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 April 30, 2006
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.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non- accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer |_| Accelerated filer |X| Non- accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.)
Yes |_| No |X|
As of June 1, 2006 the Registrant had 32,249,600 shares
of Common Stock outstanding.
1
ENZO BIOCHEM, INC.
FORM 10-Q
April 30, 2006
INDEX
-----
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
April 30, 2006 (unaudited) and July 31, 2005 3
Consolidated Statements of Operations
For the three and nine months ended April 30, 2006
and 2005 (unaudited) 4
Consolidated Statements of Cash Flows
For the nine months ended April 30, 2006 and 2005 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
Part II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 27
Item 6. Exhibits 27
Signatures 27
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS April 30,
2006 July 31,
Current assets: (unaudited) 2005
---------- ---------
Cash and cash equivalents ............................. $75,912 $76,981
Marketable securities ................................. -- 6,714
Accounts receivable, net of allowances ................ 11,178 13,421
Inventories ........................................... 2,780 2,876
Prepaid expenses ...................................... 1,517 2,580
Recoverable and prepaid income taxes .................. 2,895 1,329
Deferred taxes ........................................ -- 900
--------- ---------
Total current assets .................................... 94,282 104,801
Property and equipment, net of accumulated
depreciation and amortization ......................... 3,127 2,669
Goodwill ................................................ 7,452 7,452
Patent costs, net of accumulated amortization ........... 1,277 1,333
Other ................................................... 219 211
--------- ---------
Total assets ............................................ $106,357 $116,466
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued legal fees .................................... $2,604 $2,717
Trade accounts payable ................................ 1,422 2,414
Other accrued expenses ................................ 1,707 1,348
Accrued payroll ....................................... 896 515
Deferred revenue ...................................... -- 359
Accrued research and development expenses ............. 194 286
Installment payable, current portion .................. 150 150
--------- ---------
Total current liabilities ............................... 6,973 7,789
Deferred taxes .......................................... -- 260
Long term installment payable, net of current portion ... -- 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: 32,814,500 at April 30,
2006 and 32,526,800 at July 31, 2005 ................ 328 325
Additional paid-in capital ............................ 235,219 230,644
Less treasury stock at cost: 564,860 shares at
April 30, 2006 and 384,400 shares at July 31, 2005 .. (8,428) (5,994)
Accumulated deficit ................................... (127,735) (116,577)
Accumulated other comprehensive loss .................. -- (131)
--------- ---------
Total stockholders' equity .............................. 99,384 108,267
--------- ---------
Total liabilities and stockholders' equity .............. $106,357 $116,466
========= =========
3
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended Nine Months Ended
April 30, April 30,
2006 2005 2006 2005
----------------------------------------------------------------------
Revenues:
Research product revenues and royalty income ...... $1,896 $2,385 $6,151 $8,112
Clinical laboratory services ...................... 7,734 8,615 23,759 24,423
-------------- -------------- -------------- --------------
9,630 11,000 29,910 32,535
Costs and expenses and other (income):
Cost of research product revenues ................. 588 535 1,515 1,665
Cost of clinical laboratory services .............. 3,384 3,430 10,296 9,203
Research and development expense .................. 1,901 2,208 5,361 6,450
Selling, general, and administrative expense ...... 6,153 5,459 18,935 14,334
Provision for uncollectible accounts receivable ... 517 950 2,870 3,573
Legal expense ..................................... 1,719 1,387 5,213 3,690
Interest income ................................... (839) (416) (2,226) (1,055)
Gain on patent litigation settlement .............. -- -- -- (14,000)
-------------- -------------- -------------- --------------
13,423 13,553 41,964 23,860
(Loss) income before income taxes ................... (3,793) (2,553) (12,054) 8,675
Benefit (provision) for income taxes ................ 357 1,056 896 (3,680)
-------------- -------------- -------------- --------------
Net (loss) income ................................... ($3,436) ($1,497) ($11,158) $4,995
============== ============== ============== ==============
Net (loss) income per common share:
Basic ............................................. ($0.11) ($0.05) ($0.35) $0.16
============== ============== ============== ==============
Diluted ........................................... ($0.11) ($0.05) ($0.35) $0.15
============== ============== ============== ==============
Weighted average common shares outstanding:
Basic ............................................. 32,245 32,122 32,201 32,082
Diluted ........................................... 32,245 32,122 32,201 32,745
4
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
April 30,
2006 2005
--------- ---------
OPERATING ACTIVITIES
Net (loss) income ........................................ ($11,158) $4,995
Adjustments to reconcile net (loss) income to net cash
(used in)/provided by operating activities:
Depreciation and amortization of property
and equipment ...................................... 791 688
Amortization of patent costs .......................... 56 979
Provision for uncollectible accounts receivable ....... 2,870 3,573
Deferred taxes ........................................ 640 1,192
Stock compensation charges ............................ 1,378 --
Issuance of stock for 401(k) employer match ........... 400 352
Deferred rent ......................................... -- (87)
Loss on sales of marketable securities ................ 153 200
Changes in operating assets and liabilities:
Accounts receivable ................................... (627) (2,875)
Inventories ........................................... 96 524
Prepaid expenses ...................................... 1,063 195
Recoverable and prepaid income taxes .................. (1,566) (539)
Trade accounts payable and other accrued expenses ..... (633) (455)
Accrued research and development expenses ............. (92) (135)
Deferred revenue ...................................... (359) 955
Accrued legal fees .................................... (113) (888)
Accrued payroll ....................................... 381 463
Installment payable ................................... (150) --
--------- ---------
Adjustments .............................................. 4,288 4,142
Net cash (used in)/provided by
operating activities ............................ (6,870) 9,137
INVESTING ACTIVITIES
Capital expenditures .................................. (1,249) (955)
Patent costs .......................................... -- (20)
Sales of marketable securities ........................ 6,764 10,838
Purchases of marketable securities .................... (69) (249)
Security deposits ..................................... (8) (5)
--------- ---------
Net cash provided by investing activities .......... 5,438 9,609
FINANCING ACTIVITIES
Proceeds from the exercise of stock options ........... 363 348
--------- ---------
Net cash provided by financing activities .......... 363 348
Net (decrease) increase in cash and cash equivalents ..... (1,069) 19,094
Cash and cash equivalents at the beginning of
the period ............................................ 76,981 54,499
--------- ---------
Cash and cash equivalents at the end of the period ....... $75,912 $73,593
========= =========
5
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of April 30, 2006
and for the three and nine month periods ended
April 30, 2006 and 2005
(Unaudited)
Note 1 - Basis of Presentation
- ------------------------------
The consolidated balance sheet as of April 30, 2006 and the consolidated
statements of operations for the three and nine month periods ended April 30,
2006 and 2005 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 and nine months ended April 30, 2006 are not necessarily indicative of
the results to be expected for the entire fiscal year ending July 31, 2006.
Note 2 - Recently issued accounting pronouncements
- --------------------------------------------------
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" (SFAS 154) which replaces APB Opinion No. 20 "Accounting Changes"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements --
An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections. It
establishes retrospective application, or the earliest practicable date, as the
required method for reporting a change in accounting principle and restatement
with respect to the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not believe the adoption of SFAS 154
will have a material effect on its results of operations or financial condition.
Note 3 - Share-based compensation
- ---------------------------------
Prior to August 1, 2005, the Company accounted for employee stock option plans
under the intrinsic value method in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related interpretations. Under APB No. 25,
generally no compensation expense is recorded when terms of the award are fixed
and the exercise price the employee stock option equals or exceeds the fair
value of the underlying stock on the date of the grant.
Additionally, in periods prior to August 1, 2005, the Company followed the
disclosure-only requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which allowed entities to continue to apply the
provisions of APB No. 25 for transactions with employees and directors and
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employees and directors stock grants made as if the fair value
based method of accounting in SFAS 123 had been applied to these transactions.
6
Effective August 1, 2005, the Company adopted SFAS No. 123(R), "Share-Based
Payment" ("SFAS 123(R)") and related interpretations which superseded APB No.
25. SFAS 123(R) requires that all stock-based compensation be recognized as an
expense in the financial statements and that such cost be measured at the fair
value of the award. This statement was adopted using the modified prospective
method, which requires the Company to recognize compensation expense on a
prospective basis. Therefore, prior period financial statements have not been
restated. Under this method, in addition to reflecting compensation expense for
new share-based awards, expense is also recognized to reflect the remaining
service period of awards that had been included in pro-forma disclosures in
prior periods.
As a result of adopting SFAS 123(R), the Company's net loss for the three and
nine months ended April 30, 2006 was $427,000 and $1.3 million higher,
respectively, than if the Company had continued to account for share-based
compensation under APB No. 25. Basic and diluted loss per share for the three
and nine months ended April 30, 2006 were increased by $0.01 and $0.04 per
share, respectively as a result of adopting SFAS 123(R). Additionally, SFAS
123(R) also requires that excess tax benefits related to stock option exercises
be reflected as financing cash inflows instead of operating cash inflows. For
the three and nine months ended April 30, 2006, no excess tax benefits were
recognized. Other share-based compensation expense relating to the fair value of
restricted shares and restricted stock units issued and vested during the three
and nine months ended April 30, 2006 was $57,000 and $86,000, respectively.
The following table sets forth the amount of expense related to share-based
payment arrangements included in specific line items in the accompanying
statements of operations:
Three months ended Nine months ended
April 30, 2006 April 30, 2006
(In thousands) (In thousands)
------------------ -----------------
Cost of research product revenues $ -- $18
Research and development 38 200
Selling, general and administrative 446 1,135
------ ------
$484 $1,353
====== ======
As of April 30, 2006, there was $2.5 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Company's stock option and restricted stock plans, which will be recognized
over a weighted average life of approximately one and a half years. During the
nine months ended April 30, 2006, the Company granted awards of 67,950 shares of
restricted stock and restricted stock units, inclusive of cancellations of 7,500
shares, which vest over two to four year periods.
During the three months ended April 30, 2006, the Company granted 100,000
options to a consultant, with an exercise price of $24.84, which vest over six
months and have a two year term. See Note 8.
7
With the adoption of SFAS 123(R), the Company is required to record the fair
value of stock-based compensation awards as an expense. In order to determine
the fair value of stock options on the date of grant, the Company utilizes the
Black-Scholes option-pricing model. Inherent in this model are assumptions
related to expected stock-price volatility, option life, risk-free interest rate
and dividend yield. While the risk-free interest rate and dividend yield are
less subjective assumptions, typically based on factual data derived from public
sources, the expected stock-price volatility and option life assumptions require
a greater level of judgment which make them critical accounting estimates. The
Company uses an expected stock-price volatility assumption that is primarily
based on historical realized volatility of the underlying stock during a period
of time. No employee or director stock options were granted during the three and
nine months ended April 30, 2006.
The following table illustrates the effect on net (loss) income and (loss)
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation for the periods ended
April 30, 2005:
Three months ended Nine months ended
(In thousands, except for share data) April 30, 2005 April 30, 2005
- ------------------------------------- ------------------ -----------------
Reported net (loss) income $(1,497) $4,995
Pro forma compensation expense (1,101) (3,133)
-------- -------
Pro forma net (loss) income $(2,598) $1,862
======== =======
(Loss) earnings per share:
Basic - as reported $(.05) $.16
Basic - pro forma $(.08) $.06
Diluted - as reported $(.05) $.15
Diluted - pro forma $(.08) $.06
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 represented 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 accelerated "out of the money" options.
8
Note 4 - Supplemental disclosure for statement of cash flows
- ------------------------------------------------------------
Supplemental information with respect to the Company's consolidated statements
of cash flows is as follows:
Three months ended Nine months ended
(In thousands) April 30, April 30,
2006 2005 2006 2005
----- ------ ----- ------
Taxes paid-net $2 $1,153 $30 $2,983
===== ====== ===== ======
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 (see Note 8).
In December 2004, a director of the Company exercised incentive stock options in
a non-cash transaction. The director surrendered 17,056 shares of previously
acquired common stock in exchange for 31,660 shares. The Company recorded
approximately $0.3 million, the market value of the surrendered shares, as
treasury stock (see Note 8).
Note 5 - (Loss) earnings per share
- ----------------------------------
The Company applies SFAS No. 128, "Earnings per Share" which 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 and restricted
stock awards, is determined using the treasury stock method in accordance with
SFAS No. 128. Diluted weighted average shares outstanding for the three and nine
months ended April 30, 2006 and the three months ended April 30, 2005 does not
include the effect of dilutive employee and director stock options in all
periods and restricted stock awards in the 2006 periods because to do so would
have been antidilutive. Accordingly, basic and diluted net loss per share for
these periods 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 ended Nine months ended
(In thousands, except for share data) April 30, April 30,
2006 2005 2006 2005
------- ------- -------- -------
Numerator:
Net (loss) income ($3,436) ($1,497) ($11,158) $4,995
======= ======= ======== =======
Denominator:
Weighted average number of
common shares outstanding (basic) 32,245 32,122 32,201 32,082
Dilutive stock options -- -- -- 663
------- ------- -------- -------
Weighted average number of common
and common equivalent shares
outstanding (diluted) 32,245 32,122 32,201 32,745
======= ======= ======== =======
Basic net (loss) income per share ($.11) ($.05) ($.35) $0.16
======= ======= ======== =======
Diluted net (loss) income per share ($.11) ($.05) ($.35) $0.15
======= ======= ======== =======
9
The following table summarizes the potential number of shares issued from
exercise of "in the money" stock options, net of shares repurchased with the
option exercise proceeds, and potential shares from restricted stock awards,
which are excluded from the above computation of diluted net (loss) per share
because the effect of their potential issuance is anti-dilutive.
Three months Nine months
(In thousands) ended April 30, ended April 30,
2006 2005 2006 2005
---- ---- ---- ----
Potential net shares, issued from exercise of 408 639 451 --
"in the money" employee and director stock ==== ==== ==== ----
options and restricted stock awards, excluded
from diluted net (loss) per share calculation
The following table summarizes the number of "out of the money" options excluded
from the computation of diluted net (loss) and net income per share because the
effect of their potential exercise is anti-dilutive as of April 30.
(In thousands) 2006 2005
- ------------- ----- ----
"Out of the money" employee and director
stock options 1,109 825
===== ====
Note 6 - Comprehensive (loss) income
- ------------------------------------
The components of comprehensive (loss) income are as follows:
Three months ended Nine months ended
(In thousands) April 30, April 30,
2006 2005 2006 2005
------- ------- -------- ------
Net (loss) income ($3,436) ($1,497) ($11,158) $4,995
Net change in unrealized losses on
marketable securities, net of tax -- 70 131 125
------- ------- -------- ------
Comprehensive (loss) income ($3,436) ($1,427) ($11,027) $5,120
======= ======= ======== ======
Note 7 - Inventories
- --------------------
Inventories consist of the following, as of:
(In thousands) April 30, July 31,
2006 2005
------ ------
Raw Materials $33 $52
Work in process 1,734 1,767
Finished products 1,013 1,057
------ ------
$2,780 $2,876
====== ======
10
Note 8 - Stockholders' equity
- -----------------------------
a. STOCK OPTION PLANS
A summary of the information relating to the Company's stock option plans as of
and for the nine month periods ended April 30, 2006 and 2005 is as follows:
April 30, 2006 April 30, 2005
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
---------- -------- ---------- --------
Outstanding at
beginning of period 3,154,125 $12.61 2,856,801 $11.86
Granted 100,000 $24.84 430,975 $16.57
Exercised (255,307) $10.96 (77,292) $7.54
Cancelled (37,978) $13.11 (24,095) $7.00
--------- ----------
Outstanding at
end of period 2,960,840 $12.75 3,186,389 $12.56
========= =========
Exercisable at
end of period 2,620,650 $12.75 2,149,500 $11.23
========= =========
Weighted average fair
value of options granted
during period $0.89 $11.76
During the nine months ended April 30, 2006 and 2005, the Company received cash
proceeds of approximately $363,000 and $348,000, respectively, from the exercise
of 34,191 and 45,932 options, respectively. The aggregate intrinsic value of
stock options exercised during the nine months ended April 30, 2006 and 2005,
including the non-cash transactions (Note 4) was $0.6 million and $0.7 million,
respectively. The aggregate intrinsic value of options both outstanding and
exercisable at April 30, 2006 is approximately $3.8 million.
The following table summarizes information for stock options outstanding at
April 30, 2006:
Options outstanding Options exercisable
------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Contractual Exercise Exercise
Exercise prices Shares Life Price Shares Price
- --------------- --------- ----------- --------- --------- ---------
$5.45-8.08 289,020 2.4 years $5.64 289,020 $5.64
$8.33-12.25 1,562,827 4.6 years $11.07 1,432,456 $10.99
$12.93-19.02 929,116 7.7 years $16.77 819,297 $17.15
$20.20-24.84 161,644 3.1 years $23.02 61,644 $21.42
$36.05 18,233 3.7 years $36.05 18,233 $36.05
--------- ---------
2,960,840 2,620,650
========= =========
As of April 30, 2006, there were approximately 706,800 shares available for
grant under the Company's stock option plans. During the nine months ended April
30, 2006, the Company granted awards of 67,950 shares of restricted stock and
restricted stock units, inclusive of cancellations of 7,500 shares, which vest
over two to four year periods.
During the three months ended April 30, 2006, the Company granted 100,000
options to a consultant with an exercise price of $24.84, which vest over six
months and have a two year term. The fair value of these options at April 30,
2006 is $89,000. The fair value of the options, which will be accounted for as a
variable instrument, will be fair valued and recognized as expense over the six
month vesting term.
11
The assumptions used to fair value this option grant were as follows: risk free
interest rate of 4.7%, expected term of 2 years, expected volatility of 44%, and
no dividend yield. In connection with this consultant, the Company recognized an
expense of approximately $25,000 in selling, general and administrative expense
in the accompanying statements of operations for the three and nine months ended
April 30, 2006.
B. OTHER SHARE ISSUANCE
The Company has a qualified Salary Reduction Profit Sharing Plan (the "Plan")
for eligible employees under Section 401(k) of the Internal Revenue Code. The
Plan provides for voluntary employee contributions through salary reduction, and
voluntary annual employer contributions at the discretion of the Company of 50%
of employees' 401(k) contributions, up to 10% of the employees' compensation,
payable in Enzo Biochem, Inc. common stock. The Company made voluntary annual
contributions during the nine months ended April 30, 2006 and 2005, by issuing
32,392 and 18,100 shares of common stock, respectively, and recognizing a 401(k)
matched contributions expense of approximately $400,000 and $352,000,
respectively.
C. STOCK DIVIDEND
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 9 - Income taxes
- ---------------------
For the three months ended April 30, 2006, the Company's benefit for income
taxes was $0.4 million, which is comprised of a federal tax carryback benefit
for taxes paid in fiscal 2005 and other adjustments, net of minimum state and
local taxes due for the period. In computing the 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 which ends
July 31, 2006.
For the nine months ended April 30, 2006, the Company's benefit for income taxes
was $0.9 million, which is comprised of its federal tax carryback benefit for
taxes paid in fiscal 2005 and other adjustments, of $1.6 million offset by a
valuation allowance of $0.6 million equal to net deferred tax assets at the
beginning of the period, and by minimum state and local taxes. In computing the
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 which ends July 31, 2006.
Pursuant to SFAS 109 "Accounting for Income Taxes", during the nine months ended
April 30, 2006 the Company recorded a valuation allowance equal to its net
deferred tax assets at July 31, 2005. The Company believes that the valuation
allowance 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 benefit (provision) for income taxes is as follows:
Three months ended Nine months ended
(In thousands) April 30, April 30,
2006 2005 2006 2005
---- ------ ------ -------
Current:
Federal $388 $818 $1,600 $(3,230)
State and local (31) 318 (64) 56
Deferred -- (80) (640) (506)
---- ------ ------ -------
Benefit (provision) for income taxes $357 $1,056 $896 $(3,680)
==== ====== ====== =======
12
The components of deferred tax assets (liabilities) as of April 30, 2006 and
July 31, 2005 are as follows:
(In thousands) April 30, July 31,
Current deferred tax assets (liabilities): 2006 2005
- ------------------------------------------ --------- --------
Provision for uncollectible accounts receivable $ 529 $889
State and local tax carryforward losses 791 245
Other, net (84) (234)
Realized and unrealized losses on marketable securities 138 129
Less: valuation reserve for losses on marketable securities -- (129)
Federal tax carryforward losses 1,491 --
------- -----
Current deferred tax assets 2,865 $900
------- -----
Non current deferred tax assets (liabilities):
- ----------------------------------------------
Deferred patent costs (284) (293)
Research and development tax credit carryforward 68 --
Depreciation (38) 33
------- -----
Non current deferred tax (liabilities), net (254) (260)
------- -----
Net deferred tax assets - before valuation allowance 2,611 640
Less: valuation allowance (2,611) --
------- -----
Deferred tax assets, net $ -- $640
======= =====
In November 2005, the FASB issued FSP 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. The 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
adopted the principles set forth in this FSP to determine its APIC pool.
Note 10 - Gain on patent litigation settlement and royalty income
- -----------------------------------------------------------------
In fiscal 2005, the Company as plaintiff finalized and executed a settlement and
license agreement with Digene Corporation to settle a patent litigation lawsuit
(the "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 are 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 is 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 nine months ended April 30,
2005 and deferred $2 million, which was earned from net sales of the Company's
licensed products covered by the Agreement during the first annual period.
13
The following table summarizes royalty income recognized under the Digene
Agreement and included in the research and development segment (see Note 12):
Three months ended Nine months ended
(In thousands) April 30, April 30,
2006 2005 2006 2005
---- ---- ------ ------
Royalty income $717 $548 $2,251 $1,045
==== ==== ====== ======
Note 11 - Commitment
- --------------------
In December 2005, the Company entered into a contract to purchase for
approximately $3.1 million a 23,000 square foot building adjacent to its
corporate headquarters in Farmingdale, NY to expand its manufacturing and
research and development operations. The Company expects to close on the
purchase transaction in the fourth quarter of fiscal year ending July 31, 2006.
Upon execution of the purchase contract, the Company made a $310,000 escrow
deposit which is included in property and equipment.
14
Note 12--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 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 decisions on 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 operating
results of the reportable segments of the Company:
THREE MONTHS ENDED APRIL 30,
Research and Clinical
Development Laboratories Other Consolidated
----------------- -------------- ----------------- -----------------
2006 2005 2006 2005 2006 2005 2006 2005
------- ------- ------ ------ ------- ------- ------- -------
Operating revenues:
- -------------------
Research product revenues and royalty income (a) ... $1,896 $2,385 -- -- -- -- $1,896 $2,385
Clinical laboratory services ....................... -- -- $7,734 $8,615 -- -- 7,734 8,615
Cost and expenses (income):
- ---------------------------
Cost of research product revenues .................. 588 535 -- -- -- -- 588 535
Cost of clinical laboratory services ............... -- -- 3,384 3,430 -- -- 3,384 3,430
Research and development expense ................... 1,901 2,208 -- -- -- -- 1,901 2,208
Provision for uncollectible ........................ -- -- 517 950 -- -- 517 950
accounts
Depreciation and amortization ...................... 46 346 233 267 $ 8 $ 11 287 624
Other costs and expenses (b) ....................... 585 313 3,413 3,094 3,587 2,815 7,585 6,222
Interest income .................................... -- -- -- -- (839) (416) (839) (416)
------- ------- ------ ------ ------- ------- ------- -------
Income (loss) before income taxes .................. $(1,224) $(1,017) $187 $874 $(2,756) $(2,410) $(3,793) $(2,553)
======= ======= ====== ====== ======= ======= ======= =======
Stock based compensation
included in above cost and expenses:
- ------------------------------------
Cost of research product revenues .................. -- -- -- -- -- -- -- --
Research and development expense ................... $38 -- -- -- -- -- $38 --
Other costs and expenses ........................... 33 -- $182 -- $231 -- 446 --
------- ------- ------ ------ ------- ------- ------- -------
Totals ............................................. $71 -- $182 -- $231 -- $484 --
======= ======= ====== ====== ======= ======= ======= =======
(a) For the three months ended April 30, 2006 and 2005, royalty income from one
licensee represented 38% and 23% respectively, of the research and
development segment's revenues.
(b) Includes legal and selling, general and administrative, net of depreciation
and amortization.
15
Note 12--Segment Reporting, continued
NINE MONTHS ENDED APRIL 30,
Research and Clinical
Development Laboratories Other Consolidated
------------------ ------------------ ------------------ -------------------
2006 2005 2006 2005 2006 2005 2006 2005
------- -------- -------- ------- -------- ------- -------- --------
Operating revenues:
- -------------------
Research product revenues and royalty income (a). $6,151 $8,112 -- -- -- -- $6,151 $8,112
Clinical laboratory services .................... -- -- $23,759 $24,423 -- -- 23,759 24,423
Cost and expenses (income):
- ---------------------------
Cost of research product revenues ............... 1,515 1,665 -- -- -- -- 1,515 1,665
Cost of clinical laboratory services ............ -- -- 10,296 9,203 -- -- 10,296 9,203
Research and development expense ................ 5,361 6,450 -- -- -- -- 5,361 6,450
Provision for uncollectible accounts ............ -- -- 2,870 3,573 -- -- 2,870 3,573
Depreciation and amortization ................... 143 1,030 679 599 $ 26 $ 38 848 1,667
Other costs and expenses (b) .................... 1,581 888 9,969 8,629 11,750 6,840 23,300 16,357
Gain on patent litigation settlement ............ -- (14,000) -- -- -- -- -- (14,000)
Interest income ................................. -- -- -- -- (2,226) (1,055) (2,226) (1,055)
------- -------- -------- ------- -------- ------- -------- --------
Income (loss) before income taxes................ $(2,449) $12,079 $(55) $2,419 ($9,550) ($5,823) $(12,054) $8,675
======= ======== ======== ======= ======== ======= ======== ========
Stock based compensation
included in above cost and expenses:
- ------------------------------------
Cost of research product revenues ............... $18 -- -- -- -- -- $18 --
Research and development expense ................ 200 -- -- -- -- -- 200 --
Other costs and expenses ........................ 73 -- $474 -- $588 -- 1,135 --
------- -------- -------- ------- -------- ------- -------- --------
Totals .......................................... $291 -- $474 -- $588 -- $1,353 --
======= ======== ======== ======= ======== ======= ======== ========
(a) For the nine months ended April 30, 2006 and 2005, royalty income from one
licensee represented 37% and 13% respectively, of the research and
development segment's revenues.
(b) Includes legal and selling, general and administrative, net of depreciation
and amortization.
16
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, and be aware that our consolidated results of operations may
fluctuate significantly from quarter to quarter.
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 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 12 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 from 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 nine months ended April 30, 2006
and 2005, respectively, approximately 21% and 25% of the Company's operating
revenues were derived from research product sales and royalty income and
approximately 79% and 75% were derived from clinical laboratory services.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2006, cash and cash equivalents and marketable securities totaled
$75.9 million, a decrease of $7.8 million from July 31, 2005. We had working
capital of $87.3 million at April 30, 2006 compared to $97.0 million at July 31,
2005.
17
Net cash used in operating activities for the nine month period ended April 30,
2006 was approximately $6.9 million as compared to net cash provided by
operating activities of $9.1 million for the nine months ended April 30, 2005.
The decrease in net cash provided by operating activities was primarily due to
the 2006 period's net loss as compared to net income in the 2005 period, which
2005 increase was the result of the $14 million settlement and license agreement
with Digene Corporation. During the nine months ended April 30, 2005, the
Company as plaintiff finalized and executed a settlement and license agreement
with Digene Corporation to settle a 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 used to offset royalty income payments due based on 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 nine months ended April 30, 2005 (see Note 10).
Net cash provided by investing activities was approximately $5.4 million during
the nine months ended April 30, 2006, as compared $9.6 million during the nine
months ended April 30, 2005. The decrease during the 2006 period was primarily
the result of the net sales of marketable securities of approximately $6.7
million, versus net sales of approximately $10.6 million during the 2005 period.
During the nine months ended April 30, 2006, the Company disbursed approximately
$1.2 million for capital expenditures, including approximately $0.4 million
comprised of an escrow deposit and other costs incurred, toward the purchase for
approximately $3.1 million of a 23,000 square foot building to expand its
manufacturing and research and development operations. The Company expects to
close on the purchase transaction in the fourth quarter of the fiscal year
ending July 31, 2006.
Net cash provided by financing activities was approximately $0.4 million during
the nine months ended April 30, 2006, as compared $0.3 million during the nine
months ended April 30, 2005, and was from the exercise of stock options.
We believe that our current cash position is sufficient for our liquidity and
capital resource needs for at least the next twelve months, 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
Management's discussion and analysis of financial condition and results of
operations are based on the Company's 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 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.
18
REVENUE RECOGNITION
Research product revenues and royalty income
- --------------------------------------------
Revenues from research product sales are recognized when the products are
shipped, the sales price is fixed or determinable and collectibility is
reasonably assured. Under the terms of a settlement and license agreement to
settle a patent litigation lawsuit, the Company earned in the "first annual
period" (October 1, 2004 to September 30, 2005) a minimum royalty payment of
$2.5 million, and will 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 products subject to the
license until the expiration of the patent in April 2018. The quarterly running
royalties are 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 is recognized in the final quarter of the applicable annual royalty
period.
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 following are tables of the clinical laboratory segment's net billings and
billing percentages by billing category for the three and nine months ended
April 30, 2006 and 2005:
Net billings Three months ended Three months ended
April 30, 2006 April 30, 2005
------------------- -------------------
Billing category (In 000's) (in %) (In 000's) (in %)
- ---------------- ---------- ------ ---------- ------
Medicare $1,727 22 $1,780 20
Third party carriers 4,761 62 4,724 55
Patient self-pay 682 9 1,788 21
HMO's 564 7 323 4
------ --- ------ ---
Total $7,734 100% $8,615 100%
====== === ====== ===
Net billings Nine months ended Nine months ended
April 30, 2006 April 30, 2005
------------------- -------------------
Billing category (In 000's) (in %) (In 000's) (in %)
- ---------------- ---------- ------ ---------- ------
Medicare $5,530 23 $5,120 21
Third party carriers 13,326 56 12,890 53
Patient self-pay 3,411 15 5,476 22
HMO's 1,492 6 937 4
------ --- ------ ---
Total $23,759 100% $24,423 100%
====== === ====== ===
19
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 accounts receivable As of As of
April 30, 2006 July 31, 2005
------------------- -------------------
Billing category (In 000's) (in %) (In 000's) (in %)
- ---------------- ---------- ------ ---------- ------
Medicare $1,401 14 $1,594 13
Third party carriers 4,864 50 6,742 54
Patient self-pay 2,963 31 3,819 30
HMO's 503 5 394 3
------- --- ------- ---
Total clinical laboratories $9,731 100% $12,549 100%
=== ===
Research and development 1,447 872
------- -------
Net accounts receivable $11,178 $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.
If the Company experiences a significant change in reimbursement policies or
procedures for a particular payer, the contractual allowance 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 nine months ended April 30, 2006 and 2005, the contractual allowance
percentages, determined using the rolling monthly average historical
reimbursement statistics, were 75% and 72.7%, respectively. The Company projects
(by using a sensitivity analysis) that each 1% point change in the contractual
allowance percentage could result in a change in the net accounts receivable of
approximately $402,000 and $536,000 as of April 30, 2006 and 2005, respectively,
and a change in clinical laboratory services revenues of approximately $949,000,
and $895,000 for the nine months ended April 30, 2006 and 2005, 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.
20
In summary, the Company estimates its allowance for doubtful accounts in the
period the related services are billed and adjusts the estimate in future
accounting periods 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 copayments, which are subject to credit risk and
patients' ability to pay. During the nine months ended April 30, 2006, the
Company determined an allowance for doubtful accounts less than 210 days and
wrote off 100% of accounts receivable (for all payers) over 210 days, as it
assumed those accounts are uncollectible. The written off amounts are kept on
the aging for patient billing and demographic information. The Company adjusts
the historical collection analysis for recoveries, if any, 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 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 charge of $0.6 million for its net deferred tax assets
during the three months ended October 31, 2005, and subsequent to that date has
applied a full valuation allowance against increases in its net deferred tax
assets. The Company believes that the full valuation allowance is necessary as
it is more likely than not that the net 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 net deferred tax assets.
21
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2006 AS COMPARED TO APRIL 30, 2005
Research product revenues and royalty income was $1.9 million during the three
months ended April 30, 2006 compared to $2.4 million in the year ago quarter, a
decrease of $0.5 million or 21%. Research product revenue decreased by $0.7
million due to a decline in the volume of shipments of research products and an
increase in the volume of discounted sales to certain customers, partially
offset by an increase in royalty income of $0.2 million.
Clinical laboratory revenues were $7.7 million compared to $8.6 million during
the three months ended April 30, 2006 and 2005, respectively, a decrease of
approximately $0.9 million or 10%. The Company experienced a decrease in gross
billing due to price decreases on certain tests. In addition, the contractual
allowance expense increased to 75.4% of gross billing as compared to 71.6% in
the prior period.
The cost of research products revenues during the three months ended April 30,
2006 was comparable to the year ago quarter.
The cost of clinical laboratory services during the three months ended April 30,
2006 and 2005 was comparable, at $3.4 million. The clinical laboratories' gross
margin declined, due to lower revenues, with no significant effect on operating
costs.
Research and development expenses were $1.9 million during the three months
ended April 30, 2006 compared to $2.2 million in the year ago quarter, a
decrease of $0.3 million or 14%. While there was an increase in clinical trial
study activities for the therapeutics division of $0.4 million, it was offset by
a decrease in compensation expense of $0.2 million relating to the realignment
of executive officers responsibilities and a decrease in the amortization of
deferred patent expenses and other research expenses of $0.5 million at the life
sciences division.
Selling, general and administrative expenses were $6.2 million during the three
months ended April 30, 2006 compared to $5.5 million in the year ago quarter, an
increase of $0.7 million or 13%. The increases during the 2006 period were
primarily due to the recognition of stock option compensation charges required
by the adoption of SFAS 123(R) of $0.4 million, increases in expenditures for
corporate governance, consulting, accounting and other professional fees of $0.3
million, increase in compensation expense of $0.2 million, which was previously
included in research and development due to the realignment of executive
officers responsibilities, offset by a reduction of other operating expenses of
$0.2 million.
The provision for uncollectible accounts receivable in the clinical reference
laboratory segment during the three months ended April 30, 2006 and 2005 was
$0.5 million and $0.9 million, respectively, a decrease of $0.4 or 46%. The
decline in the provision was due to improved billing and collection procedures
and an increase in the overall collection rates.
Legal expense was $1.7 million during the three months ended April 30, 2006
compared to $1.4 million in the year ago quarter, an increase of $0.3 million or
24%, due to an increase for the ongoing patent litigation activities.
Interest income increased $0.4 million or 102% to $0.8 million during the three
months ended April 30, 2006 compared to $0.4 million during the year ago
quarter, due to higher interest rates earned offset by lower investments. The
Company earns interest by investing primarily in short term (30 days) commercial
paper and money market funds with high credit ratings.
22
For the three months ended April 30, 2006, the Company's benefit for income
taxes was $0.4 million, comprised of a federal tax carryback benefit for income
taxes paid in fiscal 2005 and other adjustments. In computing the 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 which ends July 31, 2006. During the 2006 quarter, the Company
recognized no benefit for deferred taxes. Pursuant to SFAS 109 "Accounting for
Income Taxes", the Company believes it is more likely than not that net deferred
tax assets generated during the 2006 quarter 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 deferred tax assets. For the three months ended
April 30, 2005, the Company's benefit for income taxes was $1.1 million, based
on the combined effective federal, state and local income tax rates applied to
the period's loss before taxes.
SEGMENT (LOSS) INCOME BEFORE INCOME TAXES
THREE MONTHS ENDED APRIL 30, 2006 AS COMPARED TO APRIL 30, 2005
The research and development segment's loss before income taxes was
approximately $1.2 million for the three months ended April 30, 2006, compared
to a loss of $1.0 million in the 2005 period. The loss in the 2006 period was
primarily due to the decline in revenue of $0.7 million resulting from the
decrease in the volume of shipments of research products and an increase in
volume of discounted sales to certain customers, offset by the increase in
royalty income of $0.2 million. The loss in both periods was also the result of
the dispute with former distributors, whereby the Company did not record revenue
in either period from these former distributors. Segment operating expenses
decreased in the 2006 period primarily due to decreases in the amortization of
deferred patent expenses and other research expenses of $0.5 million, and a
reduction of $0.2 million in compensation expense relating to the realignment of
executive officers responsibilities, partially offset by a $0.4 million increase
in clinical trial studies.
The clinical reference laboratory segment's income before income taxes was $0.2
million in the 2006 quarter, compared to income of $0.9 million in the 2005
quarter. The decrease in the segment's income was primarily due to a decrease in
net billings of $0.9 million due to price decreases on certain tests and the
increase in the contractual allowance expense as compared to the prior period.
Segment operating costs in the 2006 period decreased by $0.2 million, primarily
due to a decrease in the provision for uncollectible accounts of $0.4 million,
offset by recognition of stock option compensation charges required by the
adoption of SFAS 123 (R) of $0.2 million and the inclusion of compensation
expense of $0.1 million relating to the realignment of executive officers
responsibilities.
The Other segment's loss before income taxes was $2.8 million in the 2006
quarter versus $2.4 million in 2005, on an increase of $0.8 million in costs,
primarily due to the recognition of restricted stock awards expense and the
stock option compensation charges required by the adoption of SFAS 123(R) during
the 2006 quarter of $0.2 million, an increase in expenditures for corporate
governance, consulting, and accounting and legal fees of $0.7 million, and the
inclusion of compensation expense of $0.1 million for the realignment of
executive officers responsibilities, previously included in research and
development. These increases were partially offset by higher interest income
earned of $0.4 million.
23
RESULTS OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 2006 AS COMPARED TO APRIL 30, 2005
Research product revenues and royalty income was $6.2 million during the nine
months ended April 30, 2006 compared to $8.1 million in the year ago period, a
decrease of $1.9 million or 24%. The decrease in research products revenue of
$3.1 million was due to a decrease in the volume of shipments of research
products and an increase in the discounts offered to certain direct
distributors, partially offset by an increase in royalty income of $1.2 million.
Further, the Company did not record revenue from distributors during the 2006
period, which during the year ago period approximated $1.5 million, due to its
ongoing dispute with those distributors.
Clinical laboratory revenues were $23.8 million during the nine month period
ended April 30, 2006 compared to $24.4 million in the year ago period, a
decrease of approximately $0.6 million or 3%. The Company experienced a decrease
in gross billing due to price decreases on certain tests. In addition, the
contractual allowance expense increased to 75% of gross billing as compared to
72.7% in the prior period.
The cost of research products revenues during the nine months ended April 30,
2006 was $1.5 million versus $1.7 million in the 2005 period, a decrease of $0.2
million or 12%, principally due to lower revenues and the decreases in the 2006
period in royalty expenses of $0.2 million and compensation for executive
officers of $0.1 million due to the realignment of their responsibilities,
offset by increases in other operational costs.
The cost of clinical laboratory services during the nine months ended April 30,
2006 was $10.3 million compared to $9.2 million in the year ago period, an
increase of $1.1 million or 12%. The increase is primarily due to an increase in
the overall operating cost of performing testing services, especially increased
reagent costs of $0.7 million, and outside testing costs for certain esoteric
tests of $0.1 million.
Research and development expenses were $5.4 million during the nine months ended
April 30, 2006 compared to $6.5 million in the year ago period, a decrease of
$1.1 million or 17%. While there was an increase in clinical trial study
activities of $0.6 million and the recognition of stock option compensation
charges required by the adoption of SFAS 123(R) of $0.2 million during the 2006
period, these increased expenses were offset by a decrease in the amortization
of deferred patent expenses of $1.2 million, and a decrease in compensation for
executive officers of $0.7 million due to the realignment of responsibilities.
Selling, general and administrative expenses were $18.9 million during the nine
months ended April 30, 2006 compared to $14.3 million in the year ago period, an
increase of $4.6 million or 32%. The increase in the 2006 period was primarily
due to the recognition of stock option compensation charges required by the
adoption of SFAS 123(R) of $1.1 million, increases in expenditures for corporate
governance, consulting, accounting and other professional fees of $1.3 million,
an increase in compensation for executive officers of $0.8 million previously
included in research and development, due to the realignment of
responsibilities, increases in compensation and other related costs of $0.4
million relating to increased personnel, and an increase in insurance costs of
$0.3 million.
The provision for uncollectible accounts receivable in the clinical reference
laboratory segment during the nine months ended April 30, 2006 was $2.9 million,
compared to $3.6 million during the year ago period, a decrease of $0.7 million
or 20%. The provision declined due to improved billing and collection procedures
and an overall increase in collection rates.
Legal expense was $5.2 million during the nine months ended April 30, 2006
compared to $3.7 million in the year ago period, an increase of $1.5 million or
41%, due to an increase in ongoing patent litigation activities.
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Interest income increased $1.2 million or 120% to $2.2 million during the nine
months ended April 30, 2006 compared to $1.0 million during the year ago period,
due to higher interest rates earned offset by lower investments. The Company
earns interest by investing primarily in short term (30 days) commercial paper
and money market funds with high credit ratings.
For the nine months ended April 30, 2006, the Company's net benefit for income
taxes was $0.9 million, comprised of a federal tax carryback benefit of $1.6
million for taxes paid in the fiscal year ended July 31, 2005 and other
adjustments, offset by a valuation allowance charge of $0.6 million equal to net
deferred tax assets as of July 31, 2005, and by state and local minimum taxes of
$0.1 million. In computing the 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 which ends July 31, 2006. Pursuant
to SFAS 109 "Accounting for Income Taxes", the Company recorded a valuation
allowance charge during the period ended April 30, 2006 equal to its net
deferred tax assets at July 31, 2005 and has applied a full valuation allowance
against increases in its net deferred tax assets during the 2006 period. The
Company believes that the valuation charge and valuation allowance are necessary
as it is more likely than not that net 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 net deferred tax assets.
For the nine months ended April 30, 2005, the Company's (provision) for income
taxes was $3.7 million which was based on the effective federal, state and local
income tax rates applied to 2005 period's taxable income, which was primarily
comprised of the $14 million gain from the Digene agreement. The provision for
income taxes, at an effective rate of 42%, was different from the U.S. federal
statutory rate of 34% due to state income taxes net of federal tax deduction, of
approximately 5%, expenses not deductible for income tax return purposes of 1%
and other of 2%.
SEGMENT (LOSS) INCOME BEFORE INCOME TAXES
NINE MONTHS ENDED APRIL 30, 2006 AS COMPARED TO APRIL 30, 2005
The research and development segment's loss before income taxes was
approximately $2.4 million for the nine months ended April 30, 2006, compared to
income of $12.1 million in the 2005 period. The 2006 loss was due to a decrease
in research products revenue of $3.1 million, the result of a decrease in the
volume of shipment of research products and an increase in the discounts offered
to certain direct distributors, offset by an increase in royalty income of $1.2
million. The Company did not record research products revenue from distributors
during the 2006 period, which during the year ago period approximated $1.5
million, due to its ongoing dispute with those distributors. The 2005 period's
income was the result of the $14 million gain from the Digene agreement. Segment
operating expenses decreased in the 2006 period primarily due to a decrease in
the amortization of deferred patent expenses and other research costs of $1.2
million, and a decrease in compensation for executive officers of $0.7 million
due to the realignment of responsibilities, offset by the increase in clinical
trial study activities of $0.6 million.
The clinical reference laboratory segment's loss before income taxes was $0.1
million in the 2006 period versus income of $2.4 million in 2005. The 2006
period was impacted by lower revenue of $0.6 million and increases in segment
operating expenses of $1.8 million primarily due to increases in the cost of
testing services of $0.8 million, recognition of stock option compensation
charges required by the adoption of SFAS 123(R) of $0.5 million, compensation
for executive officers of $0.2 million previously included in research and
development due to the realignment of responsibilities, and compensation and
related costs of $0.4 million relating to increased personnel, offset by a
decrease in the provision for uncollectible accounts of $0.7 million.
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The Other segment's loss before income taxes was $9.5 million in the 2006 period
versus $5.8 million in 2005. The increase in the 2006 period was primarily due
to the recognition of stock option compensation charges required by the adoption
of SFAS 123(R) of $0.6 million, increases in expenditures for corporate
governance, consulting, accounting and other professional fees of $1.3 million,
an increase in legal fees of $1.5 million due to ongoing patent litigation,
increases in compensation for executive officers of $0.5 million previously
included in research and development due to the realignment of responsibilities,
increases in insurance costs of $0.3 million, and increases in other operating
expenses of $0.3 million. These increases were partially offset by higher
interest income earned of $1.2 million.
See Note 2 for recently issued accounting pronouncements.
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.
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 period that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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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: June 9, 2006 by: /s/Barry Weiner
----------------
Chief Financial Officer
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