursement policies or
procedures for a particular payer, the contractual allowance estimate percentage
is reviewed by management for that payer. However, services authorized by an
insured's healthcare provider and rendered by the Company, and the corresponding
approval of those services and their settlement by the insured's payer are often
subject to interpretation which could result in payments that differ from our
estimates.
During the three months ended October 31, 2005 and 2004, the contractual
allowance percentages, determined using the rolling monthly average historical
reimbursement statistics, were 75.1% and 73.2%, respectively. 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 of approximately $455,000 and $652,600 as of October 31, 2005 and
2004, respectively, and a change in clinical laboratory services revenues of
approximately $298,600, and $338,300 for the three months ended October 31, 2005
and 2004, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company determines the estimated allowance for doubtful accounts after the
estimated contractual allowance expense has been applied to the gross open
receivables. The allowance for doubtful accounts represents amounts that the
Company does not expect to collect after the Company has exhausted its
collection procedures. In summary, the Company estimates its allowance for
doubtful accounts in the period the related services are billed and adjusts in
future accounting periods the estimate as necessary. It bases the estimate for
the allowance on the evaluation of historical collection experience, the aging
profile of accounts receivable, the historical doubtful account write-off
percentages, payer mix, and other relevant factors.
The allowance for doubtful accounts includes the balances, after receipt of the
approved settlements, from third party payers for the insufficient diagnosis
information received from the ordering physician, which result in denials of
payment and the uncollectible portion of receivables from self payers, including
deductibles and co-payments, which are subject to credit risk and patients'
ability to pay. The Company wrote off 100% of all accounts receivable (for all
payers) over 210 days during the three months ended October 31, 2005 as it
assumed all these accounts are uncollectible. The written off amounts are kept
on the aging for patient billing and demographic information. The Company also
set up an allowance for accounts less than 210 days during the three months
ended October 31, 2005. The Company adjusts the historical collection analysis
for any recoveries on an ongoing basis.
The Company's ability to collect outstanding receivables from third party payers
is critical to its operating performance and cash flows. The primary collection
risk lies with uninsured patients or patients for whom primary insurance has
paid but a patient portion remains outstanding. The Company also assesses the
current state of its billing functions in order to identify any known collection
or reimbursement issues in order to assess the impact, if any, on the allowance
estimates, which involves judgment. The Company believes that the collectibility
of its receivables is directly linked to the quality of its billing processes,
most notably, those related to obtaining the correct information in order to
bill
15
effectively for the services provided. Should circumstances change (e.g. shift
in payer mix, decline in economic conditions or deterioration in aging of
receivables), our estimates of net realizable value of receivables could be
reduced by a material amount.
INCOME TAXES
The Company accounts for income taxes under the liability method of accounting
for income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The liability method requires
that any tax benefits recognized for net operating loss carry forwards and other
items be reduced by a valuation allowance where it is more likely than not the
benefits may not be realized. 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. Under
the liability method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Pursuant to SFAS 109 "Accounting for Income Taxes", the Company recorded a
valuation allowance of $1.1 million for its net deferred tax assets during the
quarter ended October 31, 2005. The Company believes that the valuation charge
is necessary as it is more likely than not that the deferred tax assets will not
be realized in the foreseeable future based on positive and negative evidence
available at this time. This conclusion was reached because of uncertainties
relating to future taxable income, in terms of both its timing and its
sufficiency, which would enable the Company to realize the deferred tax assets.
RESULTS OF OPERATIONS - THREE MONTHS ENDED OCTOBER 31, 2005 AS COMPARED TO
OCTOBER 31, 2004
Research product revenues and royalty income was $2.1 million during the three
months ended October 31, 2005 compared to $2.4 million in the year ago quarter,
a decrease of $0.3 million or 13%. The decrease was primarily due to a decline
in the non exclusive distribution agreement revenue from research products,
partially offset by royalties earned in the 2005 quarter but not in the 2004
quarter. The decline in the gross profit margin on research product sales and
royalties in the 2005 quarter compared to the 2004 quarter is due to this
decline in revenues from distributors with whom we had supply agreements.
Revenues from these distributors were net of manufacturing costs.
Clinical laboratory revenues were $8.0 million during the three months ended
October 31, 2005 compared to $7.8 million in the year ago quarter, an increase
of $0.2 million or 2%, primarily due to the increase in the number of customer
accounts being serviced.
The cost of research products revenues during the three months ended October 31,
2005 and 2004 was comparable, at $0.5 million.
The cost of clinical laboratory services during the three months ended October
31, 2005 was $3.5 million compared to $2.9 million in the year ago quarter, an
increase of $0.6 million or 19%, primarily due to the increased number of tests
performed and higher costs incurred to perform certain esoteric tests.
16
Research and development expenses were $1.5 million during the three months
ended October 31, 2005 compared to $2.2 million in the year ago quarter, a
decrease of $0.7 million or 30%, primarily due to the timing of when clinical
trial study costs are incurred for the development of therapeutic products, and
a decline in the amortization of deferred patent expenses.
Selling, general and administrative expenses were $5.5 million during the three
months ended October 31, 2005 compared to $4.1 million in the year ago quarter,
an increase of $1.3 million or 32%. The increase was due to stock option
compensation charges due to the adoption of SFAS 123 (R) during the quarter
ended October 31, 2005, an increase in personnel costs relating to information
technology and other service support departments, and corporate governance and
accounting fees.
The provision for uncollectible accounts receivable in the clinical reference
laboratory segment during the three months ended October 31, 2005 was $1.1
million, compared to $1.5 million during the year ago quarter, a decrease of
$0.4 million or 22%. The provision for uncollectible accounts receivable as a
percentage of clinical laboratory services revenues decreased to 15% in the 2005
period compared to 19% for the 2004 period. The decrease in the provision was
primarily due to improved billing procedures and the change in the mix of the
demographics of the patients from the New Jersey new customer accounts.
Legal expenses were $1.9 million during the three months ended October 31, 2005
compared to $1.1 million in the year ago quarter, an increase of $0.7 million or
63%. The increase is due to the on going patent litigation.
Interest income increased $0.4 million or 114% to $0.7 million during the three
months ended October 31, 2005 compared to $0.3 million during the year ago
quarter, due to the increase in interest rates earned on investments. The
Company earns interest on its cash and cash equivalents by investing primarily
in short term (90 days or less) financial instruments with high credit ratings.
For the three months ended October 31, 2005, the Company's provision for income
taxes was $0.1 million, which included a benefit for income taxes of $1.0
million, of which $0.5 million will be carried back against federal taxes paid
for fiscal 2005, offset by an increase in the valuation allowance of $1.1
million to equal net deferred tax assets as of October 31, 2005. In computing
the $0.5 million federal tax carryback benefit, the effective rate used
considered limitations on the Company's ability to carryback its estimated net
operating loss for the full fiscal year ending July 31, 2006. Pursuant to SFAS
109 "Accounting for Income Taxes", the Company recorded a valuation allowance
for its net deferred tax assets during the quarter ended October 31, 2005. The
Company believes that the valuation charge is necessary as it is more likely
than not that the deferred tax assets will not be realized in the foreseeable
future based on positive and negative evidence available at this time. This
conclusion was reached because of uncertainties relating to future taxable
income, in terms of both its timing and its sufficiency, which would enable the
Company to realize the deferred tax assets.
For the three months ended October 31, 2004, the Company's provision for income
taxes was $5.2 million which was based on the effective federal, state and local
income tax rates applied to the fiscal year's taxable income. The provision for
income taxes, at an effective rate of 43%, was different from the U.S. federal
statutory rate of 34% due to state income taxes net of federal of 8%, and other
of 1%.
SEGMENT (LOSS) INCOME BEFORE INCOME TAXES - THREE MONTHS ENDED OCTOBER 31, 2005
AS COMPARED TO OCTOBER 31, 2004
The research and development segment's loss before income taxes was
approximately $0.5 million for the three months ended October 31, 2005, compared
to income of $13 million in the 2004 period. The 2004 period income was the
result of the $14 million gain from the Digene
17
agreement. The 2005 loss was the result of a decline in research product
revenues due to the ongoing dispute with certain distributors on the sales of
certain licensed products. The clinical reference laboratory segment's income
before income taxes was $0.1 million versus $0.6 million.
The decrease is due to higher costs services provided, partially offset by
higher revenues from the increase in the number of customer accounts being
serviced, and a lower provision for uncollectible accounts, due to the expansion
into the New Jersey markets. The Other segment's (loss) before income taxes was
$(2.8) million versus $(1.5) million in the 2004 period, primarily due to legal
fees, partially offset by higher interest income earned on cash equivalents.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company's management
conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the
Company's "disclosure controls and procedures" (as such term is defined under
the Exchange Act), under the supervision and with the participation of the
principal executive officer and the principal financial officer. Based on this
evaluation, the principal executive officer and the principal financial officer
concluded that the Company's disclosure controls and procedures are effective as
of the end of the period covered by this report. Notwithstanding the foregoing,
a control system, no matter how well designed and operated can provide only
reasonable, not absolute, assurance that it will detect or uncover failures
within the Company to disclose material information otherwise required to be set
forth in the Company's periodic reports.
(b) Changes in Internal Controls
There was no change in the Company's internal controls over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
18
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There have been no material developments with respect to previously reported
legal proceedings. See the annual report on Form 10-K for the fiscal year ended
July 31, 2005 filed with the Securities and Exchange Commission for a discussion
of the Company's ongoing legal proceedings.
Item 6. EXHIBITS
EXHIBIT NO. EXHIBIT
31(a) Certification of Elazar Rabbani, Ph.D. pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of Barry Weiner pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32(a) Certification of Elazar Rabbani, Ph.D. pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32(b) Certification of Barry Weiner pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENZO BIOCHEM, INC.
------------------
Registrant)
Date: December 12, 2005 by: /s/Barry Weiner
---------------
Chief Financial Officer
19