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. 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. On March 13, 2009, the court denied defendants’ summary judgment motion and stayed the cases pending resolution of an appeal to the United States Court of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc.
On March 26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of Connecticut’s grant of summary judgment of invalidity as to various patents at issue in the Applera case, and remanded the Applera case for further proceedings consistent with the Federal Circuit’s opinion. On September 23, 2010, Applera petitioned the Supreme Court of the United States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court denied Applera’s petition for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Amersham action. On August 26, 2011, the court allowed the defendants to renew their motions for summary judgment related only to alleged non-infringement of some of the patents in suit. Defendants’ initial brief is to be filed by October 11, 2011, and all briefing is to be completed by December 16, 2011. The Company does not believe the defendants’ motion has merit, and will oppose it vigorously.
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. On January 3, 2007, Affymetrix moved for summary judgment on all counts of the Complaint. A two-day hearing on Affymetrix’s summary judgment motion was held on July 17 through July 18, 2007. On March 13, 2009, the court denied Affymetrix’s motion and stayed the case pending resolution of an appeal in the United States Court of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc. On March 26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of Connecticut’s grant of summary judgment of invalidity as to various patents at issue in the Applera case, and remanded the Applera case for further proceedings consistent with the Federal Circuit’s opinion. In light of the Federal Circuit’s remand of the Applera case to the District of Connecticut and the impending trial, on May 27, 2010, the court maintained its stay of the Affymetrix case until further notice. On September 23, 2010, Applera petitioned the Supreme Court of the United States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court denied Applera’s petition for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Affymetrix action. On August 26, 2011, the court allowed Affymetrix to renew its motion for summary judgment related only to alleged non-infringement of one patent in suit. Affymetrix’s initial brief is to be filed by October 11, 2011, and all briefing is to be completed by December 16, 2011. The Company does not believe Affymetrix’s motion has merit, and will oppose it vigorously.
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 patents. Discovery has commenced. The Court issued a Markman opinion on July 10, 2006. On January 3, 2007, Roche moved for summary judgment on all counts of the Complaint. During a two-day hearing held on July 17 through July 18, 2007, Roche subsequently withdrew its invalidity portion of its summary judgment motion.
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On March 13, 2009, the court denied Roche’s motion and stayed the cases pending resolution of an appeal to the United States Court of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc. On March 26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of Connecticut’s grant of summary judgment of invalidity as to various patents at issue in the Applera case, and remanded the Applera case for further proceedings consistent with the Federal Circuit’s opinion. In light of the Federal Circuit’s remand of the Applera case to the District of Connecticut and the impending trial, on May 27, 2010, the court maintained its stay of the Roche case until further notice. On September 23, 2010, Applera petitioned the Supreme Court of the United States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court denied Applera’s petition for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Roche action. On August 26, 2011, the court allowed Roche to renew its motion for summary judgment related only to alleged non-infringement of some of the patents in suit. Roche’s initial brief is to be filed by October 11, 2011, and all briefing is to be completed by December 16, 2011. The Company does not believe Roche’s motion has merit, and will oppose it vigorously.
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). 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. On March 26, 2010, the Federal Circuit issued an order concluding that the claims of U.S. Patent Nos. 5,328,824 and 5,449,767 were not indefinite and that there were genuine issues of material fact as to anticipation. The Court reversed the district court’s summary judgment of invalidity of those two patents and remanded the case back to the Connecticut Court. Applera and Tropix then filed a combined petition for panel rehearing and rehearing en banc. On May 26, 2010, the Federal Circuit issued an order denying both petitions. Applera filed a petition with the U.S. Supreme Court for a writ of certiorari on September 23, 2010. On June 19, 2011, the Court denied that petition. The case is currently scheduled for trial in February of 2012. 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.
On or about March 6, 2002, an action was commenced against the Company and certain officers and directors, by an investor in the Company, Lawrence Glazer and on behalf of others, who had filed for bankruptcy protection. The complaint alleged securities and common law fraud and breach of fiduciary duty and sought in excess of $150 million in damages. On August 22, 2002, the complaint was voluntarily dismissed; however a new substantially similar complaint was filed at the same time. On October 21, 2002, the Company and the other defendants filed a motion to dismiss the complaint, and the plaintiffs responded by amending the complaint and dropping their claims against defendants Keating and Yates. On November 18, 2002, the Company and the other defendants again moved to dismiss the Amended Complaint. On July 16, 2003, the Court issued a Memorandum Opinion dismissing the Amended Complaint in its entirety with prejudice. Plaintiffs thereafter moved for reconsideration but the Court denied the motion on September 8, 2003. Plaintiffs thereafter appealed the decision to the United States Court of Appeals for the Fourth Circuit. On March 21, 2005, the Fourth Circuit affirmed the lower Court’s prior dismissal of all claims asserted in the action with the sole exception of a portion of the claim for common law fraud and remanded that remaining portion of the action to the U.S. District Court for the Eastern District of Virginia. On May 20, 2005, defendants again moved the District Court to dismiss the sole remaining claim before it.
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On July 14, 2005, the District Court granted defendants’ renewed motion to dismiss. On July 29, 2005, Plaintiffs moved to amend their Complaint and for reconsideration. On August 19, 2005, the Court denied Plaintiffs’ motion to amend and entered final judgment dismissing the Complaint. Plaintiffs then appealed the order and judgment to the Fourth Circuit. On September 21, 2006, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of the Complaint. Thereafter, in March 2007, the United States Supreme Court denied the Glasers’ Petition for Certiorari. Nevertheless, on January 14, 2011, many years after it was finally dismissed, Glaser filed a motion for reconsideration of the dismissal of his case with the United States District Court for the Eastern District of Virginia, along with a motion for sanctions, claiming in pertinent part that the Court was defrauded. The Company filed papers in opposition to the motion and, on April 1, 2011, the Court denied Glaser’s motion. Glaser subsequently appealed that dismissal to the Fourth Circuit. On October 4, 2011, his appeal was denied. The Company intends to defend vigorously any further effort by Glaser to re-open this long ago dismissed action.
In January 2006, three actions were filed against the Company and certain of its officers and directors by Francis Scott Hunt and others. These actions were filed by the same attorney who had previously filed a virtually identical claim against the Company and certain of its officers and directors in the Eastern District of Virginia. These actions are in many respects identical to the Glaser action. The first action (Hunt) was filed on or about January 10, 2006, on behalf of seven alleged shareholders. The second action (Roberts) was filed on or about January 11, 2006, and was ultimately consolidated at the Company’s request with the Hunt Action before Judge Scheindlin. One of the plaintiffs in the first action, Paul Lewicki, subsequently withdrew his claim for procedural reasons and re-filed a separate virtually identical complaint (the third action listed above) on or about August 21, 2006, and the Lewicki Action was also consolidated before Judge Scheindlin. The pleadings in all three actions are virtually identical and seek to set forth only a claim for common law fraud, based on the same essential allegations set forth in the Glaser Action,i.e., that there was a fraudulent scheme approximately ten years ago to pump and dump Enzo securities. The Company and the other defendants moved to dismiss all of the Complaints and that motion was granted by Judge Scheindlin. The Plaintiffs then amended their Complaints and the Hunts moved for reconsideration. The Company and the other defendants opposed the motion for reconsideration and moved again to dismiss the Amended Complaints that were filed. The Hunts’ motion for reconsideration was denied and two of the other Plaintiffs (the McMahons) thereafter withdrew their complaint with prejudice voluntarily. After further delays during which the remaining Plaintiffs hired new counsel, Plaintiffs proposed yet another revised Complaint. The defendants’ motions to dismiss the latest version of the Complaints of the remaining Plaintiffs was granted in part and denied in part. The remaining plaintiffs and defendants, including Enzo Biochem, Inc., then proceeded with discovery. Following the completion of discovery, the defendants moved for summary judgment. On June 15, 2009, Judge Scheindlin granted the remaining defendants’ motion for summary judgment and dismissed the complaints. The remaining Plaintiffs then filed a notice of appeal to the Second Circuit Court of Appeals. On August 30, 2011, the Second Circuit denied the appeal. The remaining Plaintiffs then moved for a rehearing, and that motion is currently pending. The Company continues to believe that these actions have no merit whatsoever and expects the Second Circuit to reaffirm the denial of their appeal. In any event, the Company will continue to defend these actions vigorously.
On or about September 22, 2010, Mayflower Partners, L.P. f/k/a Biomol International, L.P. (“Mayflower”) filed an action against Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (together “Enzo”) in the United States District Court for the Southern District of New York, alleging breach of the stock and asset purchase agreement dated as of May 8, 2008 between Enzo and Mayflower (the “Agreement”). Pursuant to the Agreement, the Company acquired the assets of Mayflower, and agreed, among other things, to make certain contingent earn-out payments to Mayflower, accounted for as additional purchase price consideration, if certain performance thresholds were met for each of the two annual periods following the closing. Mayflower alleges that Enzo breached the Agreement by allegedly failing to operate the acquired business in good faith during the second earn-out period and engaging in conduct the primary purpose of which was to avoid making a second earn-out period payment under the Agreement. In addition, Mayflower claims that Enzo breached the Agreement by allegedly failing to provide the documentation appropriate to support the calculation of defined financial criteria for the second earn-out period as required under the Agreement. As part of the litigation, Mayflower moved by Order to Show cause to enjoin the accounting procedure specified under the Agreement. Mayflower’s motion was heard by a U.S. District Court Judge on September 27, 2010, who directed that the parties first go forward with the accounting procedure, as provided under the Agreement, before moving further with the litigation. The parties were unable to resolve the dispute through the accounting procedure. On January 27, 2011, Mayflower filed an amended complaint. On February 25, 2011, Enzo filed an answer to the amended complaint and on March 4, 2011 filed an amended counterclaim seeking fees and expense of the suit as provided under the Agreement. As provided under the Agreement, Mayflower’s maximum contingent earn-out was $2.5 million payable in either Enzo common stock or cash. The Company and Mayflower are currently negotiating a resolution to the second and final earn-out dispute and based on such negotiation the Company has accrued a $1.15 million settlement, expected to be in cash, which has been recorded in Goodwill as additional purchase price consideration. The Company recorded the liability in Other Current Liabilities.
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The Company is party to other claims, legal actions, complaints, and contractual disputes 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.
Item 4. (Removed and Reserved)
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common stock of the Company is traded on the New York Stock Exchange (Symbol: ENZ). The following table sets forth the high and low price of the Company’s common stock for the periods indicated as reported on the New York Stock Exchange.
| | | | | | | |
2011 Fiscal Year (August 1, 2010 to July 31, 2011): | | | | | | | |
| | High | | Low | |
| |
| |
| |
| | | | | | | |
1st Quarter | | $ | 4.62 | | $ | 3.37 | |
2nd Quarter | | $ | 5.80 | | $ | 4.16 | |
3rd Quarter | | $ | 5.09 | | $ | 3.46 | |
4th Quarter | | $ | 4.74 | | $ | 3.52 | |
| | | | | | | |
2010 Fiscal Year (August 1, 2009 to July 31, 2010): | | | | | | | |
| | High | | Low | |
| |
| |
| |
| | | | | | | |
1st Quarter | | $ | 7.66 | | $ | 4.51 | |
2nd Quarter | | $ | 6.24 | | $ | 4.52 | |
3rd Quarter | | $ | 6.67 | | $ | 4.66 | |
4th Quarter | | $ | 6.18 | | $ | 3.90 | |
As of September 30, 2011, the Company had approximately 946 stockholders of record of its common stock.
The Company has not paid a cash dividend on its common stock and intends to continue a policy of retaining earnings to finance and build its operations. Accordingly, the Company does not anticipate the payment of cash dividends to holders of common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information regarding our existing equity compensation plans as of July 31, 2011.
| | | | | | | | | | |
Plan Category | | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a) | | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) | | Number of securities
remaining available
for future issuances
under equity
compensation plans
(excluding securities
reflected in column
(a)
(c) | |
|
|
|
|
|
|
| |
Equity compensation plans approved by security holders | | | 785,124 | | $ | 14.53 | | | 2,818,300 | |
Equity compensation plans not approved by security holders | | | — | | | — | | | — | |
| |
|
| |
|
| |
|
| |
Total | | | 785,124 | | $ | 14.53 | | | 2,818,300 | |
| |
|
| |
|
| |
|
| |
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Item 6.Selected Financial Data
The following table, which is derived from the audited consolidated financial statements of the Company for the fiscal years 2007 through 2011 should be read together with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and notes to those statements included elsewhere in this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | |
| | | For the fiscal year ended July 31,
(In thousands, except per share amounts) | |
| Operating Results | | | 2011 | | | 2010 | | | (1) 2009 | | | (2) 2008 | | | (3) 2007 | |
| | | | | | | | | | | | | | | | | |
Revenues | | $ | 102,029 | | $ | 97,082 | | $ | 89,572 | | $ | 77,795 | | $ | 52,908 | |
| Operating loss | | $ | (12,928 | ) | $ | (22,058 | ) | $ | (23,407 | ) | $ | (14,786 | ) | $ | (20,966 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (12,960 | ) | $ | (22,233 | ) | $ | (23,564 | ) | $ | (10,653 | ) | $ | (13,260 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted net loss per common share: | | $ | (0.34 | ) | $ | (0.59 | ) | $ | (0.63 | ) | $ | (0.29 | ) | $ | (0.38 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | July 31,
(in thousands) | |
| Financial Position | | | 2011 | | | 2010 | | | (4) 2009 | | | (4) 2008 | | | (4) 2007 | |
| | | | | | | | | | | | | | | | | |
| Working capital | | $ | 33,670 | | $ | 42,181 | | $ | 60,518 | | $ | 92,392 | | $ | 113,850 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 109,474 | | $ | 115,245 | | $ | 133,128 | | $ | 154,522 | | $ | 159,002 | |
| | | | | | | | | | | | | | | | | |
| Long term obligations | | $ | 96 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Stockholders’ equity | | $ | 88,715 | | $ | 97,016 | | $ | 116,781 | | $ | 138,289 | | $ | 141,894 | |
| | | | | | | | | | | | | | | | | | |
Notes to Selected Financial Data
(1) On March 12, 2009, Enzo Life Sciences Inc. acquired Assay Designs, Inc. (“ADI”). As such, the operating results of ADI are included in the consolidated operating results beginning March 12, 2009.
(2) On May 8, 2008, Enzo Life Sciences Inc. acquired Biomol International, LP. (“Biomol”). As such, the operating results of Biomol are included in the consolidated operating results beginning May 8, 2008.
(3) On May 29, 2007, Enzo Life Sciences Inc. acquired Axxora Life Sciences, Inc. (“Axxora”). As such, the operating results of Axxora are included in the consolidated operating results beginning May 29, 2007.
(4) The above acquisitions were primarily paid using cash.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. See “Forward-Looking and Cautionary Statements”. Because of the foregoing factors, you should not rely on past financial results as an indication of future performance. We believe that period-to-period comparisons of our financial results to date are not necessarily meaningful and expect that our results of operations might fluctuate from period to period in the future.
The Company is a life sciences and biotechnology company focused on harnessing biological processes to develop research tools, diagnostics and therapeutics and on serving as a provider of diagnostic services to the medical community. Since our founding in 1976, our strategic focus has been on the development of enabling technologies in research, development, manufacture, licensing and marketing of innovative health care products, platforms and services based on molecular and cellular technologies. Our pioneering work in genomic analysis coupled with its extensive patent estate and enabling platforms have strategically positioned the Company to play an important role in the rapidly growing life sciences and molecular medicine marketplaces.
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We are comprised of three operating companies that have evolved out of our core competence: the use of nucleic acids as informational molecules and the use of compounds for immune modulation. These wholly owned operating companies conduct their operations through three reportable segments. Below are brief descriptions of each of the three operating segments (see Note 17 in the Notes to Consolidated Financial Statements):
Enzo Life Sciences is a company that manufactures, develops and markets functional biology and cellular biochemistry products and tools to research and pharmaceutical customers world-wide and has amassed a large patent and technology portfolio. Enzo Life Sciences, Inc. is a recognized leader in labeling and detection technologies across research and diagnostic markets. Our portfolio of proteins, antibodies, peptides, small molecules, labeling probes, dyes and kits provides life science researchers tools for target identification/validation, high content analysis, gene expression analysis, nucleic acid detection, protein biochemistry and detection, and cellular analysis. We are internationally recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over 9,000 of our own products and in addition distribute over 30,000 products made by over 40 other original manufacturers. Our strategic focus is directed to innovative high quality research reagents and kits in the primary key research areas of protein homeostasis, epigenetics, live cell analysis, molecular biology and immunoassays. The segment is an established source for a comprehensive panel of products to scientific experts in the fields of Natural Products/Antibiotics, Autophagy, Cancer, Cell Cycle, Cell Death, Cell Signaling, Cellular Analysis, Endocrinology/Hormones, DNA regulation, Compound Screening, Genomics/Molecular Biology, GPCRs, Immunology, Inflammation, Metabolism, Neuroscience, Nitric Oxide pathway, Obesity/Adipokines, Oxidative Stress, Proteases and Proteosomes, Protein Expression and modification, Signal Transduction, Stress/Heat Shock proteins and Ubiquitin/Ubl signaling.
Enzo Clinical Labs is a regional clinical laboratory serving the greater New York, New Jersey and Eastern Pennsylvania medical communities. The Company believes having clinical diagnostic services allows us to capitalize firsthand on our extensive advanced molecular and cytogenetic capabilities and the broader trends in predictive and personalized diagnostics. We offer a menu of routine and esoteric clinical laboratory tests or procedures used in general patient care by physicians to establish or support a diagnosis, monitor treatment or medication, or search for an otherwise undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale, New York, a network of 30 patient service centers throughout greater New York, New Jersey and Eastern Pennsylvania, a stand alone “stat” or rapid response laboratory in New York City, and a full-service phlebotomy and logistics department. Payments for clinical laboratory testing services are made by the Medicare program, healthcare insurers and patients.
Enzo Therapeutics is a biopharmaceutical company that has developed multiple novel approaches in the areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which are derived from the pioneering work of Enzo Life Sciences. The Company has focused its efforts on developing treatment regimens for diseases and conditions in which current treatment options are ineffective, costly, and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well as more than 40 patents and patent applications.
The following table summarizes the sources of revenues for the fiscal years ended July 31, 2011, 2010 and 2009, (in $000’s and percentages):
| | | | | | | | | | | | | | | | | | | |
Fiscal year ended July 31, | | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
Product revenues | | $ | 41,830 | | | 41 | % | $ | 43,111 | | | 44 | % | $ | 40,592 | | | 45 | % |
Royalty and license fee income | | | 7,437 | | | 7 | | | 9,793 | | | 10 | | | 9,376 | | | 11 | |
Clinical laboratory services | | | 52,762 | | | 52 | | | 44,178 | | | 46 | | | 39,604 | | | 44 | |
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|
| |
|
| |
|
| |
|
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|
| |
|
| |
Total | | $ | 102,029 | | | 100 | % | $ | 97,082 | | | 100 | % | $ | 89,572 | | | 100 | % |
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Results of Operations
Comparative Financial Data for the Fiscal Years Ended July 31,
(in 000’s)
| | | | | | | | | | | | | |
| | 2011 | | 2010 | | Increase
(Decrease) | | % Change | |
| |
| |
| |
| |
| |
Revenues: | | | | | | | | | | | | | |
Product revenues | | $ | 41,830 | | $ | 43,111 | | $ | (1,281 | ) | | (3 | ) |
Royalty and license fee income | | | 7,437 | | | 9,793 | | | (2,356 | ) | | (24 | ) |
Clinical laboratory services | | | 52,762 | | | 44,178 | | | 8,584 | | | 19 | |
| |
|
| |
|
| |
|
| | | | |
Total revenues | | | 102,029 | | | 97,082 | | | 4,947 | | | 5 | |
| | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Cost of product revenues | | | 22,137 | | | 22,547 | | | (410 | ) | | (2 | ) |
Cost of clinical laboratory services | | | 31,682 | | | 29,570 | | | 2,112 | | | 7 | |
Research and development | | | 7,806 | | | 9,704 | | | (1,898 | ) | | (20 | ) |
Selling, general, and administrative | | | 45,191 | | | 48,395 | | | (3,204 | ) | | (7 | ) |
Provision for uncollectible accounts receivable | | | 4,431 | | | 3,480 | | | 951 | | | 27 | |
Legal | | | 3,710 | | | 1,746 | | | 1,964 | | | 112 | |
Litigation settlement and related legal costs | | | — | | | 3,698 | | | (3,698 | ) | | (100 | ) |
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|
| | | | |
Total operating expenses | | | 114,957 | | | 119,140 | | | (4,183 | ) | | (4 | ) |
| |
|
| |
|
| |
|
| | | | |
| | | | | | | | | | | | | |
Operating loss | | | (12,928 | ) | | (22,058 | ) | | 9,130 | | | 41 | |
| | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | |
Interest | | | 11 | | | 19 | | | (8 | ) | | (42 | ) |
Other | | | 45 | | | 44 | | | 1 | | | 2 | |
Foreign exchange gain (loss) | | | 49 | | | (266 | ) | | 315 | | | 118 | |
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|
| |
|
| |
|
| | | | |
Loss before income taxes | | $ | (12,823 | ) | $ | (22,261 | ) | $ | 9,438 | | | 42 | |
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|
| |
|
| |
|
| | | | |
Consolidated Results:
The “2011 period” and the “2010 period” refer to the fiscal year ended July 31, 2011 and 2010, respectively.
Product revenues were $41.8 million in the 2011 period compared to $43.1 million in the 2010 period, a decrease of $1.3 million or 3% due to a decline of $1.5 million or 3.5% in organic sales. The decline is attributed to the ongoing strategy to increase direct sales and rationalize certain distribution business and negative impact from the Japanese market. The decline is offset by a 0.5% positive impact from foreign currency transactions.
Royalty and license fee income was $7.4 million in the 2011 period compared to $9.8 million in the 2010 period, a decrease of $2.4 million or 24%. Royalties are primarily earned from the reported sales of Qiagen products subject to a license agreement. During both the 2011 and 2010 periods, the Company recognized royalties of approximately $6.8 million from Qiagen. The 2011 period decrease is due to Abbott’s notification that they had made a final payment under a license agreement since they are not aware of any non-expired patents covered under the license agreement. Abbott and the Company are in communication as to patents covered under the license agreement which remains in full force. During the 2011 period, the Company recognized royalties and license fees from the Abbott agreement of approximately $0.4 compared to $3.0 million in the 2010 period. There are no direct expenses relating to royalty and licensing income.
Clinical laboratory revenues during the 2011 period were $52.8 million compared to $44.2 million in the 2010 period. The 2011 period’s increase over the 2010 period was $8.6 million or 19% due to organic growth of 11% and an increase of 8% in revenue related to a new payer contract with Empire Blue Cross of New York.
40
The cost of product revenues during the 2011 period was $22.1 million compared to $22.5 million in the 2010 period, a decrease of $0.4 million or approximately 2%. Although product sales declined during the 2011 period, cost of product revenues was negatively impacted by compensation costs, foreign exchange, other inventory adjustments and changes in cost allocations to the cost of production of $1.7 million, offset by a charge in the prior year for excess and obsolete inventory that arose primarily from the strategic realignment of marketing efforts for core products of $1.3 million.
The cost of clinical laboratory services during the 2011 period was $31.7 million as compared to $29.6 million in the 2010 period, an increase of $2.1 million or 7%. The Company incurred increased costs due to higher reagent costs and supplies of $1.7 million, primarily due to increased service volume and reagent costs for certain tests that were previously sent to outside reference labs, higher laboratory personnel and related costs of $0.2 million primarily due to incremental increases in service volume and increases in the other lab operating costs of $0.3 million offset by a decrease of outside reference lab costs of $0.1 million. In the 2011 period the gross profit margin improved from 33% to 40% due to increased revenues, process improvements and the positive impact of greater service volume on fixed costs coverage.
Research and development expenses were approximately $7.8 million during the 2011 period, compared to $9.7 million in the 2010 period, a decrease of $1.9 million or 20%. The decrease was principally attributed to lower costs of $1.4 million at Enzo Life Sciences primarily due the realignment of the R&D workforce that occurred in July 2010. There was a $0.2 million decline in clinical trial and related activities and $0.3 million in payroll costs at the Therapeutics segment.
Selling, general and administrative expenses were approximately $45.2 million during the 2011 period as compared to $48.4 million in the 2010 period, a decrease of $3.2 million or 7%. The Enzo Life Sciences segment decreased by $1.9 million principally comprised of a decline of approximately $1.1 million of discretionary marketing costs due to refocused spending and decreases of $1.0 million related to reallocation and realignment of personnel offset by increases in payroll and related costs of $0.2 million. The Clinical Lab segment’s selling general and administrative decreased by $0.1 million primarily due to a decline in payroll and related benefits of $0.8 million offset by an increase in sales commission of $0.5 million as a result of increased service revenues and an increase in other expenses of $0.2 million. The Other segment’s selling general and administrative decreased by $1.2 million, primarily due to decreases in outside consulting costs of $0.8 million, professional fees of $0.4 million and other operating expenses of $0.1 million, directly related to planned cost reductions effective August 1, 2010 and other expense improvements, offset by increases of $0.1 million in payroll and payroll related costs.
The provision for uncollectible accounts receivable, primarily relating to the Clinical Labs segment was $4.4 million for the 2011 period as compared to $3.5 million in the 2010 period, an increase of $0.9 million attributed to an increase in patient service revenue. As a percentage of Clinical Lab revenues, bad debts approximated 8% in both the 2011 and 2010 periods.
Legal expense was $3.7 million during the 2011 period compared to $1.7 million in the 2010 period, an increase of $2.0 million due to overall increases in legal services in the 2011 period for general, litigation and proxy related matters of $1.0 million and the impact of $0.5 million in insurance reimbursements and $0.5 million in negotiation and settlement adjustments in the 2010 period.
During the 2010 period, in connection with the litigation settlement with Mr. Shahram K. Rabbani to settle all of his claims against the Company, and certain of its executive officers, the Company agreed to pay a lump sum payment of $2.7 million. The Company recorded a settlement expense of approximately $3.7 million, consisting of the lump sum payment of $2.7 million and approximately $1.0 million of legal expenses incurred in connection with the claims.
The 2011 period foreign exchange benefit was approximately $0.1 million compared to a loss of $0.2 million in the 2010 period. The foreign exchange benefit or loss is determined on two factors, an intercompany loan denominated in British pounds sterling and transactions denominated in foreign currencies other than the functional currency.
41
Segment Results
The Life Sciences segment’s income before taxes was $2.8 million for the 2011 period as compared to $2.9 million for the 2010 period with the positive impact of the on-going integration of our businesses and related operational improvements and cost reductions offset by a decline in revenues. Product revenues decreased by $1.3 million or 3% in the 2011 period primarily due to a decline of organic sales of 3.5% partially attributed to the on-going strategy to increase direct sales and rationalize certain distribution business and softness in the Japan market offset by a positive impact of foreign exchange of 0.5%. Further, royalty and license fee income decreased by $2.4 million in the 2011 period principally attributed to no royalty payments received under the Abbott license agreement after the first quarter of the 2011 period. The segment’s gross profit of $27.1 million in the 2011 period was negatively impacted by the previously discussed changes in revenues and cost of product revenues. The segment’s other operating expenses, including selling, general and administrative, legal and research and development, decreased by approximately $2.8 million during the 2011 period primarily due to the lower marketing and selling expenses attributed to refocused and lower planned spending, a decline in payroll and payroll related costs, changes in expense allocations and reduced research and development expenses principally due to the realignment of research and development workforce that occurred in July 2010 offset by increased legal of $0.6 million.
The Clinical Labs segment’s loss before taxes was $2.1 million for the 2011 period as compared to $7.5 million in the 2010 period an improvement of $5.4 million arising from revenue growth, process improvements and cost containment. The revenue from laboratory services increased in the 2011 period by $8.6 million due to organic growth of 11% and the 8% increase in revenue due to the new payer contract with Empire Blue Cross of New York. The 2011 period gross profit of $21.1 million improved the gross profit margin from 33% to 40% over the 2010 period due to the previously discussed changes in service revenues and favorable impacts on costs from process improvements and benefits resulting from greater service volume on fixed costs coverage. Selling, general and administrative expense decreased by approximately $0.1 million primarily due to decreases in benefits and other costs, partially offset by increases in sales commissions directly the result of increased service revenues. The provision for uncollectible accounts receivables increased by $1.0 million as compared to the 2010 period due to the increase in patient service volume.
The Therapeutics segment’s loss before income taxes was approximately $2.0 million for the 2011 period as compared to a loss of $2.5 million for the 2010 period. The decrease in the segment loss of $0.5 million was primarily due to decreases in clinical trial activities, impacted by timing of activities, of $0.2 million and a $0.3 million decrease in payroll related expenses.
The Other segment’s loss before taxes for the 2011 period was approximately $11.5 million as compared to $15.1 million in the 2010 period, a decrease of $3.6 million. During the 2011 period, a decrease of $1.2 million in selling, general and administrative primarily due to lower consulting costs and professional fees, partially attributed to the July 2010 planned cost reductions was offset by an increase of $1.2 million in legal fees for general, litigation and proxy related costs and the impact of the recording $0.5 million in insurance reimbursements and $0.5 million in negotiation and settlement adjustments in the 2010 period. Further, the 2010 period loss included a litigation settlement and related legal costs of $3.7 million.
42
Results of Operations
Comparative Financial Data for the Fiscal Years Ended July 31,
(in 000’s)
| | | | | | | | | | | | | |
| | 2010 | | 2009 | | Increase
(Decrease) | | % Change | |
| |
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| |
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| |
Revenues: | | | | | | | | | | | | | |
Product revenues | | $ | 43,111 | | $ | 40,592 | | $ | 2,519 | | | 6 | |
Royalty and license fee income | | | 9,793 | | | 9,376 | | | 417 | | | 4 | |
Clinical laboratory services | | | 44,178 | | | 39,604 | | | 4,574 | | | 12 | |
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| |
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| | | | |
Total revenues | | | 97,082 | | | 89,572 | | | 7,510 | | | 8 | |
| | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Cost of product revenues | | | 22,547 | | | 26,766 | | | (4,219 | ) | | (16 | ) |
Cost of clinical laboratory services | | | 29,570 | | | 26,295 | | | 3,275 | | | 12 | |
Research and development | | | 9,704 | | | 9,220 | | | 484 | | | 5 | |
Selling, general, and administrative | | | 48,395 | | | 41,314 | | | 7,081 | | | 17 | |
Provision for uncollectible accounts receivable | | | 3,480 | | | 5,189 | | | (1,709 | ) | | (33 | ) |
Legal | | | 1,746 | | | 4,195 | | | (2,449 | ) | | (58 | ) |
Litigation settlement and related legal costs | | | 3,698 | | | — | | | 3,698 | | | — | |
| |
|
| |
|
| |
|
| | | | |
Total operating expenses | | | 119,140 | | | 112,979 | | | 6,161 | | | 5.5 | |
| |
|
| |
|
| |
|
| | | | |
| | | | | | | | | | | | | |
Operating loss | | | (22,058 | ) | | (23,407 | ) | | 1,349 | | | (6 | ) |
| | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | |
Interest | | | 19 | | | 581 | | | (562 | ) | | (97 | ) |
Other | | | 44 | | | 74 | | | (30 | ) | | (41 | ) |
Foreign exchange loss | | | (266 | ) | | (725 | ) | | 459 | | | (63 | ) |
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|
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|
| |
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| | | | |
Loss before income taxes | | $ | (22,261 | ) | $ | (23,477 | ) | $ | 1,216 | | | (5 | ) |
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|
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|
| |
|
| | | | |
Consolidated Results:
The “2010 period” and the “2009 period” refer to the fiscal years ended July 31, 2010 and 2009, respectively. The 2010 period includes the twelve months results of ADI which was acquired on March 12, 2009. The 2009 period includes the results of ADI from March 12, 2009 to July 31, 2009.
Product revenues increased overall by $2.5 million in the 2010 period to $43.1 million as compared to the 2009 period. Acquisition growth from the acquired ADI business was $6.5 million or 16% which was partially offset by a net organic decline of $4.4 million or 11% due to a $5.2 million decline in low margin, third-party distribution business. Our core product revenues demonstrated organic growth of $0.8 million or 2%. Foreign currency fluctuation positively affected revenues by $0.4 million or 1%.
Royalty and license fee income during the 2010 period was $9.8 million compared to $9.4 million in the 2009 period, an increase of $0.4 million or 4%. Royalties are primarily earned from the reported net sales of Qiagen products subject to a license agreement and from a license agreement with Abbott. During the 2010 and 2009 periods, the Company recognized royalties of approximately $6.8 million and $6.7 million, respectively from Qiagen and royalties and license fees under the Abbott License Agreement of approximately $3.0 million and $2.7 million respectively, an increase of $0.3 million in the 2010 period. There are no direct expenses relating to royalty and license fee income.
Clinical laboratory revenues during the 2010 period were $44.2 million compared to $39.6 million in the 2009 period. The 2010 period’s increase over the 2009 period was $4.6 million or 12%. During the 2010 period, revenue increased due to organic growth of 5.4% after giving consideration to the 2009 period contractual adjustment of $2.3 million.
The 2010 increase resulted from increased service volume, including higher priced testing volume, despite a noted general slowdown in physician office visits due to the slowed economy and a 1.9% decrease in Medicare reimbursement rates effective January 1, 2010. During the 2009 period, revenues were negatively affected by contractual adjustments of $2.3 million. These immaterial contractual adjustments in 2009 related to computational errors that affected the calculated expected reimbursement rate in fiscal 2008, and for periods prior to August 1, 2008 for the majority of payers, and credits issued which were not accrued for timely.
43
The cost of product revenues during the 2010 period was $22.5 million compared to $26.7 million in the 2009 period, a decrease of $4.2 million or 16%. The decrease is primarily due to the impact of $4.7 million in lower costs from low margin third-party distribution business, reduced fair value accounting adjustments of $1.8 million in accordance with purchase accounting rules and reclassification of $1.6 million in costs relating to the realignment of manufacturing facilities and personnel. Such decreases in 2010 were partially offset by product cost relating to ADI of $2.8 million, by the cost of sales from organic growth, and $1.0 million of higher inventory reserves for excess and obsolete inventory due primarily to a strategic realignment of marketing efforts for core products. We believe that cost of product revenues for future periods will be affected by, among other things, competitive conditions and foreign currency rates.
The cost of clinical laboratory services during the 2010 period was $29.6 million as compared to $26.3 million in the 2009 period, an increase of $3.3 million or 12%. The Company incurred increased costs due to increased reagent costs and supplies of $1.3 million, laboratory personnel and related costs of $1.6 million and outside reference lab costs of $0.4 million, partially due to increased service volumes. Laboratory personnel and related costs increased primarily due to additional headcounts in phlebotomists to expand patient collection sites and other personnel to manage expanded operations.
Research and development expenses were approximately $9.7 million during the 2010 period, compared to $9.2 million in the 2009 period, an increase of $0.5 million or 5%. The increase was principally attributed to higher costs of $1.4 million at Enzo Life Sciences primarily related to Assay Designs offset by $0.9 million in lower clinical trial and related activities and payroll costs at the Therapeutics segment.
Selling, general and administrative expenses were approximately $48.4 million during the 2010 period as compared to $41.3 million in the 2009 period, an increase of $7.1 million or 17%. The increase was primarily due to the net increase at the Enzo Life Sciences segment of $5.4 million in the 2010 period which included approximately $2.3 million of selling, general and administrative expenses related to Assay Designs operations, the impact of realigning manufacturing facilities and certain personnel of $1.6 million, $1.1 million in payroll and benefit costs, and increased depreciation and amortization of $0.7 million, which were offset by a decrease in marketing costs of $0.3 million. The Clinical Lab segment’s selling general and administrative increased $3.1 million primarily due to increased payroll and related benefits of $2.2 million attributed to increases in headcounts in our sales force and management personnel partially related to increased service volume and the marketing and development of esoteric and gene based testing capabilities, information technology costs of $0.2 million, and other overhead expenses of $0.7 million. These increases were offset by a decrease in the Other segment’s selling general and administrative of approximately $1.4 million, primarily due to decreases in professional fees of $0.3 million, outside consulting costs of $0.7 million, payroll and payroll related costs of $0.2 million, and other operating cost of $0.2 million.
The provision for uncollectible accounts receivable, primarily relating to the Clinical Labs segment was $3.5 million for the 2010 period as compared to $5.2 million in the 2009 period, a decrease of $1.7 million or 33%. The decrease is attributed to a charge in 2009 attributed to increased provisions for the Clinical Labs legacy billing system, which was replaced in August 2008, due to reduced collection efforts relating to the legacy billing system, the correction of an immaterial error relating to fiscal 2008, and increased provisions required based on changes in payer mix, offset by a reduced requirement under the new billing system.
Legal expense was $1.7 million during the 2010 period compared to $4.2 million in the 2009 period, a decrease of $2.5 million, due to overall reduction in legal services provided relating to certain patent litigation matters and general matters of $2.1 million, the reimbursement of $0.5 million in legal costs under our insurance policy, reductions in fees due to negotiated fee settlements and other adjustments of $0.5 million offset by approximately $0.6 million in incremental legal costs incurred for proxy related costs for the January 2010 annual meeting.
In connection with the litigation settlement with Mr. Shahram K. Rabbani to settle all of his claims against the Company, and certain of its executive officers, the Company paid a lump sum payment of $2.7 million. The Company recorded a settlement expense of approximately $3.7 million in the fiscal quarter ending January 31, 2010, consisting of the lump sum payment of $2.7 million and approximately $1.0 million of legal expenses incurred in connection with the claims (See Note 16 in Notes to Consolidated Financial Statements).
44
Interest income was $19,000 during the 2010 period as compared to $0.6 million during the 2009 period. The interest income decrease during the 2010 period is attributed to the decline in interest rates. Furthermore, the Company had higher average invested balances during the 2009 period. The Company earns interest by investing in short term U.S. Treasury bills and money market accounts.
The loss on foreign currency was $0.3 million during the 2010 period, due to a $0.1 million non-cash loss on an intercompany term loan denominated in British pounds sterling and the fluctuations of other foreign currencies relative to the US dollar during the period and the impact that had on settled transactions during the period. During the 2009 period, the loss on foreign currency transactions was $0.7 million primarily due to a non-cash loss on the intercompany term loan denominated in British pounds sterling. The British currency depreciated more significantly against the US dollar during the 2009 period than in the 2010 period.
The Company’s effective income tax rate benefit (provision) for the 2010 period was 0.1% compared to (0.4%) during the 2009 period. The tax benefit (provision) for the 2010 and 2009 periods were based on state and local taxes, domestic and foreign tax for tax deductible goodwill and indefinite lived intangibles, and book to tax differences for acquired inventory and differed from the expected net operating loss carry forward benefit at the U.S. federal statutory rate of 34% primarily due to the inability to recognize such benefit. The carry forward benefit cannot be recognized because of uncertainties relating to future taxable income, in terms of both its timing and its sufficiency. In the 2010 period, the Company recognized a benefit of $0.1 million primarily as a result of the expiration of the statute of limitations for an uncertain tax position.
Segment Results
The Life Sciences segment’s income before taxes was $2.9 million for the 2010 period as compared to $1.7 million for the 2009 period. Product revenues increased by $2.5 million in the 2010 period primarily due to the contribution of product revenues from the March 2009 acquisition of Assay Designs and organic growth from our core products which replaced low margin, high volume distribution product revenues principally to one customer. Royalty and license fee income increased $0.4 million from the Qiagen agreement and the Abbott license agreement. The segment’s gross margin of $30.4 million increased by $7.2 million in 2010. Gross profit margins increased to 57% from 47% due to favorable impact from ADI’s higher margin, which replaced lower margin revenue in 2009, lower inventory fair value adjustments and realignment of personnel from manufacturing to trading activity. The segment’s other operating expenses, including selling, general and administrative, legal and research and development, increased by approximately $6.4 million during the 2010 period primarily due to the inclusion of Assay Designs expenses of $3.3 million, the impact of the aforementioned realignment of personnel of payroll and related costs of $1.6 million, increased payroll and other costs of $1.2 million, and depreciation and amortization of $0.7 million, offset by lower legal costs of $0.3 million and lower marketing costs of $0.3 million. The segment experienced a foreign currency loss of $0.3 million during the 2010 period resulting from the impact that fluctuations in foreign currencies had on settled transactions and on an intercompany loan denominated in pounds sterling. In aggregate, the inventory fair value adjustment and amortization of intangibles negatively impacted the segment operating results in the 2010 period by $1.9 million.
The Clinical Laboratory segment’s loss before taxes was $7.5 million for the 2010 period as compared to a loss of $7.3 million in the 2009 period. The revenue from laboratory services increased in the 2010 period by $4.6 million due to increased service volume, despite a general slowdown in physician office visits since the fiscal third quarter, a decrease in Medicare reimbursement rates effective January 1, 2010 and during the 2009 period revenues were negatively impacted by contractual adjustments of $2.3 million. The 2010 period gross profit of $14.6 million increased $1.3 million over the 2009 period due to service volume increases, offset by increased headcount and other costs to perform increased testing, and the impact the aforementioned $2.3 million contractual adjustment had on the 2009 period gross profit. In the 2010 period, the selling, general and administrative and legal costs increased by approximately $3.2 million primarily due to increases in payroll and payroll related costs of $2.2 million attributed to increases in headcount in our sales force and management personnel partially related to increased service volume and the marketing and development of esoteric and gene-based testing capabilities, information technology costs of $0.2 million, and other operating costs of $0.7 million. The provision for uncollectible accounts receivables decreased by $1.8 million as compared to the 2009 period. During the 2009 period, the Company recorded a charge attributed to increased provisions for the Clinical Labs legacy billing system, which was replaced in August 2008, due to reduced collection efforts relating to the legacy billing system and the correction of an immaterial error relating to fiscal 2008.
The Therapeutics segment’s loss before income taxes was approximately $2.5 million for the 2010 period as compared to a loss of $3.4 million for the 2009 period. The decrease in the segment loss of $0.9 million was primarily due to decreases in clinical trial activities of $0.6 million and decreases in salaries and related costs of $0.3 million.
45
The Other segment’s loss before taxes for the 2010 period was approximately $15.1 million as compared to $14.5 million in the 2009 period, an increase of $0.6 million. The Other segment’s 2010 period loss reflects the litigation settlement of $3.7 million, offset by a decrease in professional fees, consulting costs and public relations expenses of $1.0 million, payroll and payroll related costs of $0.2 million, and $0.3 million in other costs. Legal expenses decreased $2.1 million due to the reimbursement of $0.5 million in legal fees; reduced services provided relating to certain patent litigation activity and general matters of $1.7 million and reductions in fees recorded due to negotiated fee settlements and other adjustments of $0.5 million offset by $0.6 million incremental legal costs incurred for proxy related matters in 2010. Interest income declined $0.5 million due to the decline in interest rates. The Company earns interest by investing in short term U.S. Treasury bills and money market accounts.
Liquidity and Capital Resources
At July 31, 2011, the Company had cash and cash equivalents of $14.2 million and short-term investments of $10.0 million, or $24.2 million in aggregate as compared to $33.6 million at July 31, 2010. Short term investments are in US Treasury bills. The Company had working capital of $33.7 million at July 31, 2011 compared to $42.2 million at July 31, 2010. The decrease in working capital of $8.5 million was primarily the result of the 2011 period net loss and funding for capital expenditures of $1.2 million.
Net cash used in operating activities for the year ended July 31, 2011 was approximately $8.3 million as compared to $13.4 million for the year ended July 31, 2010. The decrease in net cash used in operating activities in the 2011 period over the 2010 period of approximately $5.1 million was primarily due to a decrease in net loss of $9.3 million, and an increase in non-cash expenses of $0.8 million, offset by changes in operating assets and liabilities of $5.0 million, relating primarily to increases in accounts receivable, inventory and prepaid expenses and a decrease in accounts payable - trade.
Net cash provided by investing activities was approximately $13.5 million as compared to cash provided of $15.3 million in the year ago period. The decrease in 2011 of $1.8 million is primarily due to the decrease in purchases of short- term investments (US Treasury bills) and maturities of short-term investments over 2010 of $3.7 million offset by the decrease in cash used for capital expenditures in 2011 of $2.0 million.
Net cash used in financing activities in 2011 was $0.1 million. There were no financing activities in 2010.
We believe that our current cash and cash equivalents and short-term investments are sufficient for our foreseeable liquidity and capital resource needs over the next twelve months, although there can be no assurance that future events will not alter such view.
Effect of New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends the current fair value measurement and disclosure guidance of Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurement” to include increased transparency around valuation inputs and investment categorization. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company does not expect the adoption of these provisions to have a material impact on the its consolidated financial statements or on future operating results.
In June 2011, the FASB issued ASU 2011-05,Presentation of Comprehensive Income, updating ASCTopic 220, Comprehensive Income.Under the amended ASCTopic 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates the current option to present other comprehensive income and its components in the Statement of Stockholders’ Equity. This guidance does not change the components that are recognized in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and is to be applied retrospectively. The Company does not believe the adoption of this guidance in the first quarter of fiscal 2013 will have an impact on its consolidated financial statements or on future operating results.
In July 2011, the FASB issued ASU No. 2011-07: Health Care Entities (Topic 954) — Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. This update was issued to provide greater transparency relating to accounting practices used for net patient service revenue and related bad debt allowances by health care entities. Some health care entities recognize patient service revenue at the time the services are rendered regardless of whether the entity expects to collect that amount or has assessed the patient’s ability to pay.
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These prior accounting practices used by some health care entities resulted in a gross-up of patient service revenue and the provision for bad debts, causing difficulty for outside users of financial statements to make accurate comparisons and analyses of financial statements among entities. ASU No. 2011-07 requires certain healthcare entities to change the presentation of the statement of operations, reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue and also requires enhanced quantitative and qualitative disclosures relevant to the entity’s policies for recognizing revenue and assessing bad debts. This update is not designed and will not change the net income reported by healthcare entities. This update is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect that this update will have any material impact on its consolidated financial statements. The Company is currently evaluating if the update will have any impact on the presentation of its statement of operations.
Contractual Obligations
The Company has entered into various real estate and equipment operating leases and has employment agreements with certain executive officers. The real estate lease for the Company’s Farmingdale Clinical Lab and Research facility is with a related party. See Item 2, Properties, and Note 15 to the Consolidated Financial Statements for a further description of these various leases.
The following is a summary of future payments under the Company’s contractual obligations as of July 31, 2011:
Payments Due by Period
| | | | | | | | | | | | | | | | | |
In 000’s | | | Total | | Less than
1 year | | 1-3 years | | 4-5 years | | Over 5 years | |
| | |
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| |
| |
| |
| |
Real estate and equipment leases | | $ | 20,592 | | $ | 4,520 | | $ | 6,685 | | $ | 5,217 | | $ | 4,170 | |
Employment agreements | | | 1,223 | | | 1,223 | | | — | | | — | | | — | |
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Total contractual cash obligations | | $ | 21,815 | | $ | 5,743 | | $ | 6,685 | | $ | 5,217 | | $ | 4,170 | |
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Management is not aware of any material claims, disputes or settled matters concerning third-party reimbursements that would have a material effect on our financial statements.
Off-Balance Sheet Arrangements
The Company does not have any “off-balance sheet arrangements” as such term is defined in Item 303(a) (4) of Regulation S-K.
Critical Accounting Policies
General
The Company’s discussion and analysis of its financial condition and results of operations are based upon Enzo Biochem, Inc. consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and judgments also affect related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts, inventory, intangible assets and income taxes. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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.
47
Revenues - Clinical laboratory services
Revenues from the Clinical Labs segment 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 table represents the clinical laboratory segment’s net revenues and percentages by revenue category:
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| | | Year ended July 31
2011 | | Year ended July 31
2010 | | Year ended July 31
2009 | |
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Revenue category | | | (In 000’s) | | (in %) | | (In 000’s) | | (in %) | | (In 000’s) | | (in %) | |
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Medicare | | $ | 11,856 | | | 22 | | $ | 11,158 | | | 25 | | $ | 9,138 | | | 23 | |
Third-party payers | | | 24,335 | | | 46 | | | 19,534 | | | 44 | | | 20,073 | | | 51 | |
Patient self-pay | | | 11,554 | | | 22 | | | 8,758 | | | 20 | | | 6,056 | | | 15 | |
HMO’s | | | 5,017 | | | 10 | | | 4,728 | | | 11 | | | 4,337 | | | 11 | |
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Total | | $ | 52,762 | | | 100 | % | $ | 44,178 | | | 100 | % | $ | 39,604 | | | 100 | % |
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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, one provider whose programs are included in the Third-party payer and Health Maintenance Organizations (“HMO’s”) categories represent approximately 22%, 25% and 25%, of the Clinical Labs segment’s services net revenues for the fiscal years ended July 31, 2011, 2010 and 2009 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 we set for all third party payers, including Medicare, health maintenance organizations (“HMO’s”) and managed care. 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.
The other relevant factors that affect our contractual adjustment 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.
Our clinical laboratory business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement rates among different third-party payers, as well as constant changes of reimbursement rates. Changes that decrease reimbursement rates or coverage would negatively impact our revenues. The number of individuals covered under managed care contracts or other similar arrangements has grown over the past several years and may continue to grow in the future. In addition, Medicare and other government healthcare programs continue to shift to managed care. These trends will continue to reduce our revenues.
During the years ended July 31, 2011, 2010 and 2009, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were approximately 84%, 83% and 81% respectively, of gross billings. The Company believes a decline in reimbursement rates or a shift to managed care, or similar arrangements may be offset by the positive impact of an increase in the number of tests we perform. However, there can be no assurance that we can increase the number of tests we perform or that if we do increase the number of tests we perform, that we can maintain that higher number of tests performed, or that an increase in the number of tests we perform would result in increased revenue.
48
The Company estimates (by using a sensitivity analysis) that each 1% point change in the contractual adjustment percentage could result in a change in clinical laboratory services revenues of approximately $3,298,000, $2,589,000, and $2,040,000 for the years ended July 31, 2011, 2010, and 2009, respectively, and a change in the net accounts receivable of approximately $507,000 and $339,000 as of July 31, 2011 and 2010, respectively.
Our clinical laboratory financial billing system records gross billings using a standard fee schedule for all payers and does not record contractual adjustment by payer at the time of billing. Therefore, we are unable to quantify the effect of contractual adjustment recorded during the current period that relate to revenue recorded in a previous period. However, we can reasonably estimate our monthly contractual adjustment to revenue on a timely basis based on our quarterly review process, which includes:
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| • | an analysis of industry reimbursement trends; |
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| • | an evaluation of third-party reimbursement rates changes and changes in reimbursement arrangements with third-party payers; |
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| • | a rolling monthly analysis of current and historical claim settlement and reimbursement experience statistics with payers; |
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| • | an analysis of current gross billings and receivables by payer. |
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.
The following is a table of the Company’s net accounts receivable by segment. The Clinical Labs segment’s net receivables are detailed by billing category and as a percent to its total net receivables. As of July 31, 2011 and 2010, approximately 51% and 45%, respectively, of the Company’s net accounts receivable relates to its Clinical Labs business, which operates in the New York, New Jersey and Eastern Pennsylvania medical communities. The Life Sciences segment’s accounts receivable, of which $2.5 million or 33% and $1.9 million or 27% represents foreign receivables as of July 31, 2011 and 2010 respectively, includes royalty receivables of $2.0 million and $2.5 million, as of July 31, 2011 and 2010, of which approximately $2.0 million and $1.8 million, respectively is from Qiagen Corporation.
49
Net accounts receivable
| | | | | | | | | | | | | | |
| | | As of
July 31, 2011 | | As of
July 31, 2010 | |
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Billing category | | | (In 000’s) | | (in %) | | (In 000’s) | | (in %) | |
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Clinical Labs | | | | | | | | | | | | | |
Medicare | | $ | 1.434 | | | 19 | | $ | 849 | | | 14 | |
Third party payers | | | 3,087 | | | 40 | | | 2,664 | | | 46 | |
Patient self-pay | | | 2,865 | | | 37 | | | 2,024 | | | 35 | |
HMO’s | | | 314 | | | 4 | | | 296 | | | 5 | |
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Total Clinical Labs | | | 7,700 | | | 100 | % | | 5,833 | | | 100 | % |
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Total Life Sciences | | | 7,545 | | | | | | 7,173 | | | | |
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Total accounts receivable | | $ | 15,245 | | | | | $ | 13,006 | | | | |
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Changes in the Company’s allowance for doubtful accounts are as follows:
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In 000’s | | | July 31, 2011 | | July 31, 2010 | |
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Beginning balance | | $ | 2,839 | | $ | 4,786 | |
Provision for doubtful accounts | | | 4,431 | | | 3,480 | |
Write-offs, net | | | (3,782 | ) | | (5,427 | ) |
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Ending balance | | $ | 3,488 | | $ | 2,839 | |
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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, the historical doubtful account write-off percentages, payer mix, and other relevant factors.
The allowance for doubtful accounts includes the balances, after receipt of the approved settlements from third party payers for the insufficient diagnosis information received from the ordering physician, which result in denials of payment and the uncollectible portion of receivables from self payers, including deductibles and copayments, which are subject to credit risk and patients’ ability to pay. During the years ended July 31, 2011 and 2010, the Company determined an allowance for doubtful accounts less than 210 days and wrote off 100% of accounts receivable over 210 days, as it assumed those accounts are 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’s collection experience on Medicare receivables beyond 210 days has been insignificant. The Company adjusts the historical collection analysis for recoveries, if any, on an ongoing basis.
The Company’s ability to collect outstanding receivables from third party payers is critical to its operating performance and cash flows. The primary collection risk lies with uninsured patients or patients for whom primary insurance has paid but a patient portion remains outstanding. The Company also assesses the current state of its billing functions in order to identify any known collection or reimbursement issues in order to assess the impact, if any, on the allowance estimates, which involves judgment. The Company believes that the collectibility of its receivables is directly linked to the quality of its billing processes, most notably, those related to obtaining the accurate 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.
Billing for laboratory services is complicated because of many factors, especially: the differences between our standard gross fee schedule for all payers and the reimbursement rates of the various payers we deal with, disparity of coverage and information requirements among the various payers, and disputes with payers as to which party is responsible for reimbursement.
50
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.
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As of July 31, 2011 | | Total
Amount | | % | | Medicare
Amount | | % | | Third
Party
Payers
Amount | | % | | Self-pay
Amount | | % | | HMO’s
Amount | | % | |
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1-30 days | | $ | 29,880 | | | 60 | % | | 5,843 | | | 60 | % | | 13,851 | | | 56 | % | | 6,173 | | | 55 | % | | 4,013 | | | 95 | % |
31-60 days | | | 7,013 | | | 14 | % | | 791 | | | 8 | % | | 3,441 | | | 14 | % | | 2,687 | | | 24 | % | | 93 | | | 2 | % |
61-90 days | | | 4,029 | | | 8 | % | | 566 | | | 6 | % | | 2,522 | | | 10 | % | | 890 | | | 8 | % | | 51 | | | 1 | % |
91-120 days | | | 3,826 | | | 8 | % | | 917 | | | 9 | % | | 1,819 | | | 7 | % | | 1,046 | | | 9 | % | | 44 | | | 1 | % |
121-150 days | | | 2,084 | | | 4 | % | | 375 | | | 4 | % | | 1,385 | | | 6 | % | | 288 | | | 3 | % | | 37 | | | 1 | % |
Greater than 150 days* | | | 3,050 | | | 6 | % | | 1,234 | | | 13 | % | | 1,717 | | | 7 | % | | 94 | | | 1 | % | | 5 | | | 0 | % |
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Totals | | $ | 49,882 | | | 100 | % | | 9,726 | | | 100 | % | | 24,735 | | | 100 | % | | 11,178 | | | 100 | % | | 4,243 | | | 100 | % |
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As of July 31, 2010 | | Total
Amount | | % | | Medicare
Amount | | % | | Third
Party
Payers
Amount | | % | | Self-pay
Amount | | % | | HMO’s
Amount | | % | |
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1-30 days | | $ | 21,678 | | | 66 | % | $ | 2,886 | | | 57 | % | $ | 10,846 | | | 64 | % | $ | 4,242 | | | 59 | % | $ | 3,704 | | | 99 | % |
31-60 days | | | 4,256 | | | 13 | % | | 439 | | | 9 | % | | 2,458 | | | 15 | % | | 1,344 | | | 18 | % | | 15 | | | 1 | % |
61-90 days | | | 2,565 | | | 8 | % | | 281 | | | 6 | % | | 1,337 | | | 8 | % | | 935 | | | 13 | % | | 12 | | | — | % |
91-120 days | | | 1,771 | | | 5 | % | | 248 | | | 5 | % | | 850 | | | 5 | % | | 671 | | | 9 | % | | 2 | | | — | % |
121-150 days | | | 936 | | | 3 | % | | 236 | | | 4 | % | | 696 | | | 4 | % | | 2 | | | — | % | | 2 | | | — | % |
Greater than 150 days** | | | 1,733 | | | 5 | % | | 967 | | | 19 | % | | 711 | | | 4 | % | | 52 | | | 1 | % | | 3 | | | — | % |
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Totals | | $ | 32,939 | | | 100 | % | $ | 5,057 | | | 100 | % | $ | 16,898 | | | 100 | % | $ | 7,246 | | | 100 | % | $ | 3,738 | | | 100 | % |
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* Total includes $800 fully reserved over 210 days as of July 31, 2011.
** Total includes $805 fully reserved over 210 days as of July 31, 2010.
Income Taxes
The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items be reduced by a valuation allowance where it is 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.
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. Write downs of inventories to market value are based on a review of inventory quantities on hand and estimated sales forecasts based on sales history and anticipated future demand. Unanticipated changes in demand could have a significant impact on the value of our inventory and require additional write downs of inventory which would impact our results of operations.
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 is estimated using both a discounted cash flow model and market approach model. In determining fair value, the Company makes certain judgments on the assumptions included in the discounted cash flow such as forecasted revenue, gross profit margins, working capital cash flow, the identification of reporting units and the selection of comparable companies for the market approach. Trademarks are considered impaired if the carrying amount exceeds their estimated fair value. To date, there has been no impairment charges recorded.
51
The fair value of the trademarks is estimated based on a discounted cash flow model. 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 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.
Accrual for Self-funded Medical
Accruals for self-funded medical insurance are determined based on a number of assumptions and factors, including historical payment trends, claims history and current estimates. These estimated liabilities are not discounted. If actual trends differ from these estimates, the financial results could be impacted. As of July 31, 2011, the Company has established a reserve of $0.4 million which is included in accrued liabilities, for claims that have been reported but not paid and incurred but not reported.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates resulting from 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, 2011, our assets and liabilities would increase or decrease by $2.1 million and $0.9 million, respectively, and our net sales and net earnings (loss) would increase or decrease by $2.2 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, 2011, our pre-tax earnings (loss) would be favorably or unfavorably impacted by approximately $0.3 million on an annual basis.
Interest Rate Risk
Our excess cash is invested in highly liquid short term money market accounts and short term investments in U.S. Treasury bills. Changes in interest rates may affect the investment income we earn on money market funds and short term investments and therefore affect our cash flows and results of operations. As of July 31, 2011, we were exposed to interest rate change market risk with respect to our money market accounts and short-term investments of $14.2 million. The short-term investments bear interest rates ranging from 0% to 0.05%. As of July 31, 2011, based on the investments held, it is determined we have no material interest rate risk.
As of July 31, 2011, we have fixed interest rate financing on transportation and equipment leases.
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.
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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, 2011. 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.
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, 2011, 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, 2011 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).
Based on its assessment, management concluded that we maintained effective internal control over financial reporting as of July 31, 2011. 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, 2011. This report, in which Ernst & Young LLP has expressed an unqualified opinion, appears in this Item 9A.
53
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, 2011, 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.
In our opinion, Enzo Biochem, Inc. maintained, in all material respects, effective internal control over financial reporting as of July 31, 2011 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, 2011 and 2010 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, 2011 of Enzo Biochem, Inc. and our report dated October 14, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Jericho, New York
October 14, 2011
54
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 28, 2011 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 28, 2011 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 28, 2011 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 28, 2011 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 28, 2011 and is incorporated herein by reference.
PART IV
Item 15.Exhibits, Financial Statement Schedules
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(a) | (1) | Consolidated Financial Statements |
| | Consolidated Balance Sheets - July 31, 2011 and 2010 |
| | Consolidated Statements of Operations- Years ended July 31, 2011, 2010 and 2009 |
| | Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) - Years ended July 31, 2011, 2010 and 2009 |
| | Consolidated Statements of Cash Flows - Years ended July 31, 2011, 2010 and 2009 |
| | 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.
55
The following documents are filed as Exhibits to this Annual Report on Form 10-K:
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Exhibit No. | | Description | |
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3(a) | | Certificate of Incorporation (1) |
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3(b) | | Certificate of Incorporation, as amended on March 17, 1980. (1) |
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3(c) | | Certificate of Amendment of the Certificate of Incorporation as amended on June 16, 1981. (2) |
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3(d) | | Certificate of Amendment to the Certificate of Incorporation as of July 22, 1988. (3) |
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3(e) | | Amended and restated Bylaws. (4) |
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10(a) | | 1994 Stock Option Plan. (5) |
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10 (b) | | 1999 Stock Option Plan. (6) |
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10 (c) | | 2005 Equity Compensation Incentive Plan (7) |
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10 (d) | | 2011 Incentive Plan (8) |
| | |
10 (e) | | Lease agreement with Pari Management (9) |
| | |
10 (f) | | Settlement and Release Agreement between the Company and Sigma Aldrich (10) |
| | |
10 (g) | | Stock Purchase Agreement By and Among Enzo Life Sciences, Inc., Axxora Life Sciences Inc., and the Stock holders, Option holders and Warrant holders (12) |
| | |
10 (h) | | Stock Asset Purchase Agreement By and Among Buyer Parties and Seller Parties with respect to the Biomol International and affiliate acquisition (13) |
| | |
10 (i) | | Asset Purchase Agreement By and Among Enzo Life Sciences, Acquisition, Inc. and Assay Designs, Inc.(14) |
| | |
10 (j) | | Amended and Restated Employment Agreement with Elazar Rabbani (15) |
| | |
10(k) | | Amended and Restated Employment Agreement with Barry Weiner (15) |
| | |
14 (a) | | Code of Ethics (11) |
| | |
21* | | List of subsidiaries of the Company |
| | |
23* | | Consent of Independent Registered Public Accounting Firm |
| | |
31 (a)* | | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
31 (b)* | | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
32 (a)* | | Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
32 (b)* | | Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
56
| | |
| Notes to exhibits | |
|
| |
| |
* | Filed herewith |
| |
(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 July 31, 1989 and is incorporated herein by reference. |
| |
(4) | This exhibit was filed with the Company’s Current Report on Form 8-K May 8, 2008 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 July 31, 1995 and is incorporated herein by reference. |
| |
(6) | This exhibit was filed with the Company’s Registration Statement on Form S-8 (333-87153) and is incorporated herein by reference. |
| |
(7) | 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. |
| |
(8) | This exhibit was filed as appendix B to the Company’s Definitive Proxy Statement on Schedule 14A, which was filed with the Securities and Exchange Commission on November 16, 2010 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 July 31, 2006 and is incorporated herein by reference. |
| |
(10) | This exhibit was filed with the Company’s Current Report on Form 8-K on September 21, 2006 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 July 31, 2003 and is incorporated here by reference. |
| |
(12) | This exhibit was filed with the Company’s Current Report on Form 8-K May 30, 2007 and is incorporated herein by reference. |
| |
(13) | This exhibit was filed with the Company’s Current Report on Form 8-K May 8, 2008 and is incorporated herein by reference. |
| |
(14) | This exhibit was filed with the Company’s Current Report on Form 8-K March 13, 2009 and is incorporated herein by reference. |
| |
(15) | This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 2010 and is incorporated herein by reference. |
57
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, 2011 | 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, 2011 |
| | |
Elazar Rabbani, | | |
Chairman of Board of Directors and Secretary | | |
(Principal Executive Officer) | | |
| | |
By: /s/ Barry W. Weiner | | October 14, 2011 |
| | |
Barry W. Weiner, | | |
President, Chief Financial Officer, Principal Accounting Officer, Treasurer and Director | | |
| | |
By: /s/ Stephen B. H. Kent Ph.D. | | October 14, 2011 |
| | |
Stephen B. H. Kent, Director | | |
| | |
By: /s/ Bernard L. Kasten MD | | October 14, 2011 |
| | |
Bernard Kasten, Director | | |
| | |
By: /s/ Gregory M. Bortz | | October 14, 2011 |
| | |
Gregory M. Bortz, Director | | |
58
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):
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. as of July 31, 2011 and 2010, 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, 2011. 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, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 2011, 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.
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, 2011, 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, 2011 expressed an unqualified opinion thereon.
| |
| /s/ Ernst & Young LLP |
| |
Jericho, New York | |
October 14, 2011 | |
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | | | | | |
| | July 31,
2011 | | July 31,
2010 | |
| |
| |
| |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 14,161 | | $ | 8,759 | |
Short term investments | | | 10,000 | | | 24,807 | |
Accounts receivable, net of allowance for doubtful accounts of $3,488 in 2011 and $2,839 in 2010 | | | 15,245 | | | 13,006 | |
Inventories | | | 9,260 | | | 8,882 | |
Prepaid expenses | | | 2,733 | | | 2,284 | |
| |
|
| |
|
| |
| | | | | | | |
Total current assets | | | 51,399 | | | 57,738 | |
| | | | | | | |
Property, plant, and equipment, net | | | 10,335 | | | 11,858 | |
Goodwill | | | 27,373 | | | 24,943 | |
Intangible assets, net | | | 19,985 | | | 20,368 | |
Other | | | 382 | | | 338 | |
| |
|
| |
|
| |
| | | | | | | |
Total assets | | $ | 109,474 | | $ | 115,245 | |
| |
|
| |
|
| |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable – trade | | $ | 7,858 | | $ | 6,455 | |
Accrued liabilities | | | 8,188 | | | 8,509 | |
Other current liabilities | | | 1,683 | | | 572 | |
Deferred taxes | | | — | | | 21 | |
| |
|
| |
|
| |
| | | | | | | |
Total current liabilities | | | 17,729 | | | 15,557 | |
| | | | | | | |
Deferred taxes | | | 2,934 | | | 2,582 | |
Other | | | 96 | | | 90 | |
| | | | | | | |
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: 39,045,837 at July 31, 2011 and 38,782,725 at July 31, 2010 | | | 390 | | | 388 | |
Additional paid-in capital | | | 305,833 | | | 306,561 | |
Less treasury stock at cost: 450,014 shares at July 31, 2011 and 623,848 shares at July 31, 2010 | | | (6,387 | ) | | (8,854 | ) |
Accumulated deficit | | | (214,914 | ) | | (201,954 | ) |
Accumulated other comprehensive income | | | 3,793 | | | 875 | |
| |
|
| |
|
| |
| | | | | | | |
Total stockholders’ equity | | | 88,715 | | | 97,016 | |
| |
|
| |
|
| |
| | | | | | | |
Total liabilities and stockholders’ equity | | $ | 109,474 | | $ | 115,245 | |
| |
|
| |
|
| |
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, | |
| |
| |
| | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
Revenues: | | | | | | | | | | |
Product revenues | | $ | 41,830 | | $ | 43,111 | | $ | 40,592 | |
Royalty and license fee income | | | 7,437 | | | 9,793 | | | 9,376 | |
Clinical laboratory services | | | 52,762 | | | 44,178 | | | 39,604 | |
| |
|
| |
|
| |
|
| |
| | | 102,029 | | | 97,082 | | | 89,572 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Cost of product revenues | | | 22,137 | | | 22,547 | | | 26,766 | |
Cost of clinical laboratory services | | | 31,682 | | | 29,570 | | | 26,295 | |
Research and development | | | 7,806 | | | 9,704 | | | 9,220 | |
Selling, general, and administrative | | | 45,191 | | | 48,395 | | | 41,314 | |
Provision for uncollectible accounts receivable | | | 4,431 | | | 3,480 | | | 5,189 | |
Legal | | | 3,710 | | | 1,746 | | | 4,195 | |
Litigation settlement and related costs | | | — | | | 3,698 | | | — | |
| |
|
| |
|
| |
|
| |
Total operating expenses | | | 114,957 | | | 119,140 | | | 112,979 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | | | | | | | | | |
Operating loss | | | (12,928 | ) | | (22,058 | ) | | (23,407 | ) |
| | | | | | | | | | |
Other income (expense): | | | | | | | | | | |
Interest | | | 11 | | | 19 | | | 581 | |
Other | | | 45 | | | 44 | | | 74 | |
Foreign exchange gain (loss) | | | 49 | | | (266 | ) | | (725 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Loss before income taxes | | | (12,823 | ) | | (22,261 | ) | | (23,477 | ) |
(Provision) benefit for income taxes | | | (137 | ) | | 28 | | | (87 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net loss | | ($ | 12,960 | ) | ($ | 22,233 | ) | ($ | 23,564 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net loss per common share: | | | | | | | | | | |
Basic and diluted | | ($ | 0.34 | ) | ($ | 0.59 | ) | ($ | 0.63 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | |
Basic and diluted | | | 38,357 | | | 38,001 | | | 37,511 | |
| |
|
| |
|
| |
|
| |
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, 2011, 2010, and 2009
(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
Income | | Total
Stockholders’
Equity | | Comprehensive
loss | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 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 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) for the year ended July 31, 2010 | | | — | | | — | | | — | | | — | | | — | | | (22,233 | ) | | — | | | (22,233 | ) | | (22,233 | ) |
Vesting of restricted stock | | | 192,845 | | | — | | | 2 | | | — | | | — | | | — | | | — | | | 2 | | | — | |
Stock based compensation charges | | | — | | | — | | | — | | | 1,170 | | | — | | | — | | | — | | | 1,170 | | | — | |
Issuance of treasury stock for employee 401(k) plan match | | | — | | | (111,706 | ) | | — | | | (889 | ) | | 1,586 | | | — | | | — | | | 697 | | | — | |
Foreign currency translation adjustments | | | — | | | — | | | — | | | — | | | — | | | — | | | 599 | | | 599 | | | 599 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (21,634 | ) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 31, 2010 | | | 38,782,725 | | | 623,848 | | | 388 | | | 306,561 | | | (8,854 | ) | | (201,954 | ) | | 875 | | | 97,016 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) for the year ended July 31, 2011 | | | — | | | — | | | — | | | — | | | — | | | (12,960 | ) | | — | | | (12,960 | ) | | (12,960 | ) |
Vesting of restricted stock | | | 263,112 | | | — | | | 2 | | | — | | | — | | | — | | | — | | | 2 | | | — | |
Stock based compensation charges | | | — | | | — | | | — | | | 1,049 | | | — | | | — | | | — | | | 1,049 | | | — | |
Issuance of treasury stock for employee 401(k) plan match | | | — | | | (173,834 | ) | | — | | | (1,777 | ) | | 2,467 | | | — | | | — | | | 690 | | | — | |
Foreign currency translation adjustments | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,918 | | | 2,918 | | | 2,918 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (10,042 | ) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 31, 2011 | | | 39,045,837 | | | 450,014 | | $ | 390 | | $ | 305,833 | | $ | (6,387 | ) | $ | (214,914 | ) | $ | 3,793 | | $ | 88,715 | | | | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | |
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, | |
| |
| |
| | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
Cash flows from operating activities: | | | | | | | | | | |
Net loss | | ($ | 12,960 | ) | ($ | 22,233 | ) | ($ | 23,564 | ) |
| | | | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | |
Depreciation and amortization of property, plant and equipment | | | 2,962 | | | 2,727 | | | 2,185 | |
Amortization of intangible assets | | | 1,507 | | | 1,542 | | | 1,277 | |
Provision for uncollectible accounts receivable | | | 4,431 | | | 3,480 | | | 5,189 | |
Deferred income tax provision (benefit) | | | 17 | | | (45 | ) | | — | |
Share based compensation charges | | | 1,049 | | | 1,170 | | | 1,435 | |
Share based 401(k) employer match expense | | | 690 | | | 1,115 | | | 582 | |
Deferred revenue recognized | | | (38 | ) | | (450 | ) | | (475 | ) |
Foreign exchange (gain) loss on intercompany loan | | | (131 | ) | | 45 | | | 697 | |
| | | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | (6,537 | ) | | (3,844 | ) | | (1,409 | ) |
Inventories | | | (178 | ) | | 681 | | | 2,647 | |
Prepaid expenses | | | (432 | ) | | 220 | | | 208 | |
Accounts payable – trade | | | 1,462 | | | 2,348 | | | (571 | ) |
Accrued liabilities | | | (208 | ) | | (232 | ) | | 528 | |
Other current liabilities | | | 34 | | | (78 | ) | | (206 | ) |
Other liabilities | | | 6 | | | 90 | | | — | |
| |
|
|
|
|
|
|
|
| |
Total adjustments | | | 4,634 | | | 8,769 | | | 12,087 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash used in operating activities | | | (8,326 | ) | | (13,464 | ) | | (11,477 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Capital expenditures | | | (1,223 | ) | | (3,251 | ) | | (2,709 | ) |
Maturities of short term investments | | | 182,453 | | | 232,140 | | | 318,650 | |
Purchases of short term investments | | | (167,646 | ) | | (213,643 | ) | | (361,956 | ) |
(Increase) decrease in security deposits and other | | | (45 | ) | | 81 | | | 384 | |
Acquisitions, net of cash acquired | | | — | | | — | | | (14,541 | ) |
| |
|
| |
|
| |
|
| |
Net cash provided by (used in) investing activities | | | 13,539 | | | 15,327 | | | (60,172 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Installment loan payments | | | (68 | ) | | — | | | — | |
Proceeds from the exercise of stock options | | | — | | | — | | | 348 | |
| |
|
| |
|
| |
|
| |
Net cash (used) provided by financing activities | | | (68 | ) | | — | | | 348 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 257 | | | (33 | ) | | (92 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 5,402 | | | 1,830 | | | (71,393 | ) |
Cash and cash equivalents - beginning of year | | | 8,759 | | | 6,929 | | | 78,322 | |
| |
|
| |
|
| |
|
| |
Cash and cash equivalents - end of year | | $ | 14,161 | | $ | 8,759 | | $ | 6,929 | |
| |
|
| |
|
| |
|
| |
F-6
The accompanying notes are an integral part of these consolidated financial statements
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 1 - Summary of significant accounting policies
Nature of business
Enzo Biochem, Inc. (the “Company”) is an integrated life science and biotechnology company 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 in the New York, New Jersey and Eastern Pennsylvania medical communities. The Company operates in three segments (see Note 17).
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 amounts reported in the financial statements and accompanying footnotes. Actual results could differ from those estimates.
Foreign Currency Translation/Transactions
The Company has determined that the functional currency for its foreign subsidiaries is the local currency. For financial reporting purposes, 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. Gains or losses resulting from transactions entered into in other than the functional currency are recorded as foreign exchange gains and losses in the consolidated statements of operations.
Cash and cash equivalents
Cash and cash equivalents consist of demand deposits with banks and highly liquid money market funds.
Short term investments
Short term investments are highly liquid U.S. Government instruments with maturities of less than ninety days.
Fair Values of Financial Instruments
The recorded amounts of the Company’s cash and equivalents, short-term investments, receivables, accounts payable and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of short term investments is based on quoted market prices where available.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents, short term investments, and accounts receivable. The Company’s short term investments are invested in highly liquid US Government instruments.
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
The Company believes the fair value of the aforementioned financial instruments approximates the cost 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.
Accrual for Self-Funded Medical
Accruals for self-funded medical insurance are determined based on a number of assumptions and factors, including historical payment trends, claims history and current estimates. These estimated liabilities are not discounted. If actual trends differ from these estimates, the financial results could be impacted.
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.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Clinical laboratory services
Revenues from the Clinical Labs segment 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 tables of the Clinical Lab segment’s net revenues and revenue percentages by revenue category:
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2010 | | 2009 | |
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Revenue category | | (In 000’s) | | (in %) | | (In 000’s) | | (in %) | | (In 000’s) | | (in %) | |
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Medicare | | $ | 11,856 | | | 22 | | $ | 11,158 | | | 25 | | $ | 9,138 | | | 23 | |
Third-party payers | | | 24,335 | | | 46 | | | 19,534 | | | 44 | | | 20,073 | | | 51 | |
Patient self-pay | | | 11,554 | | | 22 | | | 8,758 | | | 20 | | | 6,056 | | | 15 | |
HMO’s | | | 5,017 | | | 10 | | | 4,728 | | | 11 | | | 4,337 | | | 11 | |
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Total | | $ | 52,762 | | | 100 | % | $ | 44,178 | | | 100 | % | $ | 39,604 | | | 100 | % |
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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 represent approximately 22%, 25% and 25% of the Clinical Labs segment net revenue for the years ended July 31, 2011, 2010 and 2009 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, 2011, 2010 and 2009, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were approximately 84%, 83% and 81%, respectively, of gross billings.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
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, 2011 and 2010, 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, 2011 and 2010, approximately 51% and 45%, respectively, of the Company’s net accounts receivable relates to its Clinical Labs business, which operates in the New York, New Jersey, and Eastern Pennsylvania medical communities.
The Life Sciences segment’s accounts receivable includes royalties receivable of $2.0 million and $2.5 million, as of July 31, 2011 and 2010, respectively, of which approximately $2.0 million and $1.8 million, respectively is from QIAGEN Gaithersburg Inc. (“Qiagen”) (see Note 13).
The following is a table of the Company’s net accounts receivable by segment.
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| | As of
July 31, 2011 | | As of
July 31, 2010 | |
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Net accounts receivable by segment | | (In 000’s) | | (in %) | | (In 000’s) | | (in %) | |
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Clinical Labs (by billing category) | | | | | | | | | | | | | |
Medicare | | $ | 1,434 | | | 19 | | $ | 849 | | | 14 | |
Third party payers | | | 3,087 | | | 40 | | | 2,664 | | | 46 | |
Patient self-pay | | | 2,865 | | | 37 | | | 2,024 | | | 35 | |
HMO’s | | | 314 | | | 4 | | | 296 | | | 5 | |
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Total Clinical Labs | | | 7,700 | | | 100 | % | | 5,833 | | | 100 | % |
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Total Life Sciences | | | 7,545 | | | | | | 7,173 | | | | |
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Total accounts receivable | | $ | 15,245 | | | | | $ | 13,006 | | | | |
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F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Changes in the Company’s allowance for doubtful accounts are as follows:
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| | July 31, 2011 | | July 31, 2010 | |
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Beginning balance | | $ | 2,839 | | $ | 4,786 | |
Provision for doubtful accounts | | | 4,431 | | | 3,480 | |
Write-offs | | | (3,782 | ) | | (5,427 | ) |
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Ending balance | | $ | 3,488 | | $ | 2,839 | |
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Inventories
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. Write downs of inventories to market value are based on a review of inventory quantities on hand and estimated sales forecasts based on sales history and anticipated future demand. Unanticipated changes in demand could have a significant impact on the value of our inventory and require additional write downs of inventory which would impact our results of operations.
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, 2011, 2010 or 2009.
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 is estimated using both a discounted cash flow model and market approach model. In determining fair value, the Company makes certain judgments on the assumptions included in the discounted cash flow such as forecasted revenue, gross profit margins, working capital cash flow, the identification of reporting units and the selection of comparable companies for the market approach. Trademarks are considered impaired if the carrying amount exceeds their estimated fair value. The fair value of the trademarks is estimated based on a discounted cash flow model. 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, 2011 and 2010
(Dollars in thousands except share data)
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 loss
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. Accumulated other comprehensive income is a separate component of stockholders’ equity and consists of foreign currency translation adjustments.
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 $235, $375 and $634 for the years ended July 31, 2011, 2010 and 2009, 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, 2011, 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 accounting pronouncements which establish 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, 2011 and 2010
(Dollars in thousands except share data)
Net income (loss) 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. Diluted weighted average shares outstanding for fiscal 2011, 2010 and 2009 do not include the potential common shares from stock options and unvested restricted stock because to do so would have been antidilutive and as such is the same as basic weighted average shares outstanding. 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, 2011, 2010, and 2009 was 27,000, 51,000, and 105,000, respectively.
For the years ended July 31, 2011, 2010 and 2009, the effect of approximately 785,000, 1,132,000 and 1,191,000 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 for the years ended July 31:
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| | 2011 | | 2010 | | 2009 | |
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Numerator: | | | | | | | | | | |
Net loss | | $ | (12,960 | ) | $ | (22,233 | ) | $ | (23,564 | ) |
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Denominator: | | | | | | | | | | |
Weighted-average common shares outstanding- Basic | | | 38,357 | | | 38,001 | | | 37,511 | |
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Add: effect of dilutive stock options and restricted stock | | | — | | | — | | | — | |
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Weighted-average common shares outstanding - Diluted | | | 38,357 | | | 38,001 | | | 37,511 | |
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Net loss per share | | | | | | | | | | |
Basic and diluted | | $ | (0.34 | ) | $ | (0.59 | ) | $ | (0.63 | ) |
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Share-Based Compensation
The Company records compensation expense associated with stock options and restricted stock based upon the fair value of stock based awards as measured at the grant date. The expense is recorded by amortizing the fair values on a straight line basis over the vesting period, adjusted for estimated forfeitures.
For the years ended July 31, 2011, 2010 and 2009, share-based compensation expense relating to the fair value of restricted shares and restricted stock units was approximately $1,049, $1,170, and $1,435, respectively (see Note 11). No excess tax benefits were recognized for the year ended July 31, 2011, 2010 and 2009.
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:
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Cost of clinical laboratory services | | $ | 10 | | $ | 12 | | $ | 8 | |
Research and development | | | 14 | | | 14 | | | 13 | |
Selling, general and administrative | | | 1,025 | | | 1,144 | | | 1,414 | |
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| | $ | 1,049 | | $ | 1,170 | | $ | 1,435 | |
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As of July 31, 2011, there was $1.1 million of total unrecognized compensation cost related to nonvested share-based payment arrangements granted under the Company’s incentive stock plans, which will be recognized over a weighted average remaining life of approximately eight months.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Subsequent events
In accordance with authoritative guidance, the Company evaluates subsequent events through the date of filing.
Effect of new accounting pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends the current fair value measurement and disclosure guidance of Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurement” to include increased transparency around valuation inputs and investment categorization. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company does not expect the adoption of these provisions to have a material impact on the its consolidated financial statements or on future operating results.
In June 2011, the FASB issued ASU 2011-05,Presentation of Comprehensive Income, updating ASCTopic 220, Comprehensive Income.Under the amended ASCTopic 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates the current option to present other comprehensive income and its components in the Statement of Stockholders’ Equity. This guidance does not change the components that are recognized in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and is to be applied retrospectively. The Company does not believe the adoption of this guidance in the first quarter of fiscal 2013 will have an impact on its consolidated financial statements or on future operating results.
In July 2011, the FASB issued ASU No. 2011-07: Health Care Entities (Topic 954) — Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. This update was issued to provide greater transparency relating to accounting practices used for net patient service revenue and related bad debt allowances by health care entities. Some health care entities recognize patient service revenue at the time the services are rendered regardless of whether the entity expects to collect that amount or has assessed the patient’s ability to pay. These prior accounting practices used by some health care entities resulted in a gross-up of patient service revenue and the provision for bad debts, causing difficulty for outside users of financial statements to make accurate comparisons and analyses of financial statements among entities. ASU No. 2011-07 requires certain healthcare entities to change the presentation of the statement of operations, reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue and also requires enhanced quantitative and qualitative disclosures relevant to the entity’s policies for recognizing revenue and assessing bad debts. This update is not designed and will not change the net income reported by healthcare entities. This update is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect that this update will have any material impact on its consolidated financial statements. The Company is currently evaluating if the update will have any impact on the presentation of its statement of operations.
Reclassifications
Certain amounts in prior years have been reclassified to conform to current year presentation.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
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”) 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 was $13,061 including acquisition costs of approximately $540. 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 fair values of the assets acquired and liabilities assumed for the Assay Designs acquisition:
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Current assets | | $ | 4,235 | |
Property and equipment | | | 1,747 | |
Other assets | | | 11 | |
Intangible assets | | | 6,360 | |
Goodwill | | | 1,823 | |
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Total assets acquired | | | 14,176 | |
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Current liabilities | | | 1,115 | |
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Total liabilities assumed | | | 1,115 | |
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Net assets acquired | | $ | 13,061 | |
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The purchase price allocation is based on a valuation of acquired tangible and intangible assets based on the final valuation completed in fiscal 2010. The Company determined the fair value of the identifiable intangible assets based on various factors including the cost and discounted cash flow models 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.
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
For financial reporting purposes, useful lives for the acquisitions have been assigned as follows:
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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 the acquisition completed in 2009 as if the acquisition had occurred as of August 1, 2008. 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.
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Year ended July 31, 2009 | | 2009 | |
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Net revenues | | $ | 96,227 | |
Net loss | | $ | (24,098 | ) |
Net loss per common share: | | | | |
Basic and diluted | | $ | (0.64 | ) |
Note 3- Supplemental disclosure for statement of cash flows
In the years ended July 31, 2011, 2010, and 2009, income taxes paid by the Company approximated $107, $186, and $220 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.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 4 – Short term investments
At July 31, 2011 and 2010 the Company’s short-term investments, whose fair value approximates cost, are in U.S. Treasury bills, which are purchased at discounts with remaining maturities of under ninety days.
The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:
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| Level 1: | Valuations based on quoted market prices in active markets for identical assets or liabilities. |
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| Level2: | Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities |
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| Level 3: | Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
At July 31, 2011 and 2010, the Company’s short-term investments are classified as Level 1 assets.
Note 5 – Accumulated Other Comprehensive Income (Loss)
The following is a summary of accumulated other comprehensive income (loss), relating to the effect of foreign currency translation:
| | | | | | | | | | | |
| | Accumulated income
(loss) before tax | | Tax (expense)
or benefit | | Accumulated income
(loss) net of tax | |
| | |
| |
| |
| |
Balance - July 31, 2008 | | $ | 1,586 | | | — | | $ | 1,586 | |
Fiscal 2009 – unrealized loss on foreign currency translation | | | (1,310 | ) | | — | | | (1,310 | ) |
| |
|
| |
|
| |
|
| |
Balance – July 31, 2009 | | | 276 | | | — | | | 276 | |
Fiscal 2010 – unrealized gain on foreign currency translation | | | 599 | | | — | | | 599 | |
| |
|
| |
|
| |
|
| |
Balance – July 31, 2010 | | | 875 | | | — | | | 875 | |
Fiscal 2011 – unrealized gain on foreign currency translation | | | 2,918 | | | — | | | 2,918 | |
| |
|
| |
|
| |
|
| |
Balance – July 31, 2011 | | $ | 3,793 | | | — | | $ | 3,793 | |
| |
|
| |
|
| |
|
| |
Note 6 - Inventories
Inventories consisted of the following at July 31:
| | | | | | | | |
| | 2011 | | 2010 | |
| | |
| |
| |
Raw materials | | $ | 1,063 | | $ | 921 | |
Work in process | | | 2,517 | | | 2,136 | |
Finished products | | | 5,680 | | | 5,825 | |
| |
|
| |
|
| |
| | $ | 9,260 | | $ | 8,882 | |
| |
|
| |
|
| |
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 7 – Property, plant, and equipment
At July 31, 2011 and 2010 property, plant, and equipment consist of:
| | | | | | |
| | | 2011 | | 2010 | |
| | |
| |
| |
Building and building improvements | | $ | 4,320 | | $ | 4,309 | |
Machinery and equipment | | | 6,916 | | | 6,814 | |
Office furniture and computer equipment | | | 14,551 | | | 13,057 | |
Leasehold improvements | | | 4,694 | | | 4,572 | |
| |
|
| |
|
| |
| | | 30,481 | | | 28,752 | |
Accumulated depreciation and amortization | | | (20,858 | ) | | (17,606 | ) |
| |
|
| |
|
| |
| | | 9,623 | | | 11,146 | |
Land and land improvements | | | 712 | | | 712 | |
| |
|
| |
|
| |
| | $ | 10,335 | | $ | 11,858 | |
| |
|
| |
|
| |
Note 8 – Goodwill and intangible assets
The Company’s change in the net carrying amount of goodwill by business segment is as follows:
| | | | | | | | | | |
| | Enzo Life
Sciences | | Enzo
Clinical
Labs | | Total | |
| |
| |
| |
| |
August 1, 2009 | | $ | 17,444 | | $ | 7,452 | | $ | 24,896 | |
Foreign currency translation | | | 47 | | | — | | | 47 | |
| |
|
| |
|
| |
|
| |
July 31, 2010 | | | 17,491 | | | 7,452 | | | 24,943 | |
Additional purchase price consideration – see Note 16 | | | 1,150 | | | — | | | 1,150 | |
Foreign currency translation | | | 1,280 | | | — | | | 1,280 | |
| |
|
| |
|
| |
|
| |
July 31, 2011 | | $ | 19,921 | | $ | 7,452 | | $ | 27,373 | |
| |
|
| |
|
| |
|
| |
Intangible assets, all of which are included in the Life Sciences segment, consist of the following:
| | | | | | | | | | | | | | | | | | | |
| | July 31, 2011 | | July 31, 2010 | |
| |
| |
| |
| | Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net | |
| |
| |
| |
| |
| |
| |
| |
Finite-lived intangible assets: | | | | | | | | | | | | | | | | | | | |
Patents | | $ | 11,027 | | $ | (10,278 | ) | $ | 749 | | $ | 11,027 | | $ | (10,154 | ) | $ | 873 | |
Customer relationships | | | 12,789 | | | (3,472 | ) | | 9,317 | | | 12,099 | | | (2,248 | ) | | 9,851 | |
Non-compete and employment agreements | | | 547 | | | (547 | ) | | — | | | 478 | | | (396 | ) | | 82 | |
Website and acquired content | | | 1,063 | | | (748 | ) | | 315 | | | 1,009 | | | (489 | ) | | 520 | |
Licensed technology and other | | | 649 | | | (355 | ) | | 294 | | | 628 | | | (285 | ) | | 343 | |
Indefinitely-lived intangible assets: | | | | | | | | | | | | | | | | | | | |
Trademarks | | | 9,310 | | | — | | | 9,310 | | | 8,699 | | | — | | | 8,699 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 35,385 | | $ | (15,400 | ) | $ | 19,985 | | $ | 33,940 | | $ | (13,572 | ) | $ | 20,368 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
F-18
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Estimated amortization expense related to these finite-lived intangible assets for the five succeeding fiscal years ending July 31 is as follows:
| | | | | | | | | | |
2012 | | $ | 1,367 | |
2013 | | | 1,311 | |
2014 | | | 1,196 | |
2015 | | | 1,154 | |
2016 | | | 1,143 | |
At July 31, 2011, the weighted average useful lives of amortizable intangible assets were approximately eight years.
Amortization expense for the years ended July 31, 2011, 2010, and 2009 was $1,507, $1,542, and $1,277, respectively.
Note 9 - Income taxes
The benefit (provision) for income taxes for fiscal years ended July 31 is as follows:
| | | | | | | | | | |
| | 2011 | | 2010 | | 2009 | |
| | |
| |
| |
| |
Current (provision) benefit: | | | | | | | | | | |
Federal | | $ | 8 | | $ | 119 | | $ | — | |
State and local | | | (161 | ) | | (75 | ) | | (75 | ) |
Foreign | | | 33 | | | (61 | ) | | (12 | ) |
Deferred (provision) benefit | | | (17 | ) | | 45 | | | — | |
| |
|
| |
|
| |
|
| |
(Provision) benefit for income taxes | | $ | (137 | ) | $ | 28 | | $ | (87 | ) |
| |
|
| |
|
| |
|
| |
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 are as follows:
| | | | | | | |
| | 2011 | | 2010 | |
| |
| |
| |
Deferred tax assets: | | | | | | | |
Federal tax carryforward losses | | $ | 25,504 | | $ | 23,100 | |
Provision for uncollectible accounts receivable | | | 1,340 | | | 1,057 | |
State and local tax carry forward losses | | | 2,419 | | | 2,117 | |
Accrued royalties | | | 143 | | | 103 | |
Stock compensation | | | 1,218 | | | 1,017 | |
Depreciation | | | — | | | 183 | |
Research and development and other tax credit carryforwards | | | 633 | | | 618 | |
Foreign tax carryforward losses | | | 381 | | | 284 | |
Realized and unrealized losses on marketable securities | | | — | | | 138 | |
Inventory | | | 1,515 | | | 1,094 | |
Accrued expenses | | | 736 | | | 263 | |
Other, net | | | 23 | | | 15 | |
| |
|
| |
|
| |
Gross deferred tax assets | | | 33,912 | | | 29,989 | |
| |
|
| |
|
| |
| | | | | | | |
Deferred tax liabilities: | | | | | | | |
Deferred patent costs | | | (170 | ) | | (204 | ) |
Intangibles | | | (2,983 | ) | | (2,797 | ) |
Depreciation | | | (27 | ) | | | |
Prepaid expenses | | | (691 | ) | | (654 | ) |
Other, net | | | (55 | ) | | (36 | ) |
| |
|
| |
|
| |
Gross deferred tax liabilities | | | (3,926 | ) | | (3,691 | ) |
| |
|
| |
|
| |
| | | | | | | |
Net deferred tax assets (liabilities) before valuation allowance | | | 29,986 | | | 26,298 | |
Less: valuation allowance | | | (32,920 | ) | | (28,901 | ) |
| |
|
| |
|
| |
Net deferred tax liabilities | | $ | (2,934 | ) | $ | (2,603 | ) |
| |
|
| |
|
| |
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
At July 31, 2011, the Company had net deferred tax liabilities of approximately $2.9 million which consists primarily of identifiable intangible assets and cumulative tax deductions in excess of book expenses recognized by foreign subsidiaries.
Net deferred tax liabilities are included in the consolidated balance sheets as follows:
| | | | | | | |
| | July 31, 2011 | | July 31, 2010 | |
| |
| |
| |
Deferred taxes: | | | | | | | |
Current | | $ | — | | $ | 21 | |
Non-current | | | 2,934 | | | 2,582 | |
| |
|
| |
|
| |
| | $ | 2,934 | | $ | 2,603 | |
| |
|
| |
|
| |
The Company recorded a valuation allowance during the year ended July 31, 2011 and 2010 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, 2011, the Company had U.S. federal net operating loss carryforwards of approximately $75.0 million. The U.S. federal tax loss carryforwards, if not fully utilized, expire between 2012 and 2031. Utilization is dependent on generating sufficient taxable income prior to expiration of the tax loss carryforwards. As of July 31, 2011, the Company had foreign loss carryforwards of approximately $1.5 million.
As a result of certain acquisitions approximately $1.5 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:
| | | | | | | | | | |
| | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
United States operations | | $ | (12,284 | ) | $ | (19,642 | ) | $ | (21,221 | ) |
International operations | | | (539 | ) | | (2,619 | ) | | (2,256 | ) |
| |
|
| |
|
| |
|
| |
Loss before taxes | | $ | (12,823 | ) | $ | (22,261 | ) | $ | (23,477 | ) |
| |
|
| |
|
| |
|
| |
The (provision) benefit for income taxes were at rates different from U.S. federal statutory rates for the following reasons for the years ended July 31:
| | | | | | | | | | |
| | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
Federal statutory rate | | | 34 | % | | 34 | % | | 34 | % |
Expenses not deductible for income tax return purposes | | | (2.3 | )% | | (1.5 | )% | | (0.4 | )% |
State income taxes, net of (benefit) of federal tax deduction | | | 1.0 | % | | 0.1 | % | | 2.5 | % |
Change in valuation allowance | | | (34.6 | )% | | (32.3 | )% | | (37.8 | )% |
Reversal of tax reserve | | | 0.1 | % | | 0.5 | | | — | |
Other | | | 0.7 | % | | (0.7 | )% | | 1.3 | |
| |
|
| |
|
| |
|
| |
| | | (1.1 | )% | | 0.1 | % | | (0.4 | )% |
| |
|
| |
|
| |
|
| |
U.S. federal income taxes have not been provided on the undistributed earnings of approximately $230 at July 31, 2011 of the Company’s foreign subsidiaries, because the determination of the amount of unrecognized US federal income tax liability with respect to such earnings is not material.
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
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 years July 31, 2008 through 2010.
Note 10 – Accrued Liabilities, Other Current Liabilities and Other Liabilities
At July 31 accrued liabilities consist of:
| | | | | | | |
| | 2011 | | 2010 | |
| |
| |
| |
Legal | | $ | 610 | | $ | 877 | |
Payroll, benefits, severance and commissions | | | 4,286 | | | 4,012 | |
Research and development | | | 709 | | | 716 | |
Professional fees | | | 782 | | | 963 | |
Outside reference lab testing | | | — | | | 194 | |
Other | | | 1,801 | | | 1,747 | |
| |
|
| |
|
| |
| | $ | 8,188 | | $ | 8,509 | |
| |
|
| |
|
| |
At July 31 other current liabilities consist of:
| | | | | | | |
| | 2011 | | 2010 | |
| |
| |
| |
Liability for purchase price consideration (see Note 16) | | $ | 1,150 | | $ | — | |
Deferred revenue | | | 396 | | | 496 | |
Other | | | 137 | | | 76 | |
| |
|
| |
|
| |
| | $ | 1,683 | | $ | 572 | |
| |
|
| |
|
| |
Self-Insured Medical Plan
Beginning in February 2010 in an attempt to offset the cost of rising health care expenses, the Company began self-funding medical insurance coverage for certain of its U.S. based employees. The risk to the Company is being limited through the use of individual and aggregate stop loss insurance. As of July 31, 2011 and July 31 2010, the Company has established a reserve of $0.4 million and $0.6 million which is included in accrued liabilities, for claims that have been reported but not paid and incurred but not reported. The reserve is based upon the Company’s historical payment trends, claim history and current estimates.
Installment Loans
The Company has installment loans outstanding for transportation and lab equipment aggregating $0.2 million at July 31, 2011, which bear interest at interest rates ranging from 0% to 5.75% per annum, and are secured by the underlying assets. The principal payments under the installment loans are as follows: 2012 - $0.1 million, included in Other Current Liabilities, 2013 – $0.06 million and 2014 - $0.04 million totaling $0.1 million included in Other Liabilities.
Note 11 – Stockholders’ equity
Common stock
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 International acquisition earn-out of $2.5 million.
Treasury stock
In fiscal 2011, the Company issued 173,834 shares from treasury stock for its employees’ 401(k) matched contributions obligation. The Company recorded an expense of $690 for the match, reducing treasury stock by $2,467 for the average acquisition cost of such shares and adjusting additional paid in capital by $1,777.
F-21
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
In fiscal 2010, the Company issued 111,706 shares from treasury stock for its employees’ 401(k) matched contributions obligation. The Company recorded an expense of $697 for the match, reducing treasury stock by $1,586 for the average acquisition cost of such shares and adjusting additional paid in capital by $889.
In fiscal 2009, the Company issued 142,150 shares from treasury stock for its employees’ 401(k) matched contributions obligation. The Company recorded an expense of $582 for the match, reducing treasury stock by $2,017 for the average acquisition cost of such shares and adjusting additional paid in capital by $1,435.
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.
Incentive stock plans
The Company has an incentive stock option plan (the “1999 Plan”) and an incentive stock option and restricted stock award plan (the “2005 Plan”),under which the Company may grant 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. On January 14, 2011, the Company’s stockholders approved the adoption of the 2011 Incentive Plan (the “2011 Plan”) which provides for the issuance of equity awards, including among others, options, restricted stock and restricted stock units for up to 3,000,000 Common Shares. No additional awards may be granted under the 1999 or 2005 Plans. The exercise price of options granted under the 2011 Plan, and consistent with other Plans, is equal to or greater than fair market value of the Common Stock on the date of grant. Unless terminated earlier by the Board of Directors the 2011 Plan will terminate at the earliest of; (a) such time as no shares of Common Stock remain available for issuance under the 2011 Plan or (b) tenth anniversary of the effective date of the 2011 Plan. Awards outstanding upon expiration of the 2011 Plan shall remain in effect until they have been exercised, terminated, or have expired. As of July 31, 2011,there were approximately 2,818,300 shares available for grant under the 2011 Plan.
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 2011 Plan provides for the issuance of restricted stock and restricted stock unit awards which generally vest over a two to four year period.
A summary of the information pursuant to the Company’s stock option plans for the years ended July 31, 2011, 2010, and 2009 is as follows:
| | | | | | | | | | | | | | | | | | | |
| | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
| | Options | | Weighted -
Average
Exercise
Price | | Options | | Weighted -
Average
Exercise
Price | | Options | | Weighted -
Average
Exercise
Price | |
| |
| |
| |
| |
| |
| |
| |
Outstanding at beginning of year | | | 1,132,450 | | $ | 14.30 | | | 1,191,519 | | $ | 14.41 | | | 2,275,415 | | $ | 13.13 | |
Exercised | | | — | | $ | — | | | — | | $ | — | | | (251,162 | ) | $ | 5.87 | |
Cancelled | | | (347,326 | ) | $ | 13.78 | | | (59,069 | ) | $ | 16.14 | | | (832,734 | ) | $ | 13.87 | |
| |
|
| | | | |
|
| | | | |
|
| | | | |
Outstanding at end of year | | | 785,124 | | $ | 14.53 | | | 1,132,450 | | $ | 14.30 | | | 1,191,519 | | $ | 14.41 | |
| |
|
| | | | |
|
| | | | |
|
| | | | |
Exercisable at end of year | | | 785,124 | | $ | 14.53 | | | 1,132,450 | | $ | 14.30 | | | 1,191,519 | | $ | 14.41 | |
| |
|
| | | | |
|
| | | | |
|
| | | | |
Weighted average fair value of options granted during year | | | | | $ | — | | | | | | — | | | | | $ | — | |
| | | | |
|
| | | | |
|
| | | | |
|
| |
The aggregate intrinsic value of stock options exercised during the years ended July 31, 2011, 2010 and 2009, including the non-cash transactions (see Note 3) was $0, $0 and $1.4 million, respectively. There is no aggregate intrinsic value of options both outstanding and exercisable at July 31, 2011.
F-22
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
The following table summarizes information for stock options outstanding at July 31, 2011:
| | | | | | | | | | |
| | Options outstanding and exercisable | |
| |
| |
Range of Exercise prices | | Shares | | Weighted- Average
Remaining
Contractual Life in
years | | Weighted-
Average Exercise
Price | |
| |
| |
| |
| |
$8.33-12.25 | | | 362,489 | | | 1.45 | | $ | 11.80 | |
$12.93-19.02 | | | 413,952 | | | 3.0 | | $ | 16.80 | |
$20.20 | | | 8,683 | | | 0.5 | | $ | 20.20 | |
| |
|
| | | | | | | |
| | | 785,124 | | | | | | | |
| |
|
| | | | | | | |
Restricted Stock Awards
During fiscal 2011, 2010 and 2009, the compensation committee of the Company’s board of directors approved grants of restricted stock and restricted stock unit awards (the “Awards”), respectively, to the Company’s directors, certain officers and certain employees under the 2011 and 2005 Plans. 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 based on the fair value of the award as measured on the grant date and 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 Plans’ terms. The Awards settle in shares of the Company’s common stock on a one-for-one basis. As of July 31, 2011, 311,952 shares were unvested.
A summary of the information pursuant to the Company’s Restricted Stock Awards for the years ended July 31, 2011, 2010 and 2009 is as follows:
| | | | | | | | | | | | | | | | |
| | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
| | Awards | | Weighted -
Average
Award Price | | Awards | | Weighted -
Average
Award Price | | Awards | | Weighted -
Average
Award Price | |
| |
| |
| |
| |
| |
| |
| |
Outstanding at beginning of year | | 417,578 | | $ | 5.50 | | 377,400 | | $ | 6.05 | | 220,240 | | $ | 12.34 | |
Awarded | | 181,643 | | $ | 3.78 | | 241,610 | | $ | 5.54 | | 291,801 | | $ | 4.05 | |
Vested | | (263,112 | ) | $ | 5.11 | | (192,845 | ) | $ | 6.46 | | (128,941 | ) | $ | 12.11 | |
Forfeited | | (24,157 | ) | $ | 5.27 | | (8,587 | ) | $ | 9.29 | | (5,700 | ) | $ | 10.18 | |
| |
| | | | |
| | | | |
| | | | |
Outstanding at end of year | | 311,952 | | $ | 4.84 | | 417,578 | | $ | 5.50 | | 377,400 | | $ | 6.05 | |
| |
| | | | |
| | | | |
| | | | |
Weighted average market value of awards granted during year | | | | $ | 3.78 | | | | $ | 5.54 | | | | $ | 4.05 | |
| | | |
|
| | | |
|
| | | |
|
| |
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, 2011, 2010, and 2009, 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 share-based 401(k) employer matched contributions and accrued expense was approximately $690, $1,115, and $582 in fiscal years 2011, 2010, and 2009, respectively.
F-23
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
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, 2011, 2010 and 2009, the employer contributions related to the Swiss benefit pension plan was approximately $480, $408 and $399, respectively. Pension expense at the other international operations was approximately $38, $36 and $36 for the years ended July 31, 2011, 2010 and 2009, respectively.
Note 13 – Royalty and other income
The Company has a license agreement with Qiagen that began in 2005, whereby the Company earns quarterly running royalties on the net sales of Qiagen products subject to the license until the expiration of the patent on April 24, 2018. During the years ended July 31, 2011, 2010 and 2009, the Company recorded royalty income under the Agreement of approximately $6.8 million, $6.8 million and $6.7 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, which is still in effect, 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 non-expired 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. This one-time fee was recognized as revenue through August 31, 2010 representing the longest expected patent life of the related patents. Abbott has notified the Company that they have made a final royalty payment because they are unaware of any non-expired patents. The Company is presently reviewing its patent portfolio and Abbott’s position. The Licensing Agreement between the parties remains in full force and effect and the Company continues its commercialization efforts under the contract terms. At July 31, 2010, the Company’s balance sheet includes current deferred revenue of approximately $0.1 million relating to the one-time fee. During the years ended July 31, 2011, 2010, and 2009, the Company recorded approximately $0.4 million, $3.0 million and $2.7 million, respectively, in royalties and license fee income under the Licensing Agreement.
F-24
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 15 – Commitments
Leases
The Company leases equipment, office and laboratory space under several non-cancelable operating leases that expire between August 2011 and May 2020. 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 $1,509, $1,470, and $1,424 during fiscal years 2011, 2010 and 2009, respectively.
Total rent expense incurred by the Company during fiscal 2011, 2010 and 2009 was approximately $4,023, $4,076, and $3,818, respectively. Minimum future annual rentals under non-cancelable operating leases, net of sublease rental income of $117 as of July 31, 2011, are as follows:
| | | | |
Years ended July 31, | | | | |
| | | |
2012 | | $ | 4,520 | |
2013 | | | 3,750 | |
2014 | | | 2,935 | |
2015 | | | 2,705 | |
2016 | | | 2,512 | |
Thereafter | | | 4,170 | |
| |
|
| |
| | $ | 20,592 | |
| |
|
| |
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 2012. Aggregate minimum compensation commitments, exclusive of any severance provisions, for the year ending July 31, 2012 is $1,223.
Note 16– Contingencies
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. 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. On March 13, 2009, the court denied defendants’ summary judgment motion and stayed the cases pending resolution of an appeal to the United States Court of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc. On March 26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of Connecticut’s grant of summary judgment of invalidity as to various patents at issue in the Applera case, and remanded the Applera case for further proceedings consistent with the Federal Circuit’s opinion. On September 23, 2010, Applera petitioned the Supreme Court of the United States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court denied Applera’s petition for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Amersham action.
F-25
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
On August 26, 2011, the court allowed the defendants to renew their motions for summary judgment related only to alleged non-infringement of some of the patents in suit. Defendants’ initial brief is to be filed by October 11, 2011, and all briefing is to be completed by December 16, 2011. The Company does not believe the defendants’ motion has merit, and will oppose it vigorously.
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. On January 3, 2007, Affymetrix moved for summary judgment on all counts of the Complaint. A two-day hearing on Affymetrix’s summary judgment motion was held on July 17 through July 18, 2007. On March 13, 2009, the court denied Affymetrix’s motion and stayed the case pending resolution of an appeal in the United States Court of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc. On March 26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of Connecticut’s grant of summary judgment of invalidity as to various patents at issue in the Applera case, and remanded the Applera case for further proceedings consistent with the Federal Circuit’s opinion. In light of the Federal Circuit’s remand of the Applera case to the District of Connecticut and the impending trial, on May 27, 2010, the court maintained its stay of the Affymetrix case until further notice. On September 23, 2010, Applera petitioned the Supreme Court of the United States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court denied Applera’s petition for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Affymetrix action. On August 26, 2011, the court allowed Affymetrix to renew its motion for summary judgment related only to alleged non-infringement of one patent in suit. Affymetrix’s initial brief is to be filed by October 11, 2011, and all briefing is to be completed by December 16, 2011. The Company does not believe Affymetrix’s motion has merit, and will oppose it vigorously.
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 patents. Discovery has commenced. The Court issued a Markman opinion on July 10, 2006. On January 3, 2007, Roche moved for summary judgment on all counts of the Complaint.
F-26
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
During a two-day hearing held on July 17 through July 18, 2007, Roche subsequently withdrew its invalidity portion of its summary judgment motion. On March 13, 2009, the court denied Roche’s motion and stayed the cases pending resolution of an appeal to the United States Court of Appeals for the Federal Circuit in Enzo’s Connecticut litigation against Applera Corporation and Tropix, Inc. On March 26, 2010, the United States Court of Appeals for the Federal Circuit reversed the District of Connecticut’s grant of summary judgment of invalidity as to various patents at issue in the Applera case, and remanded the Applera case for further proceedings consistent with the Federal Circuit’s opinion. In light of the Federal Circuit’s remand of the Applera case to the District of Connecticut and the impending trial, on May 27, 2010, the court maintained its stay of the Roche case until further notice. On September 23, 2010, Applera petitioned the Supreme Court of the United States for a writ of certiorari, seeking review of the Federal Circuit’s ruling. On June 21, 2011, the Supreme Court denied Applera’s petition for certiorari. Consequently, on August 16, 2011, the court lifted the stay in the Roche action. On August 26, 2011, the court allowed Roche to renew its motion for summary judgment related only to alleged non-infringement of some of the patents in suit. Roche’s initial brief is to be filed by October 11, 2011, and all briefing is to be completed by December 16, 2011. The Company does not believe Roche’s motion has merit, and will oppose it vigorously.
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). 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. On March 26, 2010, the Federal Circuit issued an order concluding that the claims of U.S. Patent Nos. 5,328,824 and 5,449,767 were not indefinite and that there were genuine issues of material fact as to anticipation. The Court reversed the district court’s summary judgment of invalidity of those two patents and remanded the case back to the Connecticut Court. Applera and Tropix then filed a combined petition for panel rehearing and rehearing en banc. On May 26, 2010, the Federal Circuit issued an order denying both petitions. Applera filed a petition with the U.S. Supreme Court for a writ of certiorari on September 23, 2010. On June 19, 2011, the Court denied that petition. The case is currently scheduled for trial in February of 2012. 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.
On or about March 6, 2002, an action was commenced against the Company and certain officers and directors, by an investor in the Company, Lawrence Glazer and on behalf of others, who had filed for bankruptcy protection. The complaint alleged securities and common law fraud and breach of fiduciary duty and sought in excess of $150 million in damages. On August 22, 2002, the complaint was voluntarily dismissed; however a new substantially similar complaint was filed at the same time. On October 21, 2002, the Company and the other defendants filed a motion to dismiss the complaint, and the plaintiffs responded by amending the complaint and dropping their claims against defendants Keating and Yates. On November 18, 2002, the Company and the other defendants again moved to dismiss the Amended Complaint.
F-27
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
On July 16, 2003, the Court issued a Memorandum Opinion dismissing the Amended Complaint in its entirety with prejudice. Plaintiffs thereafter moved for reconsideration but the Court denied the motion on September 8, 2003. Plaintiffs thereafter appealed the decision to the United States Court of Appeals for the Fourth Circuit. On March 21, 2005, the Fourth Circuit affirmed the lower Court’s prior dismissal of all claims asserted in the action with the sole exception of a portion of the claim for common law fraud and remanded that remaining portion of the action to the U.S. District Court for the Eastern District of Virginia. On May 20, 2005, defendants again moved the District Court to dismiss the sole remaining claim before it. On July 14, 2005, the District Court granted defendants’ renewed motion to dismiss. On July 29, 2005, Plaintiffs moved to amend their Complaint and for reconsideration. On August 19, 2005, the Court denied Plaintiffs’ motion to amend and entered final judgment dismissing the Complaint. Plaintiffs then appealed the order and judgment to the Fourth Circuit. On September 21, 2006, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of the Complaint. Thereafter, in March 2007, the United States Supreme Court denied the Glasers’ Petition for Certiorari. Nevertheless, on January 14, 2011, many years after it was finally dismissed, Glaser filed a motion for reconsideration of the dismissal of his case with the United States District Court for the Eastern District of Virginia, along with a motion for sanctions, claiming in pertinent part that the Court was defrauded. The Company filed papers in opposition to the motion and, on April 1, 2011, the Court denied Glaser’s motion. Glaser subsequently appealed that dismissal to the Fourth Circuit. On October 4, 2011, his appeal was denied. The Company intends to defend vigorously any further effort by Glaser to re-open this long ago dismissed action.
In January 2006, three actions were filed against the Company and certain of its officers and directors by Francis Scott Hunt and others. These actions were filed by the same attorney who had previously filed a virtually identical claim against the Company and certain of its officers and directors in the Eastern District of Virginia. These actions are in many respects identical to the Glaser action. The first action (Hunt) was filed on or about January 10, 2006, on behalf of seven alleged shareholders. The second action (Roberts) was filed on or about January 11, 2006, and was ultimately consolidated at the Company’s request with the Hunt Action before Judge Scheindlin. One of the plaintiffs in the first action, Paul Lewicki, subsequently withdrew his claim for procedural reasons and re-filed a separate virtually identical complaint (the third action listed above) on or about August 21, 2006, and the Lewicki Action was also consolidated before Judge Scheindlin. The pleadings in all three actions are virtually identical and seek to set forth only a claim for common law fraud, based on the same essential allegations set forth in the Glaser Action,i.e., that there was a fraudulent scheme approximately ten years ago to pump and dump Enzo securities. The Company and the other defendants moved to dismiss all of the Complaints and that motion was granted by Judge Scheindlin. The Plaintiffs then amended their Complaints and the Hunts moved for reconsideration. The Company and the other defendants opposed the motion for reconsideration and moved again to dismiss the Amended Complaints that were filed. The Hunts’ motion for reconsideration was denied and two of the other Plaintiffs (the McMahons) thereafter withdrew their complaint with prejudice voluntarily. After further delays during which the remaining Plaintiffs hired new counsel, Plaintiffs proposed yet another revised Complaint. The defendants’ motions to dismiss the latest version of the Complaints of the remaining Plaintiffs was granted in part and denied in part. The remaining plaintiffs and defendants, including Enzo Biochem, Inc., then proceeded with discovery. Following the completion of discovery, the defendants moved for summary judgment. On June 15, 2009, Judge Scheindlin granted the remaining defendants’ motion for summary judgment and dismissed the complaints. The remaining Plaintiffs then filed a notice of appeal to the Second Circuit Court of Appeals. On August 30, 2011, the Second Circuit denied the appeal. The remaining Plaintiffs then moved for a rehearing, and that motion is currently pending. The Company continues to believe that these actions have no merit whatsoever and expects the Second Circuit to reaffirm the denial of their appeal. In any event, the Company will continue to defend these actions vigorously.
On or about September 22, 2010, Mayflower Partners, L.P. f/k/a Biomol International, L.P. (“Mayflower”) filed an action against Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (together “Enzo”) in the United States District Court for the Southern District of New York, alleging breach of the stock and asset purchase agreement dated as of May 8, 2008 between Enzo and Mayflower (the “Agreement”). Pursuant to the Agreement, the Company acquired the assets of Mayflower, and agreed, among other things, to make certain contingent earn-out payments to Mayflower, accounted for as additional purchase price consideration, if certain performance thresholds were met for each of the two annual periods following the closing. Mayflower alleges that Enzo breached the Agreement by allegedly failing to operate the acquired business in good faith during the second earn-out period and engaging in conduct the primary purpose of which was to avoid making a second earn-out period payment under the Agreement. In addition, Mayflower claims that Enzo breached the Agreement by allegedly failing to provide the documentation appropriate to support the calculation of defined financial criteria for the second earn-out period as required under the Agreement.
F-28
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
As part of the litigation, Mayflower moved by Order to Show cause to enjoin the accounting procedure specified under the Agreement. Mayflower’s motion was heard by a U.S. District Court Judge on September 27, 2010, who directed that the parties first go forward with the accounting procedure, as provided under the Agreement, before moving further with the litigation. The parties were unable to resolve the dispute through the accounting procedure. On January 27, 2011, Mayflower filed an amended complaint. On February 25, 2011, Enzo filed an answer to the amended complaint and on March 4, 2011 filed an amended counterclaim seeking fees and expense of the suit as provided under the Agreement. As provided under the Agreement, Mayflower’s maximum contingent earn-out was $2.5 million payable in either Enzo common stock or cash. The Company and Mayflower are currently negotiating a resolution to the second and final earn-out dispute and based on such negotiation the Company has accrued a $1.15 million settlement, expected to be in cash, which has been recorded in Goodwill as additional purchase price consideration. The Company recorded the liability in Other Current Liabilities.
The Company is party to other claims, legal actions, complaints, and contractual disputes 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.
F-29
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Note 17 – Segment reporting
The Company has three reportable segments: Life Sciences, Clinical Labs and Therapeutics. The Company’s Life Sciences segment develops, manufactures, and markets products to research and pharmaceutical customers. The Clinical Labs segment provides diagnostic services to the health care community. The Company’s Therapeutics segment conducts research and development activities for therapeutic drug candidates. 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.
The following financial information represents the operating results of the reportable segments of the Company:
Year ended July 31, 2011
| | | | | | | | | | | | | | | | |
| | Life
Sciences | | Clinical
Labs | | Therapeutics | | Other | | Consolidated | |
| |
| |
| |
| |
| |
| |
Revenues: | | | | | | | | | | | | | | | | |
Product revenues | | $ | 41,830 | | | — | | | — | | | — | | $ | 41,830 | |
Royalty and license fee income | | | 7,437 | | | — | | | — | | | — | | | 7,437 | |
Clinical laboratory services | | | — | | $ | 52,762 | | | — | | | — | | | 52,762 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | 49,267 | | | 52,762 | | | — | | | — | | | 102,029 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of product revenues | | | 22,137 | | | — | | | — | | | — | | | 22,137 | |
Cost of clinical laboratory services | | | — | | | 31,682 | | | — | | | — | | | 31,682 | |
Research and development | | | 5,784 | | | — | | $ | 2,022 | | | — | | | 7,806 | |
Selling, general and administrative | | | 17,855 | | | 18,426 | | | — | | $ | 8,910 | | | 45,191 | |
Provision for uncollectible accounts receivable | | | 16 | | | 4,415 | | | — | | | — | | | 4,431 | |
Legal | | | 726 | | | 387 | | | — | | | 2,597 | | | 3,710 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating expenses | | | 46,518 | | | 54,910 | | | 2,022 | | | 11,507 | | | 114,957 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | 2,749 | | | (2,148 | ) | | (2,022 | ) | | (11,507 | ) | | (12,928 | ) |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest | | | 2 | | | (5 | ) | | — | | | 14 | | | 11 | |
Other | | | (3 | ) | | 30 | | | — | | | 18 | | | 45 | |
Foreign exchange gain | | | 49 | | | — | | | — | | | — | | | 49 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) before income taxes | | $ | 2,797 | | $ | (2,123 | ) | $ | (2,022 | ) | $ | (11,475 | ) | $ | (12,823 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Depreciation and amortization included above | | $ | 3,282 | | $ | 1,012 | | $ | 47 | | $ | 128 | | $ | 4,469 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Share-based compensation included in above: | | | | | | | | | | | | | | | | |
Cost of clinical laboratory services | | | — | | $ | 10 | | | — | | | — | | $ | 10 | |
Research and development | | $ | 14 | | | — | | | — | | | — | | | 14 | |
Selling, general and administrative | | | 84 | | | 61 | | | — | | $ | 880 | | | 1,025 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 98 | | $ | 71 | | | — | | $ | 880 | | $ | 1,049 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 389 | | $ | 834 | | | — | | $ | — | | $ | 1,223 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
F-30
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Year ended July 31, 2010
| | | | | | | | | | | | | | | | |
| | Life
Sciences | | Clinical
Labs | | Therapeutics | | Other | | Consolidated | |
| |
| |
| |
| |
| |
| |
Revenues: | | | | | | | | | | | | | | | | |
Product revenues | | $ | 43,111 | | | — | | | — | | | — | | $ | 43,111 | |
Royalty and license fee income | | | 9,793 | | | — | | | — | | | — | | | 9,793 | |
Clinical laboratory services | | | — | | $ | 44,178 | | | — | | | — | | | 44,178 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | 52,904 | | | 44,178 | | | — | | | — | | | 97,082 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of product revenues | | | 22,547 | | | — | | | — | | | — | | | 22,547 | |
Cost of clinical laboratory services | | | — | | | 29,570 | | | — | | | — | | | 29,570 | |
Research and development | | | 7,202 | | | — | | $ | 2,502 | | | — | | | 9,704 | |
Selling, general and administrative | | | 19,800 | | | 18,503 | | | — | | $ | 10,092 | | | 48,395 | |
Provision for uncollectible accounts receivable | | | 48 | | | 3,432 | | | — | | | — | | | 3,480 | |
Legal | | | 145 | | | 222 | | | — | | | 1,379 | | | 1,746 | |
Litigation settlement | | | — | | | — | | | — | | | 3,698 | | | 3,698 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating expenses | | | 49,742 | | | 51,727 | | | 2,502 | | | 15,169 | | | 119,140 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | 3,162 | | | (7,549 | ) | | (2,502 | ) | | (15,169 | ) | | (22,058 | ) |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest | | | (5 | ) | | — | | | — | | | 24 | | | 19 | |
Other | | | (8 | ) | | 46 | | | — | | | 6 | | | 44 | |
Foreign exchange loss | | | (266 | ) | | — | | | — | | | — | | | (266 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) before income taxes | | $ | 2,883 | | $ | (7,503 | ) | $ | (2,502 | ) | $ | (15,139 | ) | $ | (22,261 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Depreciation and amortization included above | | $ | 3,110 | | $ | 982 | | $ | 52 | | $ | 125 | | $ | 4,269 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Share-based compensation included in above: | | | | | | | | | | | | | | | | |
Cost of clinical laboratory services | | $ | — | | | 12 | | $ | — | | | — | | $ | 12 | |
Research and development | | | 14 | | | — | | | — | | | — | | | 14 | |
Selling, general and administrative and legal | | | 114 | | | 78 | | | — | | $ | 952 | | | 1,144 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 128 | | | 90 | | $ | — | | $ | 952 | | $ | 1,170 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 1,450 | | $ | 1,728 | | $ | 11 | | $ | 62 | | $ | 3,251 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
F-31
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Year ended July 31, 2009
| | | | | | | | | | | | | | | | |
| | Life
Sciences | | Clinical
Labs | | Therapeutics | | Other | | Consolidated | |
| |
| |
| |
| |
| |
| |
Revenues: | | | | | | | | | | | | | | | | |
Product revenues | | $ | 40,592 | | | — | | | — | | | — | | $ | 40,592 | |
Royalty and license fee income | | | 9,376 | | | — | | | — | | | — | | | 9,376 | |
Clinical laboratory services | | | — | | $ | 39,604 | | | — | | | — | | | 39,604 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | 49,968 | | | 39,604 | | | — | | | — | | | 89,572 | |
Operating expenses: | | | | | | | | | | | | | | | | |
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 | |
Selling, general and administrative | | | 14,546 | | | 15,425 | | | — | | $ | 11,343 | | | 41,314 | |
Provision for uncollectible accounts receivable | | | — | | | 5,189 | | | — | | | — | | | 5,189 | |
Legal | | | 392 | | | 73 | | | — | | | 3,730 | | | 4,195 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating expenses | | | 47,559 | | | 46,982 | | | 3,365 | | | 15,073 | | | 112,979 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | 2,409 | | | (7,378 | ) | | (3,365 | ) | | (15,073 | ) | | (23,407 | ) |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest | | | — | | | 57 | | | — | | | 524 | | | 581 | |
Other | | | 25 | | | 49 | | | — | | | — | | | 74 | |
Foreign exchange loss | | | (725 | ) | | — | | | — | | | — | | | (725 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) before income taxes | | $ | 1,709 | | $ | (7,272 | ) | $ | (3,365 | ) | $ | (14,549 | ) | $ | (23,477 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Depreciation and amortization included above | | $ | 2,350 | | $ | 946 | | $ | 50 | | $ | 116 | | $ | 3,462 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Share-based compensation included in above: | | | | | | | | | | | | | | | | |
Cost of clinical laboratory services | | | — | | | 8 | | $ | — | | | — | | $ | 8 | |
Research and development | | $ | 13 | | | — | | | — | | | — | | | 13 | |
Selling, general and administrative and legal | | | 128 | | $ | 135 | | $ | 119 | | $ | 1,032 | | | 1,414 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 141 | | $ | 143 | | $ | 119 | | $ | 1,032 | | $ | 1,435 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 1,334 | | $ | 1,253 | | $ | 78 | | $ | 44 | | $ | 2,709 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
F-32
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
Geographic financial information is as follows:
| | | | | | | | | | |
Net sales to unaffiliated customers: | | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
United States | | $ | 85,691 | | $ | 82,873 | | $ | 75,936 | |
Switzerland | | | 8,508 | | | 7,037 | | | 6,487 | |
United Kingdom | | | 2,825 | | | 2,507 | | | 2,517 | |
Other international countries | | | 5,005 | | | 4,665 | | | 4,632 | |
| |
|
| |
|
| |
|
| |
Total | | $ | 102,029 | | $ | 97,082 | | $ | 89,572 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Long-lived assets at July 31, | | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
United States | | $ | 44,028 | | $ | 45,439 | | $ | 45,896 | |
Switzerland | | | 8,958 | | | 7,063 | | | 7,075 | |
United Kingdom | | | 2,857 | | | 2,944 | | | 3,334 | |
Other international countries | | | 1,850 | | | 1,723 | | | 1,923 | |
| |
|
| |
|
| |
|
| |
Total | | $ | 57,693 | | $ | 57,169 | | $ | 58,228 | |
| |
|
| |
|
| |
|
| |
F-33
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 and 2010
(Dollars in thousands except share data)
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 there. 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:
| | | | | | | | | | |
| | 2011 | | 2010 | | 2009 | |
| |
| |
| |
| |
United States | | $ | 32,928 | | $ | 38,695 | | $ | 36,332 | |
Foreign countries | | | 16,339 | | | 14,209 | | | 13,636 | |
| |
|
| |
|
| |
|
| |
| | $ | 49,267 | | $ | 52,904 | | $ | 49,968 | |
| |
|
| |
|
| |
|
| |
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, 2011 and 2010. 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 for fiscal 2011 and 2010 is summarized as follows:
| | | | | | | | | | | | | |
| | Quarter Ended | |
| |
| |
Fiscal 2011 | | October 31,
2010 | | January 31,
2011 | | April 30,
2011 | | July 31,
2011 | |
| |
| |
| |
| |
| |
Total revenues | | $ | 25,652 | | $ | 23,734 | | $ | 25,827 | | $ | 26,816 | |
Gross profit | | | 13,473 | | | 10,331 | | | 12,364 | | | 12,042 | |
Loss before income taxes | | | (1,060 | ) | | (5,562 | ) | | (2,002 | ) | | (4,199 | ) |
Net loss | | | (1,122 | ) | | (5,708 | ) | | (2,110 | ) | | (4,020 | ) |
Basic and diluted loss per common share | | $ | (0.03 | ) | $ | (0.15 | ) | $ | (0.05 | ) | $ | (0.11 | ) |
| | | | | | | | | | | | | |
| | Quarter Ended | |
| |
| |
Fiscal 2010 | | October 31,
2009 | | January 31,
2010 | | April 30,
2010 | | July 31,
2010 | |
| |
| |
| |
| |
| |
Total revenues | | $ | 25,165 | | $ | 23,186 | | $ | 23,786 | | $ | 24,945 | |
Gross profit | | | 13,329 | | | 10,885 | | | 10,529 | | | 10,222 | |
Loss before income taxes | | | (1,893 | ) | | (10,210 | ) | | (4,401 | ) | | (5,757 | ) |
Net loss | | | (1,814 | ) | | (10,328 | ) | | (4,578 | ) | | (5,513 | ) |
Basic and diluted loss per common share | | $ | (0.05 | ) | $ | (0.27 | ) | $ | (0.12 | ) | $ | (0.15 | ) |
F-34
ENZO BIOCHEM, INC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 2011, 2010 and 2009
(in thousands)
| | | | | | | | | | | | | | | | | | |
Year ended
July 31, | | Description | | | Balance at
Beginning
of period | | | Charged
to
costs
and expenses | | | Charged
to other
accounts | | | Deductions | | | Balance at
end of period | |
| |
| | |
| | |
| | |
| | |
| | |
| |
|
2011 | | Allowance for doubtful accounts receivable | | | 2,839 | | | 4,431 | | | | | | 3,782 | (1) | | 3,488 | |
| | | | | | | | | | | | | | | | | | |
2010 | | Allowance for doubtful accounts receivable | | | 4,786 | | | 3,480 | | | — | | | 5,427 | (1) | | 2,839 | |
| | | | | | | | | | | | | | | | | | |
2009 | | Allowance for doubtful accounts receivable | | | 886 | | | 5,189 | | | — | | | 1,289 | (1) | | 4,786 | |
| | | | | | | | | | | | | | | | | | |
2011 | | Deferred tax valuation allowance | | | 28,901 | | | 4,019 | | | | | | | | | 32,920 | |
| | | | | | | | | | | | | | | | | | |
2010 | | Deferred tax valuation allowance | | | 21,716 | | | 7,185 | | | — | | | — | | | 28,901 | |
| | | | | | | | | | | | | | | | | | |
2009 | | Deferred tax valuation allowance | | | 12,965 | | | 8,751 | | | — | | | — | | | 21,716 | |
| | |
| (1) | Write-off of uncollectible accounts receivable. |
S-1
