The following table indicates the Clinical Labs aged gross receivables by payer group (in thousands), which is prior to adjustment to gross receivables for: 1) contractual adjustment, 2) fully reserved balances not yet written off, and 3) other revenue adjustments. The amounts as of July 31, 2009 are from the Company’s new billing system and the amounts as of July 31, 2008 are from the Company’s legacy billing system. The fully reserved amount as of July 31, 2009 is for billing from the new system only. As of July 31, 2009, all uncollected receivables from the legacy billing system have been fully reserved.
** Total includes $340 fully reserved over 210 days as of July 31, 2009.
** Total includes $2,796 fully reserved over 210 days as of July 31, 2008.
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 not more likely than not the benefits will be realized in the foreseeable future.
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.
On August 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a “more-likely-than-not” threshold for the recognition and derecognition of tax positions, provides guidance on the accounting for interest and penalties relating to tax positions and requires that the cumulative effect of applying the provisions of FIN 48 be reported as an adjustment to the opening balance of retained earnings or other appropriate components of equity or net assets in the statement of financial position. The Company did not have any significant unrecognized tax positions and there was no material effect on our financial condition or results of operations as a result of implementing FIN 48.
Inventory
The Company values inventory at the lower of cost (first-in, first-out) or market. Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead. On a quarterly basis, we review inventory quantities on hand and analyze the provision for excess and obsolete inventory based on our estimate of sales forecasts based on sales history and anticipated future demand. Our estimate of future product demand may not be accurate and we may understate or overstate the provision for excess and obsolete inventory. Accordingly, unanticipated changes in demand could have a significant impact on the value of our inventory and results of operations. At July 31, 2009 and 2008, our reserve for excess and obsolete inventory was $1,005,000 and $637,000 respectively.
Goodwill and Indefinite-Lived Intangibles
Goodwill, representing the cost of acquired businesses in excess of the fair value of net assets acquired, and indefinite-lived intangibles are not amortized, but are evaluated annually for impairment. The Company performs its annual impairment test as of the first day of its fiscal fourth quarter or if indicators of potential impairment exist. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. In assessing the recoverability of goodwill, the Company reviews both quantitative as well as qualitative factors to support its assumptions with regard to fair value. The fair value of a reporting unit, which is based on geographic region, is estimated using both a discounted cash flow model and a weighted average multiple of earnings before interest and taxes from comparable companies. To date, there have been no impairment charges recorded. As of May 1, 2009, one of the Company’s reporting unit’s fair value exceeded its carrying value by 10%. This reporting unit’s goodwill was $5.3 million at the date of our annual impairment test. In determining fair value, the Company makes certain judgments, including the identification of reporting units and the selection of comparable companies. If these estimates or their related assumptions change in the future as a result of changes in strategy and/or market conditions, the Company may be required to record an impairment charge.
Intangible Assets
Intangible assets (exclusive of patents), arose primarily from acquisitions and primarily consist of customer relationships, trademarks, licenses, employment and non-compete agreements, and website and database content. Finite-lived intangible assets are amortized according to their estimated useful lives, which range from 4 to 15 years. The Company has capitalized certain legal costs directly incurred in pursuing patent applications as patent costs. When such applications result in an issued patent, the related costs are amortized over a ten year period or the life of the patent, whichever is shorter, using the straight-line method. The Company reviews its issued patents and pending patent applications, and if it determines to abandon a patent application or that an issued patent no longer has economic value, the unamortized balance in deferred patent costs relating to that patent is immediately expensed.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates resulting from the recent acquisitions with foreign locations (See Item 1A. Risk Factors and Note 2 in the notes to consolidated financial statements) and, to a much lesser extent, interest rates on investments in short-term instruments, that could impact our results of operations and financial position. We do not currently engage in any hedging or market risk management tools.
Foreign Currency Exchange Rate Risk
The financial reporting of our non-U.S. subsidiaries is denominated in currencies other than the U.S. dollar. Since the functional currency of our non-U.S. subsidiaries is the local currency, foreign currency translation adjustments are accumulated as a component of accumulated other comprehensive income in stockholders’ equity. Assuming a hypothetical aggregate change of 10% in the exchange rates of foreign currencies against the U.S. dollar at July 31, 2009, our assets and liabilities would increase or decrease by $2.0 million and $0.5 million, respectively, and our net sales and net earnings would increase or decrease by $1.6 million and $0.1 million, respectively, on an annual basis.
We also maintain intercompany balances and loans receivable with subsidiaries with different local currencies. These amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical aggregate change of 10% in the exchange rates of foreign currencies against the U.S. dollar at July 31, 2009, our pre-tax earnings would be favorably or unfavorably impacted by approximately $0.5 million on an annual basis.
Interest Rate Risk
Our excess cash is invested in highly liquid short term US government instruments and money market funds with high credit ratings. Changes in interest rates may affect the investment income we earn on cash and cash equivalents and therefore affect our cash flows and results of operations. As of July 31, 2009, we were exposed to interest rate change market risk with respect to our short-term investments in US Government instruments of $43.3 million. The short-term investments bear interest rates ranging from 0% to 0.5%. Each 100 basis point (or 1%) fluctuation in interest rates will increase or decrease interest income on the short-term investments by approximately $0.5 million on an annual basis.
As of July 31, 2009, we did not maintain any fixed or variable interest rate financing.
Item 8.Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this report. See Item 15(a) (1) and (2)
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2009. This evaluation was carried out under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
53
Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level as of July 31, 2009, and that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported in a timely manner and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fourth quarter ended July 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and
• provide reasonable assurance regarding prevention and timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems that are determined to be effective provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting based on criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management’s evaluation did not include assessing the effectiveness of internal controls over financial reporting at Assay Designs Inc, (“ADI”), which was acquired March 12, 2009, and whose financial statements reflect total assets and net revenues of 10.1% and 4.5% respectively, of the consolidated financial statements as of and for the year ended July 31, 2009. Management has opted to exclude ADI from its assessment based upon the SEC’s comments in “Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Frequently Asked Questions (“FAQ”) (revised October 6, 2004)”. The response to FAQ No. 3 states that the SEC “would not object to management referring in the report to a discussion in the registrant’s Form 10-K or 10-KSB regarding the scope of the assessment and to such disclosure noting that management excluded the acquired business from management’s report on internal control over financial reporting”.
Based on its assessment, management concluded that we maintained effective internal control over financial reporting as of July 31, 2009. Ernst & Young LLP, our independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting as of July 31, 2009. This report, in which Ernst & Young LLP has expressed an unqualified opinion, appears in this Item 9A.
54
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Enzo Biochem, Inc.
We have audited Enzo Biochem, Inc.’s (“the Company”) internal control over financial reporting as of July 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Enzo Biochem, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Assay Designs, Inc. which is included in the 2009 consolidated financial statements of Enzo Biochem, Inc., and constituted 10.1% and 10.2% of total and net assets, respectively, as of July 31, 2009 and $4,100,000 and ($1,200,000) of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of Enzo Biochem, Inc. also did not include an evaluation of the internal control over financial reporting of Assay Designs, Inc.
In our opinion, Enzo Biochem, Inc. maintained, in all material respects, effective internal control over financial reporting as of July 31, 2009 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Enzo Biochem, Inc. as of July 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss) and cash flows for each of the three years in the period ended July 31, 2009 of Enzo Biochem, Inc. and our report dated October 14, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, New York
October 14, 2009
55
| | |
| Item 9B. | Other Information |
None
PART III
| | |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required under this item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange Commission on or before November 27, 2009 and is incorporated herein by reference.
| | |
| Item 11. | Executive Compensation |
The information required under this item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange Commission on or before November 27, 2009 and is incorporated herein by reference.
| | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required under this item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange Commission on or before November 27, 2009 and is incorporated herein by reference.
| | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required under this item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange Commission on or before November 27, 2009 and is incorporated herein by reference.
| | |
| Item 14. | Principal Accountant Fees and Services |
The information required under this item will be set forth in the Company’s proxy statement expected to be filed with the Securities and Exchange Commission on or before November 27, 2009 and is incorporated herein by reference.
PART IV
| | |
| Item 15. | Exhibits, Financial Statement Schedules |
| | | |
| (a) | (1) | Consolidated Financial Statements |
| | | Consolidated Balance Sheets - July 31, 2009 and 2008 |
| | | Consolidated Statements of Operations- Years ended July 31, 2009, 2008 and 2007 |
| | | Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) - Years ended July 31, 2009,
2008 and 2007 |
| | | Consolidated Statements of Cash Flows - Years ended July 31, 2009, 2008 and 2007 |
| | | Notes to Consolidated Financial Statements. |
| | | |
| | (2) | Financial Statement Schedule |
Schedule II - - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto or because they are not required.
56
The following documents are filed as Exhibits to this Annual Report on Form 10-K:
| | | |
Exhibit No. | | Description | |
| | | | |
|
3(a) | | Certificate of Incorporation, as amended March 17, 1980. (1) |
| | |
3(b) | | June 16, 1981 Certificate of Amendment of the Certificate of Incorporation. (2) |
| | |
3(c) | | Certificate of Amendment to the Certificate of Incorporation. (3) |
| | |
3(d) | | Amended and restated Bylaws. (14) |
| | |
10 (c) | | Employment Agreements with Elazar Rabbani. (5) |
| | |
10(d) | | Employment Agreement with Shahram Rabbani. (5) |
| | |
10(e) | | Employment Agreement with Barry Weiner. (5) |
| | |
10(f) | | 1994 Stock Option Plan. (6) |
| | |
10(g) | | 1999 Stock Option Plan. (7) |
| | |
10 (h) | | Amendment to Elazar Rabbani’s employment agreement. (8) |
| | |
10 (i) | | Amendment to Shahram Rabbani’s employment agreement. (8) |
| | |
10 (j) | | Amendment to Barry Weiner’s employment agreement. (8) |
| | |
10 (k) | | 2005 Equity Compensation Incentive Plan (10) |
| | |
10 (l) | | Lease agreement with Pari Management (11) |
| | |
10 (m) | | Settlement and Release Agreement between the Company and Sigma Aldrich (12) |
| | |
10 (n) | | Stock Purchase Agreement By and Among Enzo Life Sciences, Inc., Axxora Life Sciences Inc., and the Stock holders, Option holders and Warrant holders (13) |
| | |
10 (o) | | Stock Asset Purchase Agreement By and Among Buyer Parties and Seller Parties (14) |
|
10 (p) | | Asset Purchase Agreement By and Among Enzo Life Sciences, Acquisition, Inc. and Assay Designs, Inc. (15). |
|
14 (a) | | Code of Ethics (10) |
|
21 | | Subsidiaries of the registrant: |
| | |
| | Enzo Clinical Labs, Inc., a New York corporation. |
| | Enzo Life Sciences, Inc., a New York corporation. |
| | Enzo Therapeutics, Inc., a New York corporation. |
| | Enzo Realty, LLC, a New York Corporation |
| | |
23 | | Consent of Independent Registered Public Accounting Firm filed herewith. |
| | |
31 (a) | | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith. |
| | |
31 (b) | | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith. |
| | |
32 (a) | | Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith. |
| | |
32 (b) | | Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith. |
57
| | |
| | Notes to exhibits |
| | |
(1) | | The exhibits were filed as exhibits to the Company’s Registration Statement on Form S-18 (File No. 2-67359) and are incorporated herein by reference. |
| | |
(2) | | This exhibit was filed as an exhibit to the Company’s Form 10-K for the year ended July 31, 1981 and is incorporated herein by reference. |
| | |
(3) | | This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July31, 1989 and is incorporated herein by reference. |
| | |
(5) | | This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July31, 1994 and is incorporated herein by reference. |
| | |
(6) | | This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July31, 1995 and is incorporated herein by reference. |
| | |
(7) | | This exhibit was filed with the Company’s Registration Statement on Form S-8 (333-87153) and is incorporated herein by reference. |
| | |
(8) | | This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July31, 2000 and is incorporated herein by reference. |
| | |
(9) | | This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July31, 2004 and is incorporated herein by reference. |
| | |
(10) | | This exhibit was filed as an exhibit to the Company’s Proxy Statement of Schedule 14A filed on January 19, 2005 and is incorporated herein by reference. |
| | |
(11) | | This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July31, 2006 and is incorporated herein by reference. |
| | |
(12) | | This exhibit was filed with the Company’s Current Report on Form 8-K on September 21, 2006 and is incorporated herein by reference. |
| | |
(13) | | This exhibit was filed with the Company’s Current Report on Form 8-K May 30, 2007 and is incorporated herein by reference. |
| | |
(14) | | This exhibit was filed with the Company’s Current Report on Form 8-K May 8, 2008 and is incorporated herein by reference. |
|
(15) | | This exhibit was filed with the Company’s Current Report on Form 8-K March 13, 2009 and is incorporated herein by reference. |
| | |
(b) | | See Item 15(a) (3), above. |
| | |
(c) | | See Item 15(a) (2), above. |
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
| | ENZO BIOCHEM, INC. |
| | | |
| Date: October 14, 2009 | By: | /s/ Elazar Rabbani Ph.D. |
| | | |
| | | Chairman of the Board |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | |
By: /s/ Elazar Rabbani Ph.D. | | October 14, 2009 |
| | | |
Elazar Rabbani, | | |
Chairman of Board of Directors | | |
(Principal Executive Officer) | | |
| | |
By: /s/ Barry W. Weiner | | October 14, 2009 |
| | | |
Barry W. Weiner, | | |
President, Chief Financial Officer, Principal Accounting Officer and Director | | |
| | |
| | |
| | | |
Shahram K. Rabbani, | | |
Secretary, Treasurer and Director | | |
| | |
By: /s/ Irwin Gerson | | October 14, 2009 |
| | | |
Irwin Gerson, Director | | |
| | |
By: /s/ Stephen B. H. Kent Ph.D. | | October 14, 2009 |
| | | |
Stephen B. H. Kent, Director | | |
| | |
By: /s/ Bernard L. Kasten MD | | October 14, 2009 |
| | | |
Bernard Kasten, Director | | |
| | |
By: /s/ Melvin F. Lazar | | October 14, 2009 |
| | | |
Melvin F. Lazar, Director | | |
59
FORM 10-K, ITEM 15(a) (1) and (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
| | |
The following consolidated financial statements and financial statement schedule of Enzo Biochem, Inc. are included in Item 15(a): |
| | |
Report of Independent Registered Public Accounting Firm | | F-2 |
| | |
Consolidated Balance Sheets — July 31, 2009 and 2008 | | F-3 |
| | |
Consolidated Statements of Operations — Years ended July 31, 2009, 2008 and 2007 | | F-4 |
| | |
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) — Years ended July 31, 2009, 2008 and 2007 | | F-5 |
| | |
Consolidated Statements of Cash Flows — Years ended July 31, 2009, 2008 and 2007 | | F-6 |
| | |
Notes to Consolidated Financial Statements | | F-7 |
| | |
Schedule II - Valuation and Qualifying Accounts — Years ended July 31, 2009, 2008 and 2007 | | S-1 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Enzo Biochem, Inc.
We have audited the accompanying consolidated balance sheets of Enzo Biochem, Inc. (“the Company”) as of July 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended July 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Enzo Biochem, Inc. at July 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 9 to the consolidated financial statements, effective August 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Enzo Biochem Inc.’s internal control over financial reporting as of July 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 14, 2009 expressed an unqualified opinion.
| |
| /s/ Ernst & Young LLP |
Melville, New York | |
October 14, 2009 | |
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | | | | | |
| | July 31,
2009 | | July 31,
2008 | |
| | | | | | | |
| | | | | | | |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 6,929 | | $ | 78,322 | |
Short term investments | | | 43,306 | | | — | |
Accounts receivable, net of allowance for doubtful accounts of $4,786 in 2009 and $886 in 2008 | | | 12,480 | | | 15,348 | |
Inventories | | | 9,264 | | | 9,514 | |
Prepaid expenses | | | 2,482 | | | 2,496 | |
| | | | | | | |
| | | | | | | |
Total current assets | | | 74,461 | | | 105,680 | |
| | | | | | | |
Property, plant, and equipment, net | | | 11,323 | | | 9,053 | |
Goodwill | | | 24,896 | | | 21,321 | |
Intangible assets, net | | | 22,009 | | | 17,656 | |
Other | | | 439 | | | 812 | |
| | | | | | | |
Total assets | | $ | 133,128 | | $ | 154,522 | |
| | | | | | | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable – trade | | $ | 4,242 | | $ | 4,299 | |
Accrued liabilities | | | 8,426 | | | 7,370 | |
Other current liabilities | | | 1,062 | | | 1,161 | |
Deferred taxes | | | 213 | | | 458 | |
| | | | | | | |
Total current liabilities | | | 13,943 | | | 13,288 | |
| | | | | | | |
Deferred revenue | | | 38 | | | 512 | |
Deferred taxes | | | 2,366 | | | 2,433 | |
| | | | | | | |
Commitments and contingencies | | | | | | | |
| | | | | | | |
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: 38,589,880 at July 31, 2009 and 38,007,581 at July 31, 2008 | | | 386 | | | 380 | |
Additional paid-in capital | | | 306,280 | | | 303,811 | |
Less treasury stock at cost: 735,554 shares at July 31, 2009 and 777,719 shares at July 31, 2008 | | | (10,440 | ) | | (11,331 | ) |
Accumulated deficit | | | (179,721 | ) | | (156,157 | ) |
Accumulated other comprehensive income | | | 276 | | | 1,586 | |
| | | | | | | |
Total stockholders’ equity | | | 116,781 | | | 138,289 | |
| | | | | | | |
Total liabilities and stockholders’ equity | | $ | 133,128 | | $ | 154,522 | |
| | | | | | | |
F-3
The accompanying notes are an integral part of these consolidated financial statements
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | | | | | | | | |
| | Years ended July 31, | |
| | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Revenues: | | | | | | | | | | |
Product revenues | | $ | 40,592 | | $ | 28,087 | | $ | 6,658 | |
Royalty and license fee income | | | 9,376 | | | 7,630 | | | 5,820 | |
Clinical laboratory services | | | 39,604 | | | 42,078 | | | 40,430 | |
| | | | | | | | | | |
| | | 89,572 | | | 77,795 | | | 52,908 | |
| | | | | | | | | | |
| | | | | | | | | | |
Costs and expenses and other (income): | | | | | | | | | | |
Cost of product revenues | | | 26,766 | | | 19,159 | | | 5,034 | |
Cost of clinical laboratory services | | | 26,295 | | | 22,209 | | | 19,151 | |
Research and development expense | | | 9,220 | | | 8,637 | | | 9,393 | |
Selling, general, and administrative expense | | | 41,314 | | | 33,272 | | | 25,348 | |
Provision for uncollectible accounts receivable | | | 5,189 | | | 3,716 | | | 4,653 | |
Legal expense | | | 4,195 | | | 5,588 | | | 10,295 | |
Interest income | | | (581 | ) | | (3,696 | ) | | (5,092 | ) |
Other income | | | (74 | ) | | (171 | ) | | (2,699 | ) |
Foreign exchange loss (gain) | | | 725 | | | (27 | ) | | — | |
| | | | | | | | | | |
| | | 113,049 | | | 88,687 | | | 66,083 | |
| | | | | | | | | | |
| | | | | | | | | | |
Loss before income taxes | | | (23,477 | ) | | (10,892 | ) | | (13,175 | ) |
(Provision) benefit for income taxes | | | (87 | ) | | 239 | | | (85 | ) |
| | | | | | | | | | |
Net loss | | ($ | 23,564 | ) | ($ | 10,653 | ) | ($ | 13,260 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Net loss per common share: | | | | | | | | | | |
Basic | | ($ | 0.63 | ) | ($ | 0.29 | ) | ($ | 0.38 | ) |
| | | | | | | | | | |
Diluted | | ($ | 0.63 | ) | ($ | 0.29 | ) | ($ | 0.38 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | |
Basic | | | 37,511 | | | 36,883 | | | 35,017 | |
| | | | | | | | | | |
Diluted | | | 37,511 | | | 36,883 | | | 35,017 | |
| | | | | | | | | | |
F-4
The accompanying notes are an integral part of these consolidated financial statements
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
Years ended July 31, 2009, 2008, and 2007
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common
Stock
Shares | | Treasury
Stock
Shares | | Common
Stock
Amount | | Additional
Paid-in
Capital | | Treasury
Stock
Amount | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
(Loss) Income | | Total
Stockholders’
Equity | | Comprehensive
income (loss) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 31, 2006 | | | 32,844,200 | | | 569,700 | | $ | 328 | | $ | 236,002 | | $ | (8,499 | ) | $ | (132,244 | ) | $ | — | | $ | 95,587 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) for the year ended July 31, 2007 | | | — | | | — | | | — | | | — | | | — | | | (13,260 | ) | | — | | | (13,260 | ) | $ | (13,260 | ) |
Net proceeds from issuance of common stock | | | 4,285,715 | | | — | | | 43 | | | 56,954 | | | — | | | — | | | — | | | 56,997 | | | — | |
Purchase of treasury stock | | | — | | | 26,756 | | | | | | | | | (416 | ) | | — | | | — | | | (416 | ) | | — | |
Exercise of stock options | | | 95,525 | | | | | | 1 | | | 915 | | | — | | | — | | | — | | | 916 | | | — | |
Issuance of stock for employee
401(k) plan match | | | 29,370 | | | — | | | — | | | 421 | | | — | | | — | | | — | | | 421 | | | — | |
Vesting of restricted stock | | | 25,913 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock based compensation charges | | | — | | | — | | | — | | | 1,477 | | | — | | | — | | | — | | | 1,477 | | | — | |
Stock based compensation for consulting services | | | — | | | — | | | — | | | 130 | | | — | | | — | | | — | | | 130 | | | — | |
Foreign currency translation adjustments | | | — | | | — | | | — | | | — | | | — | | | — | | | 42 | | | 42 | | | 42 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (13,218 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 31, 2007 | | | 37,280,723 | | | 596,456 | | | 372 | | | 295,899 | | | (8,915 | ) | | (145,504 | ) | | 42 | | | 141,894 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) for the year ended July 31, 2008 | | | — | | | — | | | — | | | — | | | — | | | (10,653 | ) | | — | | | (10,653 | ) | $ | (10,653 | ) |
Purchase of treasury stock | | | — | | | 181,263 | | | | | | | | | (2,416 | ) | | — | | | — | | | (2,416 | ) | | — | |
Exercise of stock options | | | 267,345 | | | | | | 3 | | | 2,881 | | | — | | | — | | | — | | | 2,884 | | | — | |
Vesting of restricted stock | | | 70,963 | | | — | | | 1 | | | — | | | — | | | — | | | — | | | 1 | | | — | |
Stock based compensation charges | | | — | | | — | | | — | | | 1,566 | | | — | | | — | | | — | | | 1,566 | | | — | |
Issuance of stock for employee 401(k) plan match | | | 36,550 | | | — | | | — | | | 481 | | | — | | | — | | | — | | | 481 | | | — | |
Issuance of stock for acquisition | | | 352,000 | | | — | | | 4 | | | 2,996 | | | — | | | — | | | — | | | 3,000 | | | — | |
Common stock issuance costs adjustment | | | | | | — | | | — | | | (12 | ) | | — | | | — | | | — | | | (12 | ) | | | |
Foreign currency translation adjustments | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,544 | | | 1,544 | | | 1,544 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Comprehensive (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (9,109 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 31, 2008 | | | 38,007,581 | | | 777,719 | | | 380 | | | 303,811 | | | (11,331 | ) | | (156,157 | ) | | 1,586 | | | 138,289 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) for the year ended July 31, 2009 | | | — | | | — | | | — | | | — | | | — | | | (23,564 | ) | | — | | | (23,564 | ) | $ | (23,564 | ) |
Purchase of treasury stock | | | — | | | 99,985 | | | | | | | | | (1,126 | ) | | — | | | — | | | (1,126 | ) | | — | |
Exercise of stock options | | | 251,162 | | | | | | 3 | | | 1,471 | | | — | | | — | | | — | | | 1,474 | | | — | |
Vesting of restricted stock | | | 128,941 | | | — | | | 1 | | | — | | | — | | | — | | | — | | | 1 | | | — | |
Stock based compensation charges | | | — | | | — | | | — | | | 1,435 | | | — | | | — | | | — | | | 1,435 | | | — | |
Issuance of treasury stock for employee 401(k) plan match | | | — | | | (142,150 | ) | | — | | | (1,435 | ) | | 2,017 | | | — | | | — | | | 582 | | | — | |
Issuance of stock for acquisition earn out | | | 202,196 | | | — | | | 2 | | | 998 | | | — | | | — | | | — | | | 1,000 | | | — | |
Foreign currency translation adjustments | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,310 | ) | | (1,310 | ) | | (1,310 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Comprehensive (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (24,874 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 31, 2009 | | | 38,589,880 | | | 735,554 | | $ | 386 | | $ | 306,280 | | $ | (10,440 | ) | $ | (179,721 | ) | $ | 276 | | $ | 116,781 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-5
The accompanying notes are an integral part of these consolidated financial statements
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | |
| | Years ended July 31, | |
| | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Cash flows from operating activities: | | | | | | | | | | |
Net loss | | ($ | 23,564 | ) | ($ | 10,653 | ) | ($ | 13,260 | ) |
| | | | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | |
Depreciation and amortization of property, plant and equipment | | | 2,185 | | | 1,488 | | | 1,038 | |
Amortization of intangible assets | | | 1,277 | | | 658 | | | 151 | |
Provision for uncollectible accounts receivable | | | 5,189 | | | 3,716 | | | 4,653 | |
Write-off and/or reserve for obsolete inventory | | | 378 | | | 283 | | | 360 | |
Deferred income tax (benefit) provision | | | — | | | (644 | ) | | (178 | ) |
Share based compensation charges | | | 1,435 | | | 1,566 | | | 1,477 | |
Issuance of common stock for 401(k) employer match | | | 582 | | | 481 | | | 421 | |
Deferred revenue recognized | | | (475 | ) | | (426 | ) | | — | |
Gain on termination of officers life insurance policies | | | — | | | (313 | ) | | — | |
Options issued to consultants | | | — | | | — | | | 130 | |
Foreign exchange loss on intercompany loan | | | 697 | | | — | | | — | |
Other | | | — | | | — | | | 10 | |
| | | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | (1,409 | ) | | (2,837 | ) | | (6,086 | ) |
Inventories | | | 2,269 | | | 1,012 | | | 533 | |
Prepaid expenses | | | 208 | | | (574 | ) | | 31 | |
Recoverable and prepaid income taxes | | | — | | | — | | | 1,931 | |
Accounts payable – trade | | | (571 | ) | | (1,060 | ) | | 429 | |
Accrued liabilities | | | 528 | | | (1,066 | ) | | 2,892 | |
Other current liabilities | | | (206 | ) | | (195 | ) | | 74 | |
Deferred revenue | | | ��� | | | — | | | 1,628 | |
| | | | | | | | | | |
Adjustments | | | 12,087 | | | 2,089 | | | 9,494 | |
| | | | | | | | | | |
| | | | | | | | | | |
Net cash used in operating activities | | | (11,477 | ) | | (8,564 | ) | | (3,766 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Capital expenditures | | | (2,709 | ) | | (3,231 | ) | | (1,448 | ) |
Proceeds from termination of officers life insurance | | | — | | | 1,085 | | | — | |
Maturities of short term investments | | | 318,650 | | | — | | | — | |
Purchases of short term investments | | | (361,956 | ) | | — | | | — | |
(Increase) decrease in cash surrender values | | | — | | | — | | | (75 | ) |
Decrease (increase) in security deposits and other | | | 384 | | | (491 | ) | | (14 | ) |
Acquisitions, net of cash acquired | | | (14,541 | ) | | (16,144 | ) | | (16,888 | ) |
| | | | | | | | | | |
Net cash used in investing activities | | | (60,172 | ) | | (18,781 | ) | | (18,425 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Net proceeds from issuance of common stock | | | — | | | — | | | 56,997 | |
Proceeds from the exercise of stock options | | | 348 | | | 470 | | | 500 | |
Issuance costs from issuance of common stock | | | — | | | (12 | ) | | — | |
| | | | | | | | | | |
Net cash provided by financing activities | | | 348 | | | 458 | | | 57,497 | |
| | | | | | | | | | |
| | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (92 | ) | | 60 | | | (11 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
(Decrease) increase in cash and cash equivalents | | | (71,393 | ) | | (26,827 | ) | | 35,295 | |
Cash and cash equivalents - beginning of year | | | 78,322 | | | 105,149 | | | 69,854 | |
| | | | | | | | | | |
Cash and cash equivalents - end of year | | $ | 6,929 | | $ | 78,322 | | $ | 105,149 | |
| | | | | | | | | | |
F-6
The accompanying notes are an integral part of these consolidated financial statements
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Note 1 - Summary of significant accounting policies
Nature of business
Enzo Biochem, Inc. (the “Company”) is engaged in research, development, manufacturing and marketing of diagnostic and research products based on genetic engineering, biotechnology and molecular biology. These products are designed for the diagnosis of and/or screening for infectious diseases, cancers, genetic defects and other medically pertinent diagnostic information and are distributed in the United States and internationally. The Company is conducting research and development activities in the development of therapeutic products based on the Company’s technology platform of genetic modulation and immune modulation. The Company also operates a clinical laboratory that offers and provides diagnostic medical testing services to the health care community in the New York Metropolitan and New Jersey areas. The Company operates in three segments (see Note 17).
On March 12, 2009, Enzo Life Sciences, Inc. and Enzo Life Sciences Acquisition, Inc., a newly formed wholly owned subsidiary of Enzo Life Sciences, Inc. (“Acquisition Sub”), entered into an asset purchase agreement (“Purchase Agreement”) dated as of March 12, 2009 with Assay Designs, Inc. (“Assay Designs”). Assay Designs, a privately owned company with annual sales of approximately $11 million, was engaged in researching, developing, manufacturing, distributing, marketing and selling specialty immunological and biochemical protein detection kits, assays, reagents, antibodies, recombinant proteins and related products and providing related services for use in the biotechnology, pharmaceutical and life sciences research industries (“Business”). Under the terms of the Purchase Agreement, Acquisition Sub purchased from Assay Designs substantially all of its assets, including trade accounts receivable, inventory, fixed assets, and intellectual property, used in or related to the Business and assumed certain of Assay Designs’ liabilities, including trade accounts payable, capital lease obligations and certain other current liabilities. The Assay Design Acquisition strengthens the Company’s position as a global provider of life sciences reagents by broadening our product offerings and manufacturing capabilities (see Note 2).
On May 8, 2008, Enzo Life Sciences, Inc. (“Enzo Life Sciences”), a wholly-owned subsidiary of the Company, acquired substantially all assets and certain liabilities of Biomol International L.P. (“Biomol LP”) and the issued and outstanding capital stock of Affiniti, Limited, a wholly owned subsidiary of Biomol L.P., referred to as “Biomol”. Biomol is a developer, manufacturer and distributor of reagents for the research and biochemical industries and is based in the U.S. and its wholly-owned subsidiary is located in Exeter, United Kingdom. Biomol utilizes third-party distributors located in other major markets throughout the world. As a result of this transaction, Enzo Life Sciences has expanded its product offerings, both through internal manufacturing and distribution, and increases its geographic distribution (see Note 2).
Effective May 31, 2007, Enzo Life Sciences completed the acquisition of all of the issued and outstanding capital stock of Axxora Life Sciences, Inc. (“Axxora”). Axxora is a developer, manufacturer and distributor of reagents for the research and biochemical industries and is based in the U.S. with wholly-owned subsidiaries in the U.S., Switzerland, Germany and the United Kingdom. Axxora utilizes third-party distributors located in other major markets throughout the world. Axxora’s electronic marketplace enables customers to purchase research reagents from internationally recognized manufacturers covering all areas of the life sciences research reagents field. As a result of this transaction, Enzo Life Sciences has expanded its product offerings both through internal manufacturing and distribution and increases its geographic distribution (see Note 2).
Principles of consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries, Enzo Clinical Labs, Inc., Enzo Life Sciences, Inc., Enzo Therapeutics, Inc. and Enzo Realty LLC (“Realty”). All intercompany transactions and balances have been eliminated. The results of operations for companies acquired are included in the consolidated financial statements from the effective date of the acquisition.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation” (“SFAS No. 52”), the Company has determined that the functional currency for its foreign subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies are translated at current exchange rates and profit and loss accounts are translated at weighted average exchange rates. Resulting translation gains and losses are included as a separate component of stockholders’ equity as accumulated other comprehensive income or loss.
Cash and cash equivalents
Cash and cash equivalents include highly liquid US Government instruments with maturities of three months or less at the time acquired by the Company and money market funds.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. The Company’s cash equivalents are invested in diverse financial instruments with high credit ratings. The Company believes the fair value of the aforementioned financial instruments approximates the current value due to the immediate or short-term nature of these items.
Concentration of credit risk with respect to the Company’s life sciences segment is mitigated by the diversity of the Company’s clients and their dispersion across many different geographic regions. To reduce risk, the Company routinely assesses the financial strength of these customers and, consequently, believes that its accounts receivable credit exposure with respect to these customers is limited.
The Company believes that the concentration of credit risk with respect to the Clinical Labs accounts receivable is mitigated by the diversity of its numerous third party payers and individual patient accounts and is limited to certain large payers that insure individuals that utilize the Clinical labs services. To reduce risk, the Company routinely assesses the financial strength of these payers and, consequently, believes that its accounts receivable credit risk exposure, with respect to these payers, is limited. While the Company also has receivables due from the Federal Medicare program, the Company does not believe that these receivables represent a credit risk since the Medicare program is funded by the federal government and payment is primarily dependent on our submitting the appropriate documentation.
Revenue Recognition
Product revenues
Revenues from product sales are recognized when the products are shipped and title transfers, the sales price is fixed or determinable and collectibility is reasonably assured.
Royalties
Royalty revenues are recorded in the period earned. Royalties received in advance of being earned are recorded as deferred revenues in the accompanying balance sheet.
License Fees and Multiple Element Arrangements
When evaluating multiple element arrangements, the Company considers whether the components of the arrangement represent separate units of accounting as defined in Emerging Issues Task Force (“EITF”) Issue No. 00-21,Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). Application of this standard requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Clinical laboratory services
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 adjustment, 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 Lab segment’s net revenues and revenue percentages by revenue category:
| | | | | | | | | | | | | | | | |
| | 2009 | | Years ended July 31
2008 | | 2007 | |
| | | | | | | |
Revenue category | | (In 000’s) | | (in %) | | (In 000’s) | | (in %) | | (In 000’s) | | (in %) | |
| | | | | | | | | | | | | |
Medicare | | $ | 9,138 | | 23 | | $ | 9,078 | | 22 | | $ | 8,478 | | 21 | |
Third-party payers | | | 20,073 | | 51 | | | 24,768 | | 59 | | | 25,060 | | 62 | |
Patient self-pay | | | 6,056 | | 15 | | | 3,582 | | 8 | | | 2,952 | | 7 | |
HMO’s | | | 4,337 | | 11 | | | 4,650 | | 11 | | | 3,940 | | 10 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 39,604 | | 100 | % | $ | 42,078 | | 100 | % | $ | 40,430 | | 100 | % |
| | | | | | | | | | | | | | | | |
The Company provides services to certain patients covered by various third-party payers, including the Federal Medicare program. Laws and regulations governing Medicare are complex and subject to interpretation for which action for noncompliance includes fines, penalties and exclusion from the Medicare programs. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing.
Other than the Medicare program, United Healthcare of New York whose programs are included in the “Third-party payers” and “Health Maintenance Organizations” (“HMO’s”) categories, represents 25%, 26% and 20% of the Clinical labs segment net revenue for the fiscal year ended July 31, 2009, 2008 and 2007 respectively.
Contractual Adjustment
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on gross billing rates, to amounts expected to be approved and reimbursed. Gross billings are based on a standard fee schedule the Company sets for all third-party payers, including Medicare, HMO’s and managed care providers. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors which include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements and 3) the growth of in-network provider arrangements and managed care plans specific to our Company.
During the years ended July 31, 2009, 2008 and 2007, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were 80.8%, 81.8% and 79.0%, respectively, of gross billings.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period of the related revenue.
For the Clinical Labs segment, the allowance for doubtful accounts represents amounts that the Company does not expect to collect after the Company has exhausted its collection procedures. 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, payer mix and other relevant factors.
During the years ended July 31, 2009 and 2008, the Company determined an allowance for doubtful accounts for customers whose accounts receivable have been outstanding less than 210 days and wrote off 100% of accounts receivable over 210 days, as it determined based on historical trends that those accounts were uncollectible, except for certain fully reserved balances, principally related to Medicare. These accounts have not been written off because the payer’s filing date deadline has not occurred or the collection process has not been exhausted. 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 issues and 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.
The Clinical Labs segment’s net receivables are detailed by billing category and as a percent to its total net receivables. At July 31, 2009 and 2008, approximately 40% and 58%, respectively, of the Company’s net accounts receivable relates to its Clinical Labs business, which operates in the New York Metropolitan and New Jersey areas.
The Life Sciences segment’s accounts receivable includes royalties receivable of $2.5 million and $2.1 million, as of July 31, 2009 and 2008, respectively, of which approximately $1.9 million and $1.5 million, respectively is from Qiagen Corporation (see Note 13).
The following is a table of the Company’s net accounts receivable by segment.
| | | | | | | | | | | |
Net accounts receivable
Billing category | | As of
July 31, 2009 | | As of
July 31, 2008 | |
| | | | | |
Clinical Labs | | (In 000’s) | | (in %) | | (In 000’s) | | (in %) | |
| | | | | | | | | |
| | | | | | | | | | | |
Medicare | | $ | 1,113 | | 22 | | $ | 1,600 | | 18 | |
Third party payers | | | 2,003 | | 40 | | | 4,610 | | 52 | |
Patient self-pay | | | 1,635 | | 32 | | | 2,144 | | 24 | |
HMO’s | | | 303 | | 6 | | | 537 | | 6 | |
| | | | | | | | | | | |
Total Clinical Labs | | | 5,054 | | 100 | % | | 8,891 | | 100 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total Life Sciences | | | 7,426 | | | | | 6,457 | | | |
| | | | | | | | | | | |
Total accounts receivable | | $ | 12,480 | | | | $ | 15,348 | | | |
| | | | | | | | | | | |
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Changes in the Company’s allowance for doubtful accounts are as follows:
| | | | | | | |
In 000’s | | July 31, 2009 | | July 31, 2008 | |
| | | | | |
Beginning balance | | $ | 886 | | $ | 1,404 | |
Provision for doubtful accounts | | | 5,189 | | | 3,716 | |
Write-offs | | | (1,289 | ) | | (4,234 | ) |
| | | | | | | |
Ending balance | | $ | 4,786 | | $ | 886 | |
| | | | | | | |
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. Appropriate consideration is given to obsolescence and other factors in evaluating net realizable value. Work-in-process and finished goods inventories consist of material, labor and manufacturing overhead acquired inventories are recorded at fair value.
Property, plant and equipment
Property, plant and equipment is stated at cost, and depreciated on the straight-line basis over the estimated useful lives of the various asset classes as follows: building and building improvements 15-30 years and laboratory machinery and equipment and office furniture and computer equipment - - ranges from 3-10 years. Leasehold improvements are amortized over the term of the related leases or estimated useful lives of the assets, whichever is shorter.
Impairment of Long-Lived Assets
The Company reviews the recoverability of the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Should indicators of impairment exist, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of the underlying business. The net book value of an asset is adjusted to fair value if its expected future undiscounted cash flow is less than its book value. No indicators of impairment were identified during the years ended July 31, 2009, 2008 or 2007.
Goodwill and Indefinite-Lived Intangibles
Goodwill, representing the cost of acquired businesses in excess of the fair value of net assets acquired, and indefinite-lived intangibles are not amortized, but are evaluated annually for impairment. The Company performs its annual impairment test as of the first day of its fiscal fourth quarter or if indicators of potential impairment exist. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. In assessing the recoverability of goodwill, the Company reviews both quantitative as well as qualitative factors to support its assumptions with regard to fair value. The fair value of a reporting unit, which is based on geographic region, is estimated using both a discounted cash flow model and a weighted average multiple of earnings before interest and taxes from comparable companies. In determining fair value, the Company makes certain judgments, including the identification of reporting units and the selection of comparable companies. If these estimates or their related assumptions change in the future as a result of changes in strategy and/or market conditions, the Company may be required to record an impairment charge. To date, there has been no impairment charges recorded.
Intangible Assets
Intangible assets (exclusive of patents), arose primarily from acquisitions (See Note 2), and primarily consist of customer relationships, trademarks, licenses, employment and non-compete agreements, and website and database content. Finite-lived intangible assets are amortized according to their estimated useful lives, which range from 4 to 15 years.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
The Company has capitalized certain legal costs directly incurred in pursuing patent applications as patent costs. When such applications result in an issued patent, the related costs are amortized over a ten year period or the life of the patent, whichever is shorter, using the straight-line method. The Company reviews its issued patents and pending patent applications, and if it determines to abandon a patent application or that an issued patent no longer has economic value, the unamortized balance in deferred patent costs relating to that patent is immediately expensed.
Comprehensive income (loss)
SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”), requires reporting and displaying of comprehensive income (loss) and its components. In accordance with SFAS 130, the Accumulated Other Comprehensive Income (Loss), which is comprised of foreign currency translation adjustments, is disclosed as a separate component of stockholders’ equity. Comprehensive loss consists of net loss and foreign currency translation adjustments. Foreign currency translation adjustments included in comprehensive loss were not tax effected as investments in international affiliates are deemed to be permanent.
Shipping and Handling Costs
Shipping and handling costs associated with the distribution of finished goods to customers are recorded in cost of goods sold.
Research and Development
Research and development costs are charged to expense as incurred.
Advertising
All costs associated with advertising are expensed as incurred. Advertising expense, included in Selling, general and administrative expense, approximated $634,000, $113,000 and $12,000 for the years ended July 31, 2009, 2008 and 2007, respectively.
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 carryforwards and other items be reduced by a valuation allowance when it is more likely than not that 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.
It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At July 31, 2009, the Company believes it has appropriately accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected.
Segment Reporting
The Company follows SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS 131”) which establishes standards for reporting information on operating segments in interim and annual financial statements. An enterprise is required to separately report information about each operating segment that engages in business activities from which the segment may earn revenues and incur expenses, whose separate operating results are regularly reviewed by the chief operating decision maker regarding allocation of resources and performance assessment and which exceed specific quantitative thresholds related to revenue and profit or loss. The Company’s operating activities are reported in three segments (see Note 17).
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Net income (loss) per share
The Company applies SFAS No. 128, “Earnings per Share” (“SFAS 128”). SFAS 128 establishes standards for computing and presenting earnings per share. Basic net income (loss) per share represents net income (loss) 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 unvested restricted stock, is determined using the treasury stock method in accordance with SFAS 128. Diluted weighted average shares outstanding for fiscal 2009, 2008 and 2007 do not include the potential common shares from stock options and unvested restricted stock because to do so would have been antidilutive. Accordingly, basic and diluted net loss per share is the same in fiscal 2009, 2008 and 2007. The number of potential common shares (“in the money options”) and unvested restricted stock excluded from the calculation of diluted earnings per share during the years ended July 31, 2009, 2008, and 2007 was 105,000, 240,000, and 619,000, respectively.
For the years ended July 31, 2009, 2008 and 2007, the effect of approximately 1,191,000, 1,734,000 and 873,000 respectively, of outstanding “out of the money” options to purchase common shares were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per share pursuant to SFAS 128 for the years ended July 31:
| | | | | | | | | | |
In 000’s | | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Numerator: | | | | | | | | | | |
Net loss | | $ | (23,564 | ) | $ | (10,653 | ) | $ | (13,260 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Denominator: | | | | | | | | | | |
Weighted-average common shares outstanding- Basic | | | 37,511 | | | 36,883 | | | 35,017 | |
|
Add: effect of dilutive stock options and restricted stock | | | — | | | — | | | — | |
| | | | | | | | | | |
Weighted-average common shares outstanding - Diluted | | | 37,511 | | | 36,883 | | | 35,017 | |
| | | | | | | | | | |
| | | | | | | | | | |
Net loss per share | | | | | | | | | | |
Basic | | $ | (0.63 | ) | $ | (0.29 | ) | $ | (0.38 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
Diluted | | $ | (0.63 | ) | $ | (0.29 | ) | $ | (0.38 | ) |
| | | | | | | | | | |
Share-Based Compensation
The Company records compensation expense associated with stock options and restricted stock in accordance with SFAS No. 123(R), “Share-Based Payment.” The Company adopted the modified prospective application method provided for under SFAS 123(R) and consequently did not retroactively adjust results from prior periods. Under this transition method, compensation cost associated with stock options and awards recognized in the fiscal years ended July 31, 2009, 2008 and 2007, includes: (a) compensation cost of all stock-based payments granted prior to, but not yet vested as of July 31, 2005 (based on grant-date fair value estimated in accordance with the original provisions of SFAS No. 123(R), and (b) compensation cost for all stock-based payments granted on or after August 1, 2005 (based on the grant-date fair value estimated in accordance with the new provision of SFAS No. 123(R)).
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
For the years ended July 31, 2009, 2008 and 2007, share-based compensation expense relating to the fair value of restricted shares and restricted stock units vested during the years ended July 31, 2009, 2008 and 2007 was approximately $1,415,000, $1,316,000, and $649,000, respectively (see Note 11). No excess tax benefits were recognized for the year ended July 31, 2009, 2008 and 2007.
The following table sets forth the amount of expense related to share-based payment arrangements included in specific line items in the accompanying Statement of operations for the years ended July 31:
| | | | | | | | | | |
In 000’s | | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Cost of products | | $ | 8 | | $ | 14 | | $ | 10 | |
Research and development | | | 13 | | | 97 | | | 162 | |
Selling, general and administrative | | | 1,414 | | | 1,455 | | | 1,305 | |
| | | | | | | | | | |
| | $ | 1,435 | | $ | 1,566 | | $ | 1,477 | |
| | | | | | | | | | |
As of July 31, 2009, there was $1.7 million of total unrecognized compensation cost related to nonvested share-based payment arrangements granted under the Company’s stock option and restricted stock plans, which will be recognized over a weighted average remaining life of approximately 1.75 years.
Effect of new accounting pronouncements
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162”. SFAS No. 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 is effective for the Company’s interim reporting period ending on October 31, 2009. The Company does not anticipate the adoption of SFAS No. 168 will have a material impact on its financial position, results of operations or cash flows.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. During the three months ended July 31, 2009, the Company adopted SFAS SFAS 165. In response to SFAS 165, management has evaluated subsequent events through October 14, 2009, which is the date that the Company’s financial statements were filed.
In April 2009, the FASB issued FSP SFAS No. 141(R)-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”. FSP SFAS No. 141(R)-1 will amend the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS No. 141(R), “Business Combinations”. The FSP will carry forward the requirements in SFAS No. 141, “Business Combinations,” for acquired contingencies, thereby requiring that such contingencies be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. Otherwise, entities would typically account for the acquired contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” The FSP will have the same effective date as SFAS No. 141(R), and will therefore be effective for the Company’s business combinations for which the acquisition date is on or after August 1, 2009. The Company is currently evaluating the impact of the implementation of FSP SFAS No. 141(R)-1 on its consolidated financial position, results of operations and cash flows.
In April 2009, the FASB issued FSP SFAS No. 107-1 and APB 28-1,”Interim Disclosures about Fair Value of Financial Instruments. “FSP SFAS No. 107-1 and APB 28-1 enhances consistency in financial reporting by increasing the frequency of fair value disclosures. The FSP relates to fair value disclosures for any financial instruments that are not currently reflected on a company’s balance sheet at fair value. Prior to the effective date of this FSP, fair values for these assets and liabilities have only been disclosed once a year.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
The FSP will now require these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The disclosure requirement under this FSP is effective for the Company’s interim reporting period ending on October 31, 2009.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No.142, Goodwill and Other Intangible Assets. FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of FSP FAS 142-3 will have on its consolidated results of operation, cash flows or financial condition.
In December 2007, the FASB issued Statement No. 141 (revised 2007),”Business Combinations” (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any controlling interest in the business and the goodwill acquired. SFAS No. 141R further requires that: 1) contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration, 2) acquisition-related costs will be expensed as incurred rather than capitalized as part of the purchase price, 3) reversal of valuation allowances created in purchase accounting will be recorded through the income tax provision, 4) in order to accrue for a restructuring plan in purchase accounting, the requirements of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, would have to be met at the acquisition date. SFAS No. 141R also establishes disclosure requirements that will require disclosure of the nature and financial effects of the business combination. SFAS No. 141R will impact business combinations for the Company that may be completed on or after August 1, 2009. The Company cannot anticipate whether the adoption of SFAS No. 141R will have a material impact on its results of operations and financial condition as the impact is solely dependent on the terms of any business combination entered into by the Company on or after August 1, 2009.
Reclassifications
Certain amounts in prior years have been reclassified to conform to current year presentation. In Fiscal 2009, the Company reclassified certain payroll taxes and employee benefits included in selling, general and administrative expense to cost of sales. The payroll taxes and benefits reclassed were approximately $1,146,000 and $952,000 for the years ended July 31, 2008 and 2007, respectively.
NOTE 2 - Acquisitions Assay Designs, Inc.
On March 12, 2009, Enzo Life Sciences, Inc. and Enzo Life Sciences Acquisition, Inc., a newly formed wholly owned subsidiary of Enzo Life Sciences, Inc. (“Acquisition Sub”), entered into an asset purchase agreement (“Purchase Agreement”) dated as of March 12, 2009 with Assay Designs, Inc. (“Assay Designs”). Assay Designs, a privately owned company with annual sales of approximately $11 million, was engaged in researching, developing, manufacturing, distributing, marketing and selling specialty immunological and biochemical protein detection kits, assays, reagents, antibodies, recombinant proteins and related products and providing related services for use in the biotechnology, pharmaceutical and life sciences research industries (“Business”). Under the terms of the Purchase Agreement, Acquisition Sub purchased from Assay Designs substantially all of its assets, including trade accounts receivable, inventory, fixed assets, and intellectual property, used in or related to the Business and assumed certain of Assay Designs’ liabilities, including trade accounts payable, capital lease obligations and certain other current liabilities.
The execution of the Purchase Agreement and the closing of the transaction occurred simultaneously on March 12, 2009. The purchase price consisted of $12,228,000 in cash, exclusive of acquisition costs of approximately $540,000, and was subject to an upward or downward post-closing purchase price adjustment based on Assay Designs’ working capital as of the closing date and $328,000 representing estimated costs to consolidate an acquired facility and involuntary termination of certain employees, of which $184,000 is outstanding and included in accrued liabilities in the accompanying balance sheet at July 31, 2009. At the closing, $100,000 was held in escrow to secure the payment of any downward post-closing purchase price adjustment and $750,000 was held in escrow for 12 months to secure the payment of any indemnification obligations of Assay Designs under the Purchase Agreement. Subsequent to the acquisition date, the Company paid $270,000 in additional purchase price in connection with the working capital adjustment and released the $100,000 escrow amount.
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
The Company expects the cost of the acquisition to be increased when the integration plan to consolidate a facility and the involuntary termination of certain employees is finalized. The Assay Design Acquisition strengthens the Company’s position as a global provider of life sciences reagents by broadening our product offerings and manufacturing capabilities.
The acquisition was funded with the Company’s cash. Effective March 12, 2009, Assay Designs became a wholly-owned subsidiary of Enzo Life Sciences. The consolidated financial statements include the results of operations for Assay Designs from the date of acquisition.
The following table presents the preliminary estimated fair values of the assets acquired and liabilities assumed (in thousands) as of the date of acquisition:
| | | | |
Current assets | | $ | 4,235 | |
Property and equipment | | | 1,747 | |
Other assets | | | 11 | |
Intangible assets | | | 6,360 | |
Goodwill | | | 1,803 | |
| | | | |
Total assets acquired | | | 14,156 | |
| | | | |
Less: | | | | |
Current liabilities | | | 1,115 | |
| | | | |
Total liabilities assumed | | | 1,115 | |
| | | | |
Net assets acquired | | $ | 13,041 | |
| | | | |
The preliminary purchase price allocation is based on management’s estimate of acquired tangible and intangible assets and will be adjusted based on the final valuation to be completed within one year from the acquisition date. The excess of the total purchase price over the fair value of the net assets acquired, including the estimated fair value of the identifiable intangible assets, has been allocated to goodwill.
Biomol International, L.P.
On May 8, 2008, Enzo Life Sciences, Inc. acquired substantially all of the U.S. based assets and certain liabilities of Biomol International, LP (“Biomol LP”) through a newly formed US subsidiary Biomol International, Inc. and all of the stock of Biomol’s wholly-owned United Kingdom subsidiary, Affinity Limited, through Axxora UK, a wholly-owned subsidiary of Enzo Life Sciences, collectively referred to as “Biomol” for approximately $18.1 million in cash and stock, subject to adjustment, exclusive of acquisition costs of approximately $800,000 and two contingent earn-out payments accounted for as additional purchase consideration if and when the contingencies are resolved beyond a reasonable doubt. At closing, the purchase price was satisfied as follows: $12.9 million in cash was paid to Biomol LP, issuance of 352,000 shares of Enzo common stock, at fair market value, to Biomol LP, $1.5 million in cash was paid to an escrow agent for the one-year period following the closing to satisfy any indemnification obligations of the sellers under the Agreement and $550,000 was paid to an escrow agent, for the 60 day period following the closing to satisfy any specified purchase price adjustments. The $550,000 was released by the escrow agent in August 2008. The earn-outs of $2.5 million on each of the next two anniversaries of the acquisition date will be based on attaining certain revenue and EBITDA targets, as defined. Biomol was a privately owned, closely held global manufacturer and marketer of specialty life sciences research products. Effective May 8, 2008, Biomol became a wholly-owned subsidiary of Enzo Life Sciences. The acquisition was financed with the Company’s cash and cash equivalents and Enzo common stock. The consolidated financial statements include the results of operations for Biomol from the date of acquisition. Effective February 2, 2009, the names of Biomol International, Inc. and Affinity Limited were changed to Enzo Life Sciences International, Inc. and Enzo Life Sciences (UK) Ltd., respectively.
In June 2009, the conditions for the first annual earn-out of $2.5 million were met and the Company recorded $2.5 million of additional goodwill. The Company issued 202,196 shares of Enzo common stock at fair value and paid $1.5 million in cash to satisfy the $2.5 million earn-out liability.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
The following table presents the fair values of the assets acquired and liabilities assumed (in thousands):
| | | | |
Current assets | | $ | 5,167 | |
Property and equipment | | | 939 | |
Other assets | | | 18 | |
Intangible assets | | | 7,660 | |
Goodwill | | | 9,226 | |
| | | | |
Total assets acquired | | | 23,010 | |
| | | | |
| | | | |
Less: | | | | |
Current liabilities | | | 1,100 | |
Deferred tax liabilities | | | 609 | |
| | | | |
Total liabilities assumed | | | 1,709 | |
| | | | |
| | | | |
Net assets acquired | | $ | 21,301 | |
| | | | |
The purchase price allocation is based on a valuation of acquired tangible and intangible assets based on the final valuation completed in fiscal 2009. The Company determined the estimated fair value of the identifiable intangible assets based on various factors including: cost, discounted cash flow and relief from royalty approaches in determining the purchase price allocation. The excess of the total purchase price over the fair value of the net assets acquired, including the estimated fair value of the identifiable intangible assets, has been allocated to goodwill.
Axxora Life Sciences, Inc.
On May 29, 2007, Enzo Life Sciences entered into a Stock Purchase Agreement (the “Agreement”), by and among Enzo Life Sciences, Axxora and the stockholders, option holders and warrant holders of Axxora who own all of the issued and outstanding capital stock, options and warrants, respectively, of Axxora (collectively, the “Security holders”). Pursuant to the Agreement, Enzo Life Sciences purchased all of the issued and outstanding capital stock of Axxora from the Security holders for an aggregate purchase price of $16,322,000, exclusive of acquisition costs of $1,023,000, $475,000 previously advanced to Axxora to repay outstanding debt, and acquired cash of $881,000, which is included in current assets below. Effective May 31, 2007, Axxora became a wholly-owned subsidiary of Enzo Life Sciences. The acquisition was financed with the Company’s cash and cash equivalents. The consolidated financial statements presented herein include the results of operations for Axxora from the date of acquisition.
F-17
|
ENZO BIOCHEM, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
July 31, 2009 and 2008 |
The following table presents the fair values of the assets acquired and liabilities assumed (in thousands):
| | | | | | | |
Current assets | | $ | 9,033 | | | | |
Property and equipment | | | 360 | | | | |
Other assets | | | 82 | | | | |
Intangible assets | | | 8,220 | | | | |
Goodwill | | | 6,470 | | | | |
| | | | | | | |
Total assets acquired | | | 24,165 | | | | |
| | | | | | | |
| | | | | | | |
Less: | | | | | | | |
Current liabilities | | | 3,919 | | | | |
Deferred tax liabilities | | | 2,426 | | | | |
| | | | | | | |
Total liabilities assumed | | | 6,345 | | | | |
| | | | | | | |
| | | | | | | |
Net assets acquired | | $ | 17,820 | | | | |
| | | | | | | |
The purchase price allocation is based on a valuation of acquired intangible assets based on the final valuation completed in fiscal 2008. The Company determined the fair value of the identifiable intangible assets based on various factors including: cost, discounted cash flow and relief from royalty approaches in determining the purchase price allocation. The excess of the total purchase price over the fair value of the net assets acquired, including the estimated fair value of the identifiable intangible assets, has been allocated to goodwill.
On March 7, 2008, Axxora acquired 100% of the outstanding stock of a distributor of life science products in Belgium for a total consideration of approximately $229,000 in cash, net of cash acquired, including transaction costs. Liabilities assumed aggregated $369,000. Prior to the acquisition, the acquired company was a distributor of Enzo Life Science’s products as well as other unrelated manufacturers. The Company recorded goodwill of $232,000 and intangibles for customer relationships of $174,000 related to this acquisition. The consolidated financial statements presented herein include the results of operations for the acquired company from the date of acquisition. For financial reporting purposes, useful lives for the acquisitions have been assigned as follows:
| |
Customer relationships | 8 -15 years |
Trademarks | Indefinite |
Other intangibles | 4-5 years |
The following unaudited pro forma financial information presents the combined results of operations of the Company and acquisitions completed in 2009 and 2008 as if the acquisitions had occurred as of August 1, 2007. The pro forma financial information reflects appropriate adjustments for amortization of intangible assets and interest expense. The pro forma financial information presented is not necessarily indicative of either the actual consolidated operating results had the acquisition been completed at the beginning of each period or future operating results of the consolidated entities.
| | | | | | | |
| | Year Ended July 31, | |
| | | | | | | |
| | 2009 | | 2008 | |
| | | | | |
Net revenues | | $ | 96,227 | | $ | 97,737 | |
Net loss | | $ | (24,098 | ) | $ | (10,381 | ) |
Net loss per common share: | | | | | | | |
Basic and diluted | | $ | (0.64 | ) | $ | (0.28 | ) |
F-18
|
ENZO BIOCHEM, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
July 31, 2009 and 2008 |
Note 3- Supplemental disclosure for statement of cash flows
In the years ended July 31, 2009, 2008, and 2007, net income taxes (refunded to) or paid by the Company approximated $220,000, $233,000, and $(1,670,000) respectively.
In fiscal 2009, certain officers of the Company exercised 206,576 stock options in a non-cash transaction. The officers surrendered 99,985 shares of previously acquired common stock to exercise the stock options. The Company recorded approximately $1.1 million, the market value of the surrendered shares, as treasury stock.
In fiscal 2008, certain officers and directors of the Company exercised 220,158 stock options in non-cash transactions. The officers surrendered 181,263 shares of previously owned shares of the Company’s common stock to exercise the stock options. The Company recorded approximately $2.4 million, the market value of the surrendered shares, as treasury stock.
In fiscal 2007, certain officers of the Company exercised 43,112 stock options in non-cash transactions. The officers surrendered 26,756 shares of previously owned shares of the Company’s common stock to exercise the stock options. The Company recorded approximately $0.4 million, the market value of the surrendered shares, as treasury stock.
Note 4 – Short term investments
At July 31, 2009 the Company’s short-term investments, whose fair value approximates cost, are in U.S. Government Treasury bills, which are purchased at discounts with remaining maturities of under ninety days.
Effective August 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), for assets and liabilities measured at fair value on a recurring basis. SFAS 157 establishes a common definition for fair value to be applied to existing GAAP that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of SFAS 157 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, SFAS 157 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
| | |
| Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities. |
| | |
| Level2: | Observable market-based inputs or unobservable inputs that are corroborated by market data. |
| | |
| Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. |
At July 31, 2009, the Company’s short-term investments are classified as Level 1 assets. The Company had no short term investments or marketable securities at July 31, 2008.
Note 5 – Accumulated Other Comprehensive Income (Loss)
The following is a summary of accumulated other comprehensive loss, relating to the effect of foreign currency translation:
| | | | | | | | | | | |
In 000’s | | | Accumulated income
(loss) before tax | | Tax (expense)
or benefit | | Accumulated income
(loss) net of tax | |
| | | | | | | | | |
Balance - July 31, 2006 | | | — | | | — | | | — | |
Fiscal 2007 – gain on foreign currency translation | | $ | 42 | | | — | | $ | 42 | |
| | | | | | | | | | |
Balance - July 31, 2007 | | | 42 | | | — | | | 42 | |
Fiscal 2008 – gain on foreign currency translation | | | 1,544 | | | — | | | 1,544 | |
| | | | | | | | | | |
Balance – July 31, 2008 | | | 1,586 | | | — | | | 1,586 | |
Fiscal 2009 – loss on foreign currency translation | | | (1,310 | ) | | — | | | (1,310 | ) |
| | | | | | | | | | |
Balance – July 31, 2009 | | $ | 276 | | | — | | $ | 276 | |
| | | | | | | | | | |
F-19
|
ENZO BIOCHEM, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
July 31, 2009 and 2008 |
Note 6 - Inventories
At July 31, 2009 and 2008 inventories, net of reserves of $1,005,000 and $637,000, respectively, consist of:
| | | | | | | | | | | | | | | | | | | | |
In 000’s | | | | | | | | | | | | 2009 | | 2008 | | | | |
| | | | | | | | | | | | | | | | | | | |
Raw materials | | | | | | | | | | | $ | 1,228 | | $ | 341 | | | | |
Work in process | | | | | | | | | | | | 1,072 | | | 899 | | | | |
Finished products | | | | | | | | | | | | 6,964 | | | 8,274 | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | $ | 9,264 | | $ | 9,514 | | | | |
| | | | | | | | | | | | | | | | | | | |
Note 7 – Property, plant, and equipment
At July 31, 2009 and 2008 property, plant, and equipment consist of:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
In 000’s | | | | | | | | | | | | | 2009 | | | 2008 | | | | |
| | | | | | | | | | | | | | | | | | | |
Building and building improvements | | | | | | | $ | 4,219 | | $ | 4,199 | | | | |
Laboratory machinery and equipment | | | | | | | | 6,553 | | | 4,002 | | | | |
Office furniture and computer equipment | | | | | | | | 11,330 | | | 8,617 | | | | |
Leasehold improvements | | | | | | | | | | | | 4,430 | | | 4,281 | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 26,532 | | | 21,099 | | | | |
Accumulated depreciation and amortization | | | | | | | | (15,921 | ) | | (12,758 | ) | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | 10,611 | | | 8,341 | | | | |
Land and land improvements | | | | | | | | | | | | 712 | | | 712 | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | $ | 11,323 | | $ | 9,053 | | | | |
| | | | | | | | | | | | | | | | | | | |
Note 8 – Goodwill and intangible assets
The Company’s change in the net carrying amount of goodwill by business segment is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Enzo Life
Sciences | | Enzo
Clinical
Labs | | Total | |
| | | | | | | | | | | | | | | | | | |
August 1, 2007 | | | | | | | | | | | $ | 6,224 | | $ | 7,452 | | $ | 13,676 | |
Acquisitions –see Note 2 | | | | | | | | | | | | 7,137 | | | — | | | 7,137 | |
Foreign currency translation | | | | | | | | | | | | 508 | | | — | | | 508 | |
| | | | | | | | | | | | | | | | | | | |
July 31, 2008 | | | | | | | | | | | | 13,869 | | | 7,452 | | | 21,321 | |
Acquisition – see Note 2 | | | | | | | | | | | | 4,303 | | | — | | | 4,303 | |
Other Adjustments | | | | | | | | | | | | (148 | ) | | — | | | (148 | ) |
Foreign currency translation | | | | | | | | | | | | (580 | ) | | — | | | (580 | ) |
| | | | | | | | | | | | | | | | | | | |
July 31, 2009 | | | | | | | | | | | $ | 17,444 | | $ | 7,452 | | $ | 24,896 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Intangible assets, all of which are included in the Life Science segment, consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | July 31, 2009 | | July 31, 2008 | |
| | | | | |
| | Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net | |
| | | | | | | | | | | | | |
Finite-lived intangible assets: | | | | | | | | | | | | | | | | | | | |
Patents | | $ | 11,027 | | $ | (10,030 | ) | $ | 997 | | $ | 11,027 | | $ | (9,929 | ) | $ | 1,098 | |
Customer relationships | | | 12,125 | | | (1,190 | ) | | 10,935 | | | 8,314 | | | (392 | ) | | 7,922 | |
Non-compete and employment agreements | | | 469 | | | (280 | ) | | 189 | | | 481 | | | (126 | ) | | 355 | |
Website and acquired content | | | 1,005 | | | (303 | ) | | 702 | | | 984 | | | (117 | ) | | 867 | |
Licensed technology and other | | | 588 | | | (83 | ) | | 505 | | | 737 | | | (29 | ) | | 708 | |
Indefinitely-lived intangible assets: | | | | | | | | | | | | | | | | | | | |
Trademarks | | | 8,681 | | | — | | | 8,681 | | | 6,706 | | | — | | | 6,706 | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 33,895 | | $ | (11,886 | ) | $ | 22,009 | | $ | 28,249 | | $ | (10,593 | ) | $ | 17,656 | |
| | | | | | | | | | | | | | | | | | | |
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Estimated amortization expense related to these finite-lived intangible assets for the five succeeding fiscal years ending July 31 is as follows (in thousands):
| | | | |
2010 | | $ | 1,520 | |
2011 | | | 1,421 | |
2012 | | | 1,337 | |
2013 | | | 1,292 | |
2014 | | | 1,211 | |
At July 31, 2009, the weighted average useful lives of amortizable intangible assets were approximately 10 years.
Amortization expense for the years ended July 31, 2009, 2008, and 2007 was $1,277,000, $658,000, and $151,000, respectively.
Note 9 - Income taxes
The Company accounts for income taxes under the provisions of SFAS 109. The (provision) benefit for income taxes is as follows:
| | | | | | | | | | | |
Fiscal year ended July 31, (in 000’s) | | | 2009 | | 2008 | | 2007 | |
| | | | | | | | | |
Current (provision) benefit: | | | | | | | | | | |
Federal | | $ | — | | $ | — | | $ | — | |
State and local | | | (75 | ) | | (320 | ) | | (261 | ) |
Foreign | | | (12 | ) | | (85 | ) | | (2 | ) |
Deferred benefit (provision) | | | — | | | 644 | | | 178 | |
| | | | | | | | | | |
(Provision) benefit for income taxes | | $ | (87 | ) | $ | 239 | | $ | (85 | ) |
| | | | | | | | | | |
Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The components of deferred tax assets (liabilities) as of July 31, 2009 and 2008 are as follows:
| | | | | | | | |
In 000’s | | | July 31, 2009 | | July 31, 2008 | |
| | | | | | | |
Deferred tax assets: | | | | | | | |
Federal tax carryforward losses | | $ | 16,507 | | $ | 10,693 | |
Provision for uncollectible accounts receivable | | | 1,763 | | | 309 | |
State and local tax carry forward losses | | | 2,080 | | | 1,478 | |
Accrued royalties | | | 279 | | | 456 | |
Stock compensation | | | 794 | | | 505 | |
Depreciation | | | 152 | | | 46 | |
Research and development and other tax credit carryforwards | | | 618 | | | 530 | |
Realized and unrealized losses on marketable securities | | | 138 | | | 138 | |
Inventory | | | 261 | | | — | |
Other, net | | | 251 | | | 236 | |
| | | | | | | |
Gross deferred tax assets | | | 22,843 | | | 14,391 | |
| | | | | | | |
| | | | | | | |
Deferred tax liabilities: | | | | | | | |
Deferred patent costs | | | (235 | ) | | (252 | ) |
Inventory | | | — | | | (265 | ) |
Intangibles | | | (2,730 | ) | | (3,039 | ) |
Prepaid expenses | | | (657 | ) | | (686 | ) |
Other, net | | | (84 | ) | | (75 | ) |
| | | | | | | |
Gross deferred tax liabilities | | | (3,706 | ) | | (4,317 | ) |
| | | | | | | |
| | | | | | | |
Net deferred tax assets (liabilities) before valuation allowance | | | 19,137 | | | 10,074 | |
Less: valuation allowance | | | (21,716 | ) | | (12,965 | ) |
| | | | | | | |
Net deferred tax assets (liabilities) | | $ | (2,579 | ) | $ | (2,891 | ) |
| | | | | | | |
F-21
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
At July 31, 2009, the Company had net deferred tax liabilities of approximately $2.6 million which consists primarily of identifiable intangible assets and cumulative tax deductions in excess of book expenses recognized by foreign subsidiaries (see Note 2).
Deferred tax liabilities are included in the consolidated balance sheets as follows:
| | | | | | | | |
In 000’s | | | July 31, 2009 | | July 31, 2008 | |
| | | | | | | |
Deferred taxes: | | | | | | | |
Current | | $ | 213 | | $ | 458 | |
Non-current | | | 2,366 | | | 2,433 | |
| | | | | | | |
| | $ | 2,579 | | $ | 2,891 | |
| | | | | | | |
Pursuant to SFAS 109, the Company recorded a valuation allowance during the year ended July 31, 2009 and 2008 equal to domestic and certain foreign net deferred tax assets. The Company believes that the valuation allowance is necessary as it is not more likely than not that the deferred tax assets will 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.
As of July 31, 2009, the Company had U.S. federal net operating loss carryforwards of approximately $45.8 million. The U.S. federal tax loss carryforwards, if not fully utilized, expire between 2011 and 2029. Utilization is dependent on generating sufficient taxable income prior to expiration of the tax loss carryforwards. As of July 31, 2009, the Company has state and local tax loss carryforwards of approximately $56.8 million.
As a result of the acquisition described in Note 2 – Axxora Acquisition, approximately $1.4 million of the Company’s U.S. federal net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code Section 382 due to the ownership change. However, management does not believe that such a change would have a significant impact on the Company’s ability to utilize its tax loss carryforwards.
The components of loss before income taxes consisted of the following for the years ended July 31:
| | | | | | | | | | | |
In 000’s | | | 2009 | | 2008 | | 2007 | |
| | | | | | | | | |
United States operations | | $ | (21,221 | ) | $ | (9,605 | ) | $ | (12,595 | ) |
International operations | | | (2,256 | ) | | (1,287 | ) | | (580 | ) |
| | | | | | | | | | |
Loss before taxes | | $ | (23,477 | ) | $ | (10,892 | ) | $ | (13,175 | ) |
| | | | | | | | | | |
The benefit (provision) for income taxes were at rates different from U.S. federal statutory rates for the following reasons:
| | | | | | | | | | | |
Year ended July 31, | | | 2009 | | 2008 | | 2007 | |
| | | | | | | | | |
Federal statutory rate | | | 34 | % | | 34 | % | | 34 | % |
Expenses not deductible for income tax return purposes | | | (0.4 | )% | | (1.1 | %) | | (3.0 | %) |
State income taxes, net of (benefit) of federal tax deduction | | | 2.5 | % | | 1.4 | % | | (1.0 | %) |
Change in valuation allowance | | | (37.8 | )% | | (32.9 | %) | | (30.0 | %) |
Other | | | 1.3 | % | | 0.8 | % | | (1.0 | %) |
| | | | | | | | | | |
| | | (0.4 | )% | | 2.2 | % | | (1.0 | %) |
| | | | | | | | | | |
U.S. federal income taxes have not been provided on the undistributed earnings of approximately $238,000 at July 31, 2009 of the Company’s foreign subsidiaries, because the determination of the amount of unrecognized US income tax liability with respect to such earnings is not practicable.
F-22
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
The Company adopted the provisions of FIN 48 on August 1, 2007. The cumulative effect of adopting FIN 48 did not have a material impact on the Company’s financial position or results of operations. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | |
In 000’s | | | | | |
| | | | | | |
Balance at August 1, 2008 | | $ | 291 | |
Additions for tax positions related to prior years | | | — | |
Additions for tax positions related to current year | | | — | |
Reductions for lapse of statute of limitations | | | (157 | ) |
Tax audit settlements | | | (24 | ) |
| | | | |
Balance at July 31, 2009 | | $ | 110 | |
| | | | |
Approximately $97,000 of the FIN 48 liability at July 31, 2009, which relates to the Axxora acquisition described in Note 2, can be completely reduced within the next two months with the lapse of the statute of limitations. The amount, if recognized, would not affect the Company’s effective tax rate.
Interest and penalties related to income tax liabilities are included in income tax expense. During the fiscal year ended July 31, 2009, the Company recognized a net decrease of approximately $2,000. The Company has accrued approximately $24,000 for the payment of interest and penalties as of July 31, 2009 and had accrued approximately $64,000 as of July 31, 2008.
The Company files income tax returns in the U.S. Federal jurisdiction, various U.S. state jurisdictions and several foreign jurisdictions. With few exceptions, the years that remain subject to examination are fiscal July 31, 2006 through fiscal 2008.
Note 10 – Accrued Liabilities and Other Current Liabilities
At July 31, 2009 and 2008, accrued liabilities consist of:
| | | | | | | | |
In 000’s | | | 2009 | | 2008 | |
| | | | | | | |
Legal | | $ | 1,095 | | $ | 1,702 | |
Payroll, benefits, and commissions | | | 2,737 | | | 1,989 | |
Research and development | | | 656 | | | 1,200 | |
Professional fees | | | 1,752 | | | 584 | |
Outside reference lab testing | | | 65 | | | 46 | |
Other | | | 2,121 | | | 1,849 | |
| | | | | | | |
| | $ | 8,426 | | $ | 7,370 | |
| | | | | | | |
At July 31, 2009 and 2008, other current liabilities consist of:
| | | | | | | | |
In 000’s | | | 2009 | | 2008 | |
| | | | | | | |
Deferred revenue | | $ | 850 | | $ | 1,089 | |
Other | | | 212 | | | 72 | |
| | | | | | | |
| | $ | 1,062 | | $ | 1,161 | |
| | | | | | | |
Note 11 – Stockholders’ equity
Common stock offerings
In June 2009, the Company issued 202,196 shares of common stock at a fair value of $1.0 million in connection with the Biomol earn-out of $2.5 million (see Note 2).
During fiscal 2007, the Company entered into two Placement Agent Agreements with Lazard Capital Markets LLC, as exclusive placement agent, relating to “registered direct” offerings (“Offerings”) of shares of the Company’s common stock. In December 2006, the Company entered into a definitive Subscription Agreement with various institutional investors relating to the sale of an aggregate of 3,285,715 shares of common stock for a purchase price of $14.00 per share.
F-23
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Net proceeds from the Offering aggregating $42.9 million, net of placement fees and financing costs of $3.1 million, were credited to common stock and additional paid-in capital. In February 2007, the Company entered into the second definitive Subscription Agreement with an investor for the sale of an aggregate of 1,000,000 shares of common stock for a purchase price of $15.00 per share. Net proceeds from this Offering aggregated $14.1 million, net of placement fees and financing costs of $0.9 million, and were credited to common stock and additional paid in capital. The Company filed prospectus supplements with the SEC relating to the Offerings under a Registration Statement filed and supplement thereto.
Treasury stock
In fiscal 2009, certain officers of the Company exercised 206,576 stock options in a non-cash transaction. The officers surrendered 99,985 shares of previously acquired common stock to exercise the stock options. The Company recorded approximately $1.1 million, the market value of the surrendered shares, as treasury stock.
In fiscal 2009, the Company issued 142,150 shares from treasury stock for its employees’ 401(k) matched contributions obligation. The Company recorded approximately $2.0 million, the average acquisition cost of the shares, as a reduction of treasury stock (see Note 3).
In fiscal 2008, certain officers and a director of the Company exercised 220,158 stock options in a non-cash transaction. The officers and director surrendered 181,263 previously owned shares of the Company’s common stock to exercise the stock options. The Company recorded approximately $2.4 million, the market value of surrendered shares, as treasury stock.
In fiscal 2007, certain officers of the Company exercised 43,112 stock options in a non-cash transaction. The officers surrendered 26,756 shares of previously owned shares of the Company’s common stock to exercise the stock options. The Company recorded approximately $0.4 million, the market value of the surrendered shares, as treasury stock.
Incentive stock option plans
The Company has incentive stock option plans (the “1994 Plan” and “1999 Plan”) and an incentive stock option and restricted stock award plan (the “2005 Plan”), collectively the “Plans”, under which the Company may grant options for up to 1,336,745 common shares under the 1994 plan, options for up to 2,312,356 common shares under the 1999 Plan and options and restricted stock awards for up to 1,000,000 common shares under the 2005 Plan. No additional options may be granted under the 1994 or 1999 Plans. The exercise price of options granted under such plans is equal to or greater than fair market value of the common stock on the date of grant. The options granted pursuant to the plans may be either incentive stock options or non statutory options. Stock options generally become exercisable at 25% per year after one year and expire ten years after the date of grant. The 2005 Plan provides for the issuance of restricted stock and restricted stock unit awards which generally vest over a two to four year period.
As of July 31, 2009, there were approximately 401,000 shares available for grant under the Company’s 2005 Plan.
A summary of the information pursuant to the Company’s stock option plans for the years ended July 31, 2009, 2008, and 2007 is as follows:
| | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
| | Options | | Weighted -
Average
Exercise
Price | | Options | | Weighted -
Average
Exercise
Price | | Options | | Weighted -
Average
Exercise
Price | |
| | | | | | | | | | | | | |
Outstanding at beginning of year | | | 2,275,415 | | $ | 13.13 | | | 2,700,457 | | $ | 13.32 | | | 2,877,727 | | $ | 13.20 | |
Granted | | | — | | $ | — | | | — | | $ | | | | 27,761 | | $ | 17.06 | |
Exercised | | | (251,162 | ) | $ | 5.87 | | | (267,345 | ) | $ | 10.80 | | | (95,525 | ) | $ | 9.60 | |
Cancelled | | | (832,734 | ) | $ | 13.87 | | | (157,697 | ) | $ | 20.42 | | | (109,506 | ) | $ | 14.36 | |
| | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 1,191,519 | | $ | 14.41 | | | 2,275,415 | | $ | 13.13 | | | 2,700,457 | | $ | 13.32 | |
| | | | | | | | | | | | | | | | | | | |
Exercisable at end of year | | | 1,191,519 | | $ | 14.41 | | | 2,250,483 | | $ | 13.12 | | | 2,670,680 | | $ | 13.32 | |
| | | | | | | | | | | | | | | | | | | |
Weighted average fair value of
options granted during year | | | | | $ | — | | | | | | — | | | | | $ | 4.42 | |
| | | | | | | | | | | | | | | | | | | |
F-24
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
The aggregate intrinsic value of stock options exercised during the years ended July 31, 2009, 2008 and 2007, including the non-cash transactions (see Note 3) was $1.4 million, $0.7 million and $0.7 million, respectively. There is no aggregate intrinsic value of options both outstanding and exercisable at July 31, 2009.
The following table summarizes information for stock options outstanding at July 31, 2009:
| | | | | | | | | | |
| | Options outstanding and exercisable | |
| | | |
Range of Exercise prices | | Shares | | Weighted- Average
Remaining
Contractual Life in
years | | Weighted-
Average Exercise
Price | | |
| | | | | | | | |
$8.33-12.25 | | | 621,083 | | | 2.7 | | 11.89 | | |
$12.93-19.02 | | | 544,388 | | | 4.6 | | 16.95 | | |
$20.20-24.84 | | | 26,048 | | | 2.2 | | 21.54 | | |
| | | | | | | | | | |
| | | 1,191,519 | | | | | | | |
| | | | | | | | | | |
During the year ended July 31, 2007, the Company granted 27,761 options under a two year consulting arrangement with a former employee with an exercise price of $17.06 which were fully vested at the inception of the arrangement. The assumptions used to fair value this option grant as of May 2, 2007 were as follows: risk free interest rate of 4.65%, expected term of 2 years, expected volatility of 40%, and no dividend yield. The fair value of the options of approximately $123,000 was recognized as an expense and included in selling, general and administrative expense in the accompanying statement of operations for the year ended July 31, 2007.
Restricted Stock Awards
During fiscal 2009, 2008 and 2007, the compensation committee of the Company’s board of directors approved grants of 291,801, 160,140 and 97,700 of restricted stock and restricted stock unit awards (the “Awards”), respectively, under the 2005 Plan to the Company’s directors, certain officers and employees. The Awards vest upon the recipient’s continued employment or director service ratably over either two, three or four years. Share-based compensation expense is recorded over the vesting period on a straight-line basis. The Awards will be forfeited if the recipient ceases to be employed by or serve as a director of the Company, as defined in the Award grants. The Awards settle in shares of the Company’s common stock on a one-for-one basis. As of July 31, 2009, 377,400 shares were unvested.
A summary of the information pursuant to the Company’s Restricted Stock Awards for the years ended July 31, 2009, 2008 and 2007 is as follows:
| | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
| | Awards | | Weighted -
Average
Award Price | | Awards | | Weighted -
Average
Award Price | | Awards | | Weighted -
Average
Award Price | |
| | | | | | | | | | | | | |
Outstanding at beginning of year | | | 220,240 | | $ | 12.34 | | | 141,062 | | $ | 14.15 | | | 77,450 | | | 12.21 | |
Awarded | | | 291,801 | | $ | 4.05 | | | 160,140 | | $ | 11.42 | | | 97,700 | | $ | 15.16 | |
Vested | | | (128,941 | ) | $ | 12.11 | | | (70,962 | ) | $ | 13.55 | | | (25,913 | ) | | 12.34 | |
Forfeited | | | (5,700 | ) | $ | 10.18 | | | (10,000 | ) | $ | 14.73 | | | (8,175 | ) | $ | 13.60 | |
| | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 377,400 | | $ | 6.05 | | | 220,240 | | $ | 12.34 | | | 141,062 | | $ | 14.15 | |
| | | | | | | | | | | | | | | | | | | |
Weighted average market value of
awards granted during year | | | | | $ | 4.05 | | | | | $ | 11.42 | | | | | $ | 15.16 | |
| | | | | | | | | | | | | | | | | | | |
Note 12 - Employee benefit plan
The Company has a qualified Salary Reduction Profit Sharing Plan (the “Plan”) for eligible U.S. employees under Section 401(k) of the Internal Revenue Code. The Plan provides for voluntary employee contributions through salary reduction and voluntary employer contributions at the discretion of the Company. For the years ended July 31, 2009, 2008, and 2007, the Company authorized employer matched contributions of 50% of the employees’ contribution up to 10% of the employees’ compensation, payable in Enzo Biochem, Inc. common stock. The 401 (k) employer matched contributions expense was approximately 582,000, 481,000, and 421,800, in fiscal years 2009, 2008, and 2007, respectively.
F-25
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
The Company’s Swiss operations provide a pension plan under the Swiss government’s social security system for Swiss employees. Employees are required to contribute based on a formula and the Company’s Swiss operations make contributions of at least 50% of the employee contribution. During the years ended July 31, 2009 and 2008 and the two months ended July 31, 2007, the period after the acquisition of Axxora Life Sciences, Inc., the employer contributions related to the Swiss benefit pension plan was approximately $399,000, $325,000, and $58,000, respectively.
Pension expense at the other international operations was approximately $36,000 and $3,000 for the years ended July 31, 2009 and 2008, respectively
Note 13 – Royalty and other income
In fiscal 2007, The Company as plaintiff and Sigma Aldrich (“Sigma”) entered into a Settlement Agreement and Release (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the Company’s litigation with Sigma was dismissed and the Company recognized a $2 million gain on patent litigation settlement which is included in “Other income” in the accompanying statement of operations for the year ended July 31, 2007 (see Note 16).
In fiscal 2007, the Company received a payment of approximately $699,000 from Perkin Elmer Inc. (“Perkin Elmer”) for amounts due under a Distribution Agreement (the “Distribution Agreement”) which terminated December 31, 2004. The Distribution Agreement is presently subject to a lawsuit for breach of contract, patent infringement, unfair competition under state law, unfair competition under federal law, tortuous interference with business relations, and fraud in the inducement of contract (See Note 16). Perkin Elmer advised in a letter to the Company that the payment was owed under the Distribution Agreement and was delayed because of changes to their accounting system and personnel changes and that it was always their intent to comply with the Distribution Agreement. The Company advised Perkin Elmer that the payment did not represent all amounts owed under the Distribution Agreement. Accordingly, the payment is included in “Other income” in the accompanying statement of operations for the year ended July 31, 2007.
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. Digene Corporation was acquired by QIAGEN. The license agreement with the Company was assigned to QIAGEN Gaithersburg Inc. (“Qiagen”). In addition, the Agreement provides for the Company to receive quarterly running royalties on the net sales of Qiagen 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. During the years ended July 31, 2009, 2008 and 2007, the Company recorded royalty income under the Agreement of approximately $6.7 million, $5.5 million, and $4.7 million, respectively, which is included in the Life Sciences segment.
Note 14 - Licensing and Supply Agreement:
On April 27, 2007 (the “Effective Date”) Enzo Life Sciences, Inc. (“Life Sciences”) and Abbott Molecular Inc. (“Abbott”) entered into a 5 year agreement covering the supply of certain of Enzo Life Sciences products to Abbott for use in their product line. The parties also entered into a limited non-exclusive royalty bearing cross-licensing agreement (“Licensing Agreement”) for various patents. The Licensing Agreement requires each party to pay royalties, as defined through the lives of the related covered patents. In connection with a component of the License Agreement, Abbott paid a one-time fee of $1.5 million relating to a fully paid-up license and sublicense, as defined. The one-time fee will be recognized as revenue over the longest expected patent life. At July 31, 2009, the Company’s balance sheet includes current and non-current deferred revenue of approximately $0.4 and $0.1 million, respectively, relating to the one-time fee. During the years ended July 31, 2009, 2008 and 2007, the Company recorded approximately $2.7 million, $2.1 million and $1.0 million in royalties and license fee income under the Licensing Agreement.
F-26
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Note 15 – Commitments
Leases
The Company leases equipment, office and laboratory space under several non-cancelable operating leases that expire between March 2010 and March 2017. Certain leases include renewal options and rent escalation clauses. An entity owned by certain executive officers/directors of the Company owns the building that the Company leases as its main facility for laboratory operations and certain research operations. In March 2005, the Company amended and extended the lease for another 12 years. In addition to the minimum annual rentals of space, the lease is subject to annual increases, based on the consumer price index. Annual increases are limited to 3% per year. Rent expense, inclusive of real estate taxes, approximated $1,424,000, $1,395,000, and $1,376,000 during fiscal years 2009, 2008, and 2007.
Total rent expense incurred by the Company during fiscal 2009, 2008 and 2007 was approximately $3,818,000, $2,885,000, and $2,510,000, respectively. Minimum future annual rentals under non-cancelable operating leases as of July 31, 2009, are as follows:
| | | | |
Years ended July 31, | | In 000’s | |
| | | | |
2010 | | $ | 4,410 | |
2011 | | | 4,090 | |
2012 | | | 3,105 | |
2013 | | | 2,623 | |
2014 | | | 1,942 | |
Thereafter | | | 4,146 | |
| | | | |
| | $ | 20,316 | |
| | | | |
Employment Agreements
The Company has employment agreements with certain officers that are cancelable at any time but provide for severance pay in the event an officer is terminated by the Company without cause, as defined in the agreements. Unless cancelled earlier, the contracts expire through May 2010. Aggregate minimum compensation commitments, exclusive of any severance provisions, for the years ending July 31, 2010 and 2011 are $1,948,000 and $1,211,000 respectively.
Note 16– Contingences
In October 2002, the Company filed suit in the United States District Court of the Southern District of New York against Amersham plc, Amersham Biosciences, Perkin Elmer, Inc., Perkin Elmer Life Sciences, Inc., Sigma-Aldrich Corporation, Sigma Chemical Company, Inc., Molecular Probes, Inc. and Orchid Biosciences, Inc. In January 2003, the Company amended its complaint to include defendants Sigma Aldrich Co. and Sigma Aldrich, Inc. The counts set forth in the suit are for breach of contract; patent infringement; unfair competition under state law; unfair competition under federal law; tortious interference with business relations; and fraud in the inducement of contract. The complaint alleges that these counts arise out of the defendants’ breach of distributorship agreements with the Company concerning labeled nucleotide products and technology, and the defendants’ infringement of patents covering the same. In April, 2003, the court directed that individual complaints be filed separately against each defendant. The defendants have answered the individual complaints and asserted a variety of affirmative defenses and counterclaims.
F-27
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Fact discovery is ongoing. The court issued a claim construction opinion on July 10, 2006. The Company and Sigma Aldrich (“Sigma”) entered into a Settlement Agreement and Release effective September 15, 2006 (the “Agreement”). Pursuant to the Agreement, the Company’s litigation with Sigma was dismissed and the Company recognized $2 million on settlement in the quarter ending October 31, 2006. On January 3, 2007, the remaining defendants moved for summary judgment on all counts in the individual complaints. During a two-day hearing held on July 17 through July 18, 2007, the defendants subsequently withdrew the invalidity portion of their summary judgment motions. The court has yet to rule on the pending summary judgment motions. There can be no assurance that the Company will be successful with the remaining outstanding litigation. However, even if the Company is not successful, management does not believe that there will be a significant adverse monetary impact to the Company. The Company has not recorded revenue under these distribution agreements in fiscal 2009, 2008 and 2007. The Company recorded other income from Perkin Elmer in fiscal 2007 (See Note 13).
On October 28, 2003, the Company and Enzo Life Sciences, Inc., filed suit in the United States District Court of the Eastern District of New York against Affymetrix, Inc (“Affymetrix”). The Complaint alleges that Affymetrix improperly transferred or distributed substantial business assets of the Company to third parties, including portions of the Company’s proprietary technology, reagent systems, detection reagents and other intellectual property. The Complaint also charges that Affymetrix failed to account for certain shortfalls in sales of the Company’s products, and that Affymetrix improperly induced collaborators and customers to use the Company’s products in unauthorized fields or otherwise in violation of the agreement. The Complaint seeks full compensation from Affymetrix to the Company for its substantial damages, in addition to injunctive and declaratory relief to prohibit, among other things, Affymetrix’s unauthorized use, development, manufacture, sale, distribution and transfer of the Company’s products, technology, and/or intellectual property, as well as to prohibit Affymetrix from inducing collaborators, joint venture partners, customers and other third parties to use the Company’s products in violation of the terms of the agreement and the Company’s rights. Subsequent to the filing of the Complaint against Affymetrix, Inc. referenced above, on or about November 10, 2003, Affymetrix, Inc. filed its own Complaint against the Company and its subsidiary, Enzo Life Sciences, Inc., in the United States District Court for the Southern District of New York, seeking among other things, declaratory relief that Affymetrix, Inc., has not breached the parties’ agreement, that it has not infringed certain of Enzo’s Patents, and that certain of Enzo’s patents are invalid. The Affymetrix Complaint also seeks damages for alleged breach of the parties’ agreement, unfair competition, and tortuous interference, as well as certain injunction relief to prevent alleged unfair competition and tortuous interference. The Company does not believe that the Affymetrix Complaint has any merit and intends to defend vigorously. Affymetrix also moved to transfer venue of Enzo’s action to the Southern District of New York, where other actions commenced by Enzo were pending as well as Affymetrix’s subsequently filed action. On January 30, 2004, Affymetrix’s motion to transfer was granted. Accordingly, the Enzo and Affymetrix actions are now both pending in the Southern District of New York. Initial pleadings have been completed and discovery has commenced. The Court issued a Markman (claim construction) opinion on July 10, 2006. The Company has not recorded any revenue from Affymetrix during the fiscal years ended July 31, 2009, 2008 or 2007.
On June 2, 2004, Roche Diagnostic GmbH and Roche Molecular Systems, Inc. (collectively “Roche”) filed suit in the U.S. District Court of the Southern District of New York against Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (collectively “Enzo”). The Complaint was filed after Enzo rejected Roche’s latest cash offer to settle Enzo’s claims for,inter alia, alleged breach of contract and misappropriation of Enzo’s assets. The Complaint seeks declaratory judgment (i) of patent invalidity with respect to Enzo’s 4,994,373 patent (the “‘373 patent”), (ii) of no breach by Roche of its 1994 Distribution and Supply Agreement with Enzo (the “1994 Agreement”), (iii) that non-payment by Roche to Enzo for certain sales of Roche products does not constitute a breach of the 1994 Agreement, and (iv) that Enzo’s claims of ownership to proprietary inventions, technology and products developed by Roche are without basis. In addition, the suit claims tortious interference and unfair competition. The Company does not believe that the Complaint has merit and intends to vigorously respond to such action with appropriate affirmative defenses and counterclaims. Enzo filed an Answer and Counterclaims on November 3, 2004 alleging multiple breaches of the 1994 Agreement and related infringement of Enzo’s ‘373 patent. Discovery has commenced. The Court issued a Markman opinion on July 10, 2006. The Company did not record any revenue from Roche during the fiscal years ended July 31, 2009, 2008 or 2007. The Roche agreement remains in force to date.
On June 7, 2004, the Company and Enzo Life Sciences, Inc., filed suit in the United States District Court for the District of Connecticut against Applera Corporation and its wholly-owned subsidiary Tropix, Inc. The complaint alleges infringement of six patents (relating to DNA sequencing systems, labeled nucleotide products, and other technology).
F-28
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Yale University is the owner of four of the patents and the Company is the exclusive licensee. These four patents are commonly referred to as the “Ward” patents. Accordingly, Yale is also a plaintiff in the lawsuit. Yale and Enzo are aligned in protecting the validity and enforceability of the patents. Enzo Life Sciences is the owner of the remaining two patents. The complaint seeks permanent injunction and damages (including treble damages for willful infringement). Defendants answered the complaint on July 29, 2004. The answer pleads affirmative defenses of invalidity, estoppels and laches and asserts counterclaims of non-infringement and invalidity. A Markman hearing was held on May 25, 2006 and the district court issued a ruling on October 12, 2006. On August 17, 2007, the Company voluntarily dismissed the infringement claims for one of the patents in suit without prejudice. Defendants similarly dismissed their defenses and counterclaims as to that patent. On the same date, the Company conceded a judgment of non-infringement for another of the patents in suit based on the district court’s claim construction, reserving the right to appeal their construction. The defendants filed motions for summary judgment for invalidity, laches and non-infringement of the Ward patents on March 5, 2007. The Company and other plaintiff filed a motion for summary judgment on infringement of the Ward patents on March 5, 2007. On August 20, 2007, the district court heard oral arguments on the motions for summary judgment. On September 6, 2007, the court granted defendants’ motion for summary judgment of invalidity of three of the remaining Ward patents and entered judgment to that effect. The Company and other plaintiff filed a notice of appeal to the United States Court of Appeals for the Federal Circuit on September 7, 2007. On January 30, 2008, the Court of Appeals for the Federal Circuit granted the Company’s alternative motion to dismiss its appeal and remand to the Connecticut Court for further proceedings incident to an entry of a final, appealable judgment. The Company requested the Connecticut Court to dispose of all outstanding issues (including the Company’s claim under the fourth Ward patent and certain counterclaims of Applera’s) and enter final judgment. The Connecticut Court granted this request. The Company subsequently filed an Appeal on April 7, 2009. Briefing is completed and the matter has not yet been set for submission or argument. The Company and other plaintiff intend to vigorously argue this appeal; however, the outcome of the appeal cannot be anticipated at this time. If the appeal is granted, there can be no assurance that the Company will be successful in this litigation. Even if the Company is not successful, management does not believe that there will be a significant adverse monetary impact on the Company.
In January 2006, the Company was named along with certain of its officers and directors among others, in several complaints titled Francis Scott Hunt, et al. v. Enzo Biochem Inc., et al., Index No. 06-CV-00170 (SAS) and Ken Roberts v. Enzo Biochem, Inc. et al., Index No. 06-CV-00213 (SAS), and Paul Lewicki v. Enzo Biochem Inc., et al., Index No. 06-CV-06347 (SAS) based only upon a claim for common law fraud. These three consolidated actions were all filed in the United States District Court for the Southern District of New York (“the Court”). The actions seek damages in excess of $8 million and are all based on allegations of a fraudulent scheme to pump and dump Enzo securities as was initially set forth in a previous action (filed by the same attorney) which was dismissed by the Eastern District of Virginia and such dismissal was thereafter affirmed by the Fourth Circuit Court of Appeals and is now final since the U.S. Supreme Court denied a petition for certiorari. The Company and the other defendants likewise moved to dismiss all of the Complaints in these actions and that motion was granted by the Court. As a result, some of the Plaintiffs were no longer able to pursue their claims or choose not to pursue them further. Other Plaintiffs amended their Complaints and the Company and the other defendants moved once again to dismiss those Amended Complaints. The Court granted in part and denied in part those motions. The remaining Plaintiffs then conducted discovery, and following the completion of discovery, the Company and other defendants moved for summary judgment dismissal of the Amended Complaints. The Court recently granted the defendants’ motion and dismissed all the Amended Complaints. Several of the Plaintiffs then filed a notice of appeal to the Second Circuit Court of Appeals. The Company believes that the latest complaints in these actions have no merit and that the appeals also lacks merit. The Company will continue to defend these actions vigorously.
Shahram K. Rabbani (“Mr. Rabbani”), the Secretary and Treasurer and a member of the board of directors of the Company and the former President of Enzo Clinical Labs, Inc., in connection with the termination of his employment, submitted on April 30, 2009 a demand for arbitration and related statement of claim to the American Arbitration Association. The statement of claim names the Company, Dr. Elazar Rabbani, the Chairman of the Board and Chief Executive Officer of the Company, and Barry W. Weiner, the President and Chief Financial Officer and a member of the board of directors of the Company, as respondents and alleges, among other things, claims relating to the termination of Mr. Rabbani’s employment as President of Clinical Labs. The statement of claim purports to allege claims for breach of contract against the Company, unlawful retaliation under the Sarbanes-Oxley’s whistleblower statute (the “Claims”) against the Company, Dr. Rabbani and Mr. Weiner, and tortious interference with contract against Dr. Rabbani and Mr. Weiner. Mr. Rabbani seeks damages of no less than $10 million including attorneys’ fees, costs, and punitive damages. The Company believes the Claims are without merit and intends to defend vigorously against them.
F-29
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
Subsequent to April 30, 2009, the Company conducted a review, as directed by a special committee of the Board of Directors, relating to the aforementioned Claims pertaining to Enzo Clinical Labs. The review concluded that the purported Claims were unsubstantiated.
On September 18, 2009, Mr. Rabbani amended his statement of claim to add a claim for defamation against the Company and a claim against the Company, Dr. Rabbani and Mr. Weiner seeking a declaratory judgment. The Company also believes these additional claims are without merit and intends to defend vigorously against them
The Company is party to other claims, legal actions and complaints that arise in the ordinary course of business. The Company believes that any liability that may ultimately result from the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on its financial position or results of operations.
Note 17 – Segment reporting
The Company has three reportable segments: Life Sciences, Therapeutics and Clinical Labs. The Company’s Life Sciences segment develops, manufactures, and markets products to research and pharmaceutical customers. The Company’s Therapeutic segment conducts research and development activities for therapeutic drug candidates. The Clinical Labs 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 three 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.
F-30
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
The following financial information (in thousands) represents the operating results of the reportable segments of the Company:
| | | | | | | | | | | | | | | | | |
Year ended July 31, 2009 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Revenues: | | | Life Sciences | | Therapeutics | | Clinical Labs | | Other | | Consolidated | |
| | | | | | | | | | | | | |
Product revenues | | $ | 40,592 | | | | | | | | | | | $ | 40,592 | |
Royalty income and license fee income | | | 9,376 | | | | | | | | | | | | 9,376 | |
Clinical laboratory services | | | | | | | | $ | 39,604 | | | | | | 39,604 | |
| | | | | | | | | | | | | | | | |
| | | 49,968 | | | | | | 39,604 | | | | | | 89,572 | |
| | | | | | | | | | | | | | | | | |
Cost and expenses and other (income): | | | | | | | | | | | | | | | | |
Cost of product revenues | | | 26,766 | | | | | | | | | | | | 26,766 | |
Cost of clinical laboratory services | | | | | | | | | 26,295 | | | | | | 26,295 | |
Research and development | | | 5,855 | | $ | 3,365 | | | | | | | | | 9,220 | |
Provision for uncollectible accounts | | | | | | | | | 5,189 | | | | | | 5,189 | |
Selling, general and administrative and legal | | | 14,938 | | | | | | 15,498 | | $ | 15,073 | | | 45,509 | |
Interest income | | | | | | | | | (57 | ) | | (524 | ) | | (581 | ) |
Other income | | | (25 | ) | | | | | (49 | ) | | | | | (74 | ) |
Foreign exchange loss (gain) | | | 725 | | | | | | | | | | | | 725 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 1,709 | | $ | (3,365 | ) | $ | (7,272 | ) | $ | (14,549 | ) | $ | (23,477 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Depreciation and amortization included above | | $ | 2,350 | | $ | 50 | | $ | 946 | | $ | 116 | | $ | 3,462 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Share - based compensation included in | | | | | | | | | | | | | | | | |
Cost of products | | | | | | | | $ | 8 | | | | | $ | 8 | |
Research and development | | $ | 13 | | | | | | | | | | | | 13 | |
Selling, general and administrative and legal | | | 128 | | $ | 119 | | | 135 | | $ | 1,032 | | | 1,414 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 141 | | $ | 119 | | $ | 143 | | $ | 1,032 | | $ | 1,435 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 1,334 | | $ | 78 | | | 1,253 | | $ | 44 | | $ | 2,709 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Year ended July 31, 2008 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Revenues: | | | Life Sciences | | Therapeutics | | Clinical Labs | | Other | | Consolidated | |
| | | | | | | | | | | | | |
Product revenues | | $ | 28,087 | | | | | | | | | | | $ | 28,087 | |
Royalty and license fee income | | | 7,630 | | | | | | | | | | | | 7,630 | |
Clinical laboratory services | | | | | | | | $ | 42,078 | | | | | | 42,078 | |
| | | | | | | | | | | | | | | | |
| | | | 35,717 | | | | | | 42,078 | | | | | | 77,795 | |
| | | | | | | | | | | | | | | | | |
Cost and expenses and other (income): | | | | | | | | | | | | | | | | |
Cost of product revenues | | | 19,159 | | | | | | | | | | | | 19,159 | |
Cost of clinical laboratory services | | | | | | | | | 22,209 | | | | | | 22,209 | |
Research and development | | | 3,473 | | $ | 5,164 | | | | | | | | | 8,637 | |
Provision for uncollectible accounts | | | | | | | | | 3,716 | | | | | | 3,716 | |
Selling, general and administrative and legal | | | 9,779 | | | | | | 14,349 | | $ | 14,732 | | | 38,860 | |
Interest income | | | | | | | | | (239 | ) | | (3,457 | ) | | (3,696 | ) |
Other income | | | (71 | ) | | (100 | ) | | | | | | | | (171 | ) |
Foreign exchange loss (gain) | | | (27 | ) | | | | | | | | | | | (27 | ) |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 3,404 | | $ | (5,064 | ) | $ | 2,043 | | $ | (11,275 | ) | $ | (10,892 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Depreciation and amortization included above | | $ | 1,138 | | $ | 35 | | $ | 853 | | $ | 120 | | $ | 2,146 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Share - based compensation included in | | | | | | | | | | | | | | | | |
Cost of products | | $ | 8 | | | | | $ | 6 | | | | | $ | 14 | |
Research and development | | | 34 | | $ | 63 | | | | | | | | | 97 | |
Selling, general and administrative and legal | | | 129 | | | | | | 247 | | $ | 1,079 | | | 1,455 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 171 | | $ | 63 | | $ | 253 | | $ | 1,079 | | $ | 1,566 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 2,308 | | $ | 63 | | $ | 797 | | $ | 63 | | $ | 3,231 | |
| | | | | | | | | | | | | | | | |
F-31
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
| | | | | | | | | | | | | | | | | |
Year ended July 31, 2007 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Revenues: | | Life Sciences | | Therapeutics | | Clinical Labs | | Other | | Consolidated | |
| | | | | | | | | | | | | |
Product revenues | | $ | 6,658 | | | | | | | | | | | $ | 6,658 | |
Royalty and license fee income | | | 5,820 | | | | | | | | | | | | 5,820 | |
Clinical laboratory services | | | | | | | | $ | 40,430 | | | | | | 40,430 | |
| | | | | | | | | | | | | | | | |
| | | 12,478 | | | | | | 40,430 | | | | | | 52,908 | |
| | | | | | | | | | | | | | | | |
Cost and expenses and other (income): | | | | | | | | | | | | | | | | |
Cost of product revenues | | | 5,034 | | | | | | | | | | | | 5,034 | |
Cost of clinical laboratory services | | | | | | | | | 19,151 | | | | | | 19,151 | |
Research and development | | | 3,349 | | $ | 6,044 | | | | | | | | | 9,393 | |
Provision for uncollectible accounts | | | | | | | | | 4,653 | | | | | | 4,653 | |
Selling, general and administrative and legal | | | 2,772 | | | | | | 13,451 | | $ | 19,420 | | | 35,643 | |
Interest income | | | | | | | | | (99 | ) | | (4,993 | ) | | (5,092 | ) |
Other income | | | (2,699 | ) | | | | | | | | | | | (2,699 | ) |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 4,022 | | $ | (6,044 | ) | $ | 3,274 | | $ | (14,427 | ) | $ | (13,175 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Depreciation and amortization included above | | $ | 288 | | $ | 16 | | $ | 838 | | $ | 47 | | $ | 1,189 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Share - based compensation included in | | | | | | | | | | | | | | | | |
Cost of products | | $ | 10 | | | | | | | | | | | $ | 10 | |
Research and development | | | 51 | | $ | 111 | | | | | | | | | 162 | |
Selling, general and administrative and legal | | | 66 | | | | | $ | 358 | | $ | 881 | | | 1,305 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 127 | | $ | 111 | | $ | 358 | | $ | 881 | | $ | 1,477 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 106 | | $ | 82 | | $ | 698 | | $ | 562 | | $ | 1,448 | |
| | | | | | | | | | | | | | | | |
Geographic financial information is as follows (in thousands):
| | | | | | | | | | |
Net sales to unaffiliated customers: | | 2009 | | 2008 | | 2007 | |
| | | | | | | |
United States | | $ | 75,936 | | $ | 62,243 | | $ | 50,051 | |
Switzerland | | | 6,487 | | | 9,142 | | | 945 | |
United Kingdom | | | 2,517 | | | 2,127 | | | 272 | |
Other international countries | | | 4,632 | | | 4,283 | | | 1,640 | |
| | | | | | | | | | |
Total | | $ | 89,572 | | $ | 77,795 | | $ | 52,908 | |
| | | | | | | | | | |
| | | | | | | | | | |
Long-lived assets at July 31, | | 2009 | | 2008 | | 2007 | |
| | | | | | | |
United States | | $ | 45,896 | | $ | 34,202 | | $ | 21,438 | |
Switzerland | | | 7,075 | | | 7,437 | | | 6,652 | |
United Kingdom | | | 3,334 | | | 4,193 | | | — | |
Other international countries | | | 1,923 | | | 2,198 | | | 1,545 | |
| | | | | | | | | | |
Total | | $ | 58,228 | | $ | 48,030 | | $ | 29,635 | |
| | | | | | | | | | |
F-32
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009 and 2008
The Company’s reportable segments are determined based on the services they perform, the products they sell, and the royalties and license fee income they earn, not on the geographic area in which they operate. The Company’s Clinical Labs segment operates 100% in the United States with all revenue derived from that country. The Life Sciences segment earns product revenue both in the United States and foreign countries and royalty and license fee income in the United States. The following is a summary of the Life Sciences segment revenues attributable to customers located in the United States and foreign countries:
| | | | | | | | | | | |
In 000’s | | | 2009 | | 2008 | | 2007 | |
| | | | | | | | | |
United States | | $ | 36,332 | | $ | 20,165 | | $ | 9,621 | |
Foreign countries | | | 13,636 | | | 15,552 | | | 2,857 | |
| | | | | | | | | | |
| | $ | 49,968 | | $ | 35,717 | | $ | 12,478 | |
| | | | | | | | | | |
Note 18 – Summary of Selected Quarterly Financial Data (unaudited)
The following table contains statement of operations information for each quarter of the years ended July 31, 2009 and 2008. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Unaudited quarterly financial data (in thousands, except per share amounts) for fiscal 2009 and 2008 is summarized as follows:
| | | | | | | | | | | | | | |
| | Quarter Ended | |
| | | |
Fiscal 2009 | | October 31,
2008 | | January 31,
2009 | | April 30,
2009 | | July 31,
2009 | |
| | | | | | | | | | |
Total revenues | | $ | 21,065 | | $ | 20,916 | | $ | 23,061 | | $ | 24,530 | |
Gross profit | | | 8,168 | | | 8,007 | | | 9,706 | | | 10,630 | |
Loss before income taxes | | | (6,233 | ) | | (7,567 | ) | | (4,226 | ) | | (5,451 | ) |
Net loss | | | (6,372 | ) | | (7,673 | ) | | (4,242 | ) | | (5,277 | ) |
Basic loss per common share | | $ | (0.18 | ) | $ | (0.20 | ) | $ | (0.11 | ) | $ | (0.14 | ) |
Diluted loss per common share | | $ | (0.18 | ) | $ | (0.20 | ) | $ | (0.11 | ) | $ | (0.14 | ) |
| | | | | | | | | | | | | |
| | Quarter Ended | |
| | | |
Fiscal 2008 | | October 31,
2007 | | January 31,
2008 | | April 30,
2008 | | July 31,
2008 | |
| | | | | | | | | | |
Total revenues | | $ | 19,447 | | $ | 18,224 | | $ | 18,948 | | $ | 21,176 | |
Gross profit | | | 9,632 | | | 8,795 | | | 9,082 | | | 8,918 | |
Loss before income taxes | | | (1,347 | ) | | (4,013 | ) | | (1,940 | ) | | (3,592 | ) |
Net loss | | | (1,232 | ) | | (4,055 | ) | | (2,107 | ) | | (3,259 | ) |
Basic loss per common share | | $ | (0.03 | ) | $ | (0.11 | ) | $ | (0.06 | ) | $ | (0.09 | ) |
Diluted loss per common share | | $ | (0.03 | ) | $ | (0.11 | ) | $ | (0.06 | ) | $ | (0.09 | ) |
F-33
ENZO BIOCHEM, INC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 2009, 2008 and 2007
(in thousands)
| | | | | | | | | | | | | | | | | | | |
Year ended
July 31, | | Description | | Balance at
Beginning
of period | | Charged
(credited) to
costs
and expenses | | Charged
to other
accounts | | Deductions | | Balance at
end of period | |
| | | | | | | | | | | | | | |
2009 | | | Allowance for doubtful accounts receivable | | 886 | | | 5,189 | | | | | | 1,289 | (1) | 4,786 | | |
| | | | | | | | | | | | | | | | | | |
2008 | | | Allowance for doubtful accounts receivable | | 1,404 | | | 3,716 | | | — | | | 4,234 | (1) | 886 | | |
| | | | | | | | | | | | | | | | | | |
2007 | | | Allowance for doubtful accounts receivable | | 1,033 | | | 4,653 | | | — | | | 4,282 | (1) | 1,404 | | |
| | | | | | | | | | | | | | | | | | |
2009 | | | Deferred tax valuation allowance | | 12,965 | | | 8,751 | | | — | | | — | | 21,716 | | |
| | | | | | | | | | | | | | | | | | |
2008 | | | Deferred tax valuation allowance | | 9,385 | | | 3,580 | | | — | | | — | | 12,965 | | |
| | | | | | | | | | | | | | | | | | |
2007 | | | Deferred tax valuation allowance | | 4,856 | | | 5,220 | | | — | | | 691 | (2) | 9,385 | | |
| | | | | | | | | | | | | | | | | | |
2009 | | | Reserve for obsolete inventory | | 637 | | | 378 | | | | | | 10 | | 1,005 | | |
| | | | | | | | | | | | | | | | | | |
2008 | | | Reserve for obsolete inventory | | 379 | | | 283 | | | — | | | 25 | (3) | 637 | | |
| | | | | | | | | | | | | | | | | | |
2007 | | | Reserve for obsolete inventory | | 238 | | | 337 | | | — | | | 196 | (3) | 379 | | |
| | |
| (1) | Write-off of uncollectible accounts receivable. |
| | |
| (2) | Utilization of deferred tax assets |
| | |
| (3) | Write-off of obsolete inventory |
S-1
