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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2005
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2866202
- -------------------- ----------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
60 Executive Blvd., Farmingdale, New York 11735
- ----------------------------------------- -----------
(Address of Principal Executive office) (Zip Code)
(631-755-5500)
- -----------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
- ----------------------------- -----------------------
(Title of Class) (Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
_X_ Yes No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
_X_ Yes No
As of February 28, 2005 the Registrant had 32,094,300 shares of common stock
outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
January 31, 2005
INDEX
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PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
- -------
Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 2005 (unaudited)
and July 31, 2004 3
Consolidated Statements of Operations
For the three and six months ended January 31, 2005
and 2004 (unaudited) 4
Consolidated Statements of Cash Flows
For the six months ended January 31, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits 17
ENZO BIOCHEM, INC.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
January 31, July 31,
2005 2004
(unaudited)
--------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 69,123 $ 54,499
Marketable securities ................................ 12,449 17,242
Accounts receivable, less allowance for
doubtful accounts .................................. 14,681 14,794
Income tax receivable ................................ 3,374 3,907
Inventories .......................................... 3,284 3,434
Prepaid expenses ..................................... 1,514 1,833
Deferred taxes ....................................... 1,262 1,975
-------- --------
Total current assets ................................... 105,687 97,684
Property and equipment, at cost less
accumulated depreciation and amortization ............ 2,747 2,414
Goodwill ............................................... 7,452 7,452
Patent costs, less accumulated amortization ............ 1,985 2,624
Other .................................................. 165 160
-------- --------
$118,036 $110,334
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ............................... $ 977 $ 2,092
Income taxes payable ................................. 1,978 --
Deferred revenue ..................................... 1,503 --
Accrued legal fees ................................... 511 2,051
Accrued payroll ...................................... 406 258
Other accrued expenses ............................... 1,029 711
Accrued research and development expenses ............ 197 225
Deferred rent ........................................ -- 87
-------- --------
Total current liabilities .............................. 6,601 5,424
Deferred taxes ......................................... 156 444
Long term payable ...................................... 300 300
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: 32,477,575 at
January 31, 2005 and 30,864,800 at July 31, 2004 ... 325 309
Additional paid-in capital ........................... 230,481 205,920
Less treasury stock at cost: 384,451 shares
at January 31, 2005 and 349,900 shares
at July 31, 2004 ................................... (5,994) (5,669)
Accumulated deficit .................................. (113,619) (96,148)
Accumulated other comprehensive loss ................. (214) (246)
-------- --------
Total stockholders' equity ............................. 110,979 104,166
-------- --------
$118,036 $110,334
======== ========
3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
January 31, January 31,
2005 2004 2005 2004
----------------------------------------------
(In thousands, except per share data)
Revenues:
Research product revenues and royalty income ....... $3,271 $3,968 $5,727 $6,727
Clinical laboratory services ....................... 7,964 7,060 15,809 14,573
------ ------- ------- -------
11,235 11,028 21,536 21,300
Costs and expenses and other income:
Cost of research product revenues .................. 555 614 1,130 1,107
Cost of clinical laboratory services ............... 2,859 2,516 5,773 4,838
Research and development expense ................... 2,030 2,349 4,243 4,281
Selling, general and administrative expenses ....... 4,738 3,658 8,875 6,958
Provision for uncollectible accounts receivable .... 1,146 3,133 2,623 5,505
Legal expense ...................................... 1,160 1,823 2,303 2,779
Interest income .................................... (309) (310) (639) (596)
Gain on patent litigation settlement ............... -- -- (14,000) --
------ ------- ------- -------
12,179 13,783 10,308 24,872
(Loss) income before benefit (provision) for taxes
on income .......................................... (944) (2,755) 11,228 (3,572)
Benefit (provision) for taxes on income .............. 416 1,300 (4,736) 1,793
------ ------- ------- -------
Net (loss) income .................................... $(528) $(1,455) $6,492 $(1,779)
====== ======= ======= =======
Net (loss) income per common share:
Basic .............................................. ($0.02) ($0.05) $0.20 ($0.06)
====== ======= ======= =======
Diluted ............................................ ($0.02) ($0.05) $0.20 ($0.06)
====== ======= ======= =======
Denominator for per share calculation:
Basic ............................................. 32,076 31,538 32,062 31,523
====== ======= ======= =======
Diluted ........................................... 32,076 31,538 32,739 31,523
====== ======= ======= =======
4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months
Ended January 31,
2005 2004
-------------------
(In Thousands)
Cash flows from operating activities:
Net income (loss) ............................................. $ 6,492 $(1,779)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment ..... 383 523
Amortization of patent costs ................................ 660 582
Issuance of stock for employee 401(k) plan .................. -- 282
Provision for uncollectible accounts receivable ............. 2,623 5,505
Deferred taxes .............................................. 425 (1,608)
Deferred rent ............................................... (87) (116)
Loss on sale of marketable securities ....................... 98 --
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectible amounts ................................... (2,509) (5,311)
Inventories ............................................... 150 295
Income taxes receivable ................................... 533 --
Prepaid expenses .......................................... 318 46
Prepaid taxes ............................................. -- (251)
Trade accounts payable and other accrued expenses ......... (797) (344)
Income taxes payable ...................................... 1,978 --
Accrued research and development expenses ................. (28) --
Deferred revenue .......................................... 1,503 --
Accrued legal fees ........................................ (1,540) (565)
Accrued payroll ........................................... 148 (450)
------- -------
Total adjustments ......................................... 3,858 (1,412)
------- -------
Net cash provided by (used in) operating activities ... 10,350 (3,191)
------- -------
Cash flows from investing activities:
Capital expenditures .......................................... (715) (560)
Patent costs .................................................. (21) (43)
Sales (purchases) of marketable securities, net ............... 4,725 (193)
Security deposits ............................................. (5) 4
------- -------
Net cash provided by (used in) investing activities ......... 3,984 (792)
------- -------
Cash flows from financing activities:
Proceeds from the exercise of stock options ................... 290 521
------- -------
Net cash provided by financing activities ................... 290 521
------- -------
Net increase (decrease) in cash and cash equivalents ............ 14,624 (3,462)
Cash and cash equivalents at the beginning of the period ........ 54,499 63,268
------- -------
Cash and cash equivalents at the end of the period .............. $69,123 $59,806
======= =======
5
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2005
(Unaudited)
Note 1. Basis of Presentation
- -----------------------------
The consolidated financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements for the
year ended July 31, 2004 and notes thereto contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
results of operations for the six months ended January 31, 2005 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending July 31, 2005.
Reclassifications
- -----------------
Certain amounts in prior years have been reclassified to conform to current year
presentation.
Stock Based Compensation Plans
- ------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 "Share-Based Payment" ("SFAS 123(R)"). The statement requires that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instrument issued. The statement covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Company will be required to adopt SFAS 123(R) as of August
1, 2005, the first day of its fiscal year ending July 31, 2006. The adoption of
SFAS 123(R) may have a material impact on the consolidated financial statements
of the Company.
For the fiscal year ending July 31, 2005, the Company will continue to account
for stock option grants to employees under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. Under APB No. 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recorded.
Pro forma information regarding net income (loss) applicable to common
stockholders is required by FASB Statement No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which also requires that the information be
determined as if the Company has accounted for its stock options under the fair
value method of that statement. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
6
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2005
(Unaudited)
The following table illustrates the effect on net income (loss) and earnings
(loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation for the periods ended
January 31, 2005 and 2004:
Three Months Ended Six Months Ended
January 31, January 31,
2005 2004 2005 2004
------- ------- ------- -------
(In thousands, except for share data)
Reported net income (loss) ......... $(528) $(1,455) $6,492 $(1,779)
Pro forma compensation expense ..... (1,051) (750) (2,032) (1,562)
------- ------- ------- -------
Pro forma net income (loss) ........ $(1,579) $(2,205) $4,460 $(3,341)
======= ======= ======= =======
Earnings (loss) per share:
Basic - as reported ............. $(.02) $(.05) $0.20 $(.06)
Basic - pro forma ............... (.05) (.07) 0.14 (.11)
Diluted - as reported ........... $(.02) $(.05) $0.20 $(.06)
Diluted - pro forma ............. (.05) (.07) 0.14 (.11)
Net (Loss) Income Per Share
The Company applies SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes
standards for computing and presenting earnings per share. Basic net 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, is determined
using the treasury stock method in accordance with SFAS No. 128. Diluted
weighted average shares outstanding for the three and six month periods ended
January 31, 2004 and for the three months ended January 31, 2005 do not include
the potential common shares from stock options because to do so would have been
antidilutive. Accordingly, basic and diluted net loss per share for those
periods is the same. The following table sets forth the computation of basic and
diluted net income (loss) per share pursuant to SFAS 128.
Three Months Ended Six Months Ended
January 31, January 31,
2005 2004 2005 2004
------------------ ------------------
(In thousands, except for share data)
Numerator:
Net income (loss) for numerator
for basic and diluted earnings
per common share ................. $(528) $(1,455) $6,492 $(1,779)
Denominator:
Denominator for basic net income
(loss) per common equivalent
share during the period .......... 32,076 31,538 32,062 31,523
Effect of dilutive employee
and director stock options
and warrants ..................... -- -- 677 --
------- ------- ------- -------
Denominator for diluted net income
(loss) per common equivalent
share and assumed conversions .... 32,076 31,538 32,739 31,523
======= ======= ======= =======
Basic net income (loss) per share .. $(.02) $(.05) $0.20 $(.06)
======= ======= ======= =======
Diluted net income (loss)
per share ........................ $(.02) $(.05) $0.20 $(.06)
======= ======= ======= =======
7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2005
(Unaudited)
The following table summarizes, for each period presented, the number of shares
excluded from the computation of diluted earnings per share, as their effect
upon potential issuance was anti-dilutive.
Three Months Ended Six Months Ended
January 31, October 31,
2005 2004 2005 2004
------------------ ------------------
(In thousands)
Employee and director stock
options and warrants ............. 861 1,055 -- 1,120
The Company declared a 5% stock dividend on October 5, 2004 which was paid on
November 15, 2004 to shareholders of record as of October 25, 2004. The shares
and per share data have been adjusted to retroactively reflect this stock
dividend for all periods presented. As of January 31, 2005 the Company recorded
a charge to accumulated deficit and a credit to common stock and additional
paid-in-capital in the amount of $24.0 million which reflects the fair value of
the dividend on the date of declaration.
Inventories
Inventories consist of the following as of:
January 31, 2005 July 31, 2004
--------------------------------
(In thousands)
Raw Materials $107 $125
Work in process 2,177 2,188
Finished products 1,000 1,121
------ ------
$3,284 $3,434
====== ======
Note 2. Gain on Patent Litigation Settlement
On October 14, 2004, the Company finalized and executed a settlement and
license agreement with Digene Corporation to settle its patent litigation
lawsuit. Under the terms of the agreement, the Company received an initial
payment of $16.0 million, of which $2.0 million is to be used to offset royalty
income payments based upon net sales of licensed products covered by the
agreement during the first year. The Company will receive in the first annual
period (October 1, 2004 to September 30, 2005) a minimum royalty payment of $2.5
million inclusive of the $2 million discussed above and at least a minimum
royalty of $3.5 for each of the next four annual periods. In addition, the
agreement provides for the Company to receive quarterly running royalties on the
net sales of Digene products subject to the license until the expiration of the
patent on April 24, 2018. These quarterly running royalties will be fully
creditable against the minimum royalty payments due in the first five years of
the agreement. The balance, if any, of the minimum royalty payment will be
recognized in the final quarter of the applicable annual royalty period. As a
result of this settlement and license agreement with Digene (the "Digene
agreement"), the Company recorded a gain on patent litigation settlement of
$14.0 million in the first quarter of Fiscal 2005. During the fiscal quarter
ended January 31, 2005, the Company recognized royalties from the Digene
agreement, which is included in research product revenues and royalty income.
See Legal Proceedings.
8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2005
(UNAUDITED)
Note 3--Segment Reporting
The Company has two reportable segments: research and development and
clinical reference laboratories. The Company's research and development segment
conducts research and development activities as well as selling products derived
from these activities. The clinical reference laboratories provide diagnostic
services to the health care community. The Company evaluates performance based
on income before provision for taxes on income. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Costs excluded from income before provision for
taxes on income and reported as other consist of corporate general and
administrative costs that are not allocable to the two reportable segments.
Management of the Company evaluates assets on a consolidated basis only and
therefore, assets by reportable segment have not been included in the reportable
segments below.
The following financial information (in thousands) represents the reportable
segments of the Company:
Research Clinical Reference
and Development Laboratories Other Consolidated
------------------ ------------------ ------------------ --------------------
Six Months Ended Six Months Ended Six Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
------------------ ------------------ ------------------ --------------------
2005 2004 2005 2004 2005 2004 2005 2004
-------- ------ ------- -------- ------- ------- -------- --------
Operating revenues:
Research product revenues and
royalty income .......................... $ 5,727 $6,727 -- -- -- -- $ 5,727 $ 6,727
Clinical laboratory services .............. -- -- $15,809 $ 14,573 -- -- 15,809 14,573
Cost and expenses and other income:
Cost of research product revenues ......... 1,130 1,107 -- -- -- -- 1,130 1,107
Cost of clinical laboratory services ...... -- -- 5,773 4,838 -- -- 5,773 4,838
Research and development expense .......... 4,243 4,281 -- -- -- -- 4,243 4,281
Provision for uncollectible accounts ...... -- -- 2,623 5,505 -- -- 2,623 5,505
Other costs and expenses .................. 1,259 788 5,867 4,658 4,052 4,291 11,178 9,737
Gain on patent litigation settlement ...... (14,000) -- -- -- -- -- (14,000) --
Interest income ........................... -- -- -- -- (639) (596) (639) (596)
-------- ------ ------- -------- ------- ------- -------- --------
Income (loss) before (provision)
benefit for income taxes on income ...... $ 13,095 $ 551 $ 1,546 $ (428) $(3,413) $(3,695) $ 11,228 $ (3,572)
======== ====== ======= ======== ======= ======= ======== ========
Three Months Ended Three Months Ended Three Months Ended Three Months Ended
January 31, January 31, January 31, January 31,
------------------ ------------------ ------------------ --------------------
2005 2004 2005 2004 2005 2004 2005 2004
-------- ------ ------- -------- ------- ------- -------- --------
Operating revenues:
Research product revenues and
royalty income .......................... $ 3,271 $3,968 -- -- -- -- $ 3,271 $ 3,968
Clinical laboratory services .............. -- -- $ 7,964 $ 7,060 -- -- 7,964 7,060
Cost and expenses and other income:
Cost of research product revenues ......... 555 614 -- -- -- -- 555 614
Cost of clinical laboratory services ...... -- -- 2,859 2,516 -- -- 2,859 2,516
Research and development expense .......... 2,030 2,349 -- -- -- -- 2,030 2,349
Provision for uncollectible accounts ...... -- -- 1,146 3,133 -- -- 1,146 3,133
Other costs and expenses .................. 625 398 3,060 2,501 2,213 2,582 5,898 5,481
Interest income ........................... -- -- -- -- (309) (310) (309) (310)
-------- ------ ------- -------- ------- ------- -------- --------
Income (loss) before (provision)
benefit for income taxes on income ...... $ 61 $ 607 $ 899 $ (1,090) $(1,904) ($2,272) $ (944) $ (2,755)
======== ====== ======= ======== ======= ======= ======== ========
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements. See "Forward-Looking and
Cautionary Statements." 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.
Enzo Biochem, Inc. (the "Company" or "Enzo") is a leading life sciences
and biotechnology company focused on harnessing genetic processes to develop
research tools, diagnostics and therapeutics. Enzo also provides clinical
laboratory services to the medical community. In addition, our work in gene
analysis has led to our development of significant therapeutic product
candidates, several of which are currently in clinical trials, and several are
in preclinical studies.
The business activities of the Company are performed by the Company's
three wholly owned subsidiaries. These activities are: (1) research and
development, manufacturing and marketing of biomedical research products and
tools through Enzo Life Sciences and research and development of therapeutic
products through Enzo Therapeutics, and (2) the operation of a clinical
reference laboratory through Enzo Clinical Labs. For information relating to the
Company's business segments, see Note 3 of the Notes to Consolidated Financial
Statements.
The Company's source of revenue has been from the direct sales of
research products of labeling and detection reagents for the genomics and
sequencing markets, as well as through non-exclusive distribution agreements and
licensing with other companies. Another source of revenue has been from the
clinical laboratory service market. Clinical laboratory services are provided to
patients covered by various third party insurance programs, including Medicare
and self payors for the services provided. The clinical laboratory is subject to
seasonal fluctuations in operating results. Volume of testing generally declines
during the summer months, the year-end holiday periods and other major holidays.
In addition, volume declines due to inclement weather may reduce net revenues.
Therefore, comparison of the results of successive quarters may not accurately
reflect trends or results for the full year. For the six months ended January
31, 2005 and 2004, respectively, approximately 27% and 32% of the Company's
operating revenues were derived from research product sales and royalty income
and approximately 73% and 68% were derived from clinical laboratory services.
Liquidity and Capital Resources
At January 31, 2005, our cash and cash equivalents and marketable
securities totaled $81.6 million, an increase of $9.8 million from July 31,
2004. We had working capital of $99.1 million at January 31, 2005 compared to
$92.3 million at July 31, 2004.
Net cash provided by operating activities for the six month period ended
January 31, 2005 was approximately $10.4 million as compared to net cash used in
operating activities of $3.2 million for the six month period ended January 31,
2004. The increase in net cash provided by operating activities was primarily
due to net income in the 2005 period resulting from a settlement and license
agreement with Digene Corporation as compared to the net loss in the 2004
period.
10
On October 14, 2004, the Company finalized and executed a settlement and
license agreement with Digene Corporation to settle its patent litigation
lawsuit. Under the terms of the agreement, the Company received an initial
payment of $16.0 million, of which $2.0 million is to be used to offset royalty
income payments based upon net sales of licensed products covered by the
agreement during the first year. The Company will receive in the first annual
period (October 1, 2004 to September 30, 2005) a minimum royalty payment of $2.5
million inclusive of the $2 million discussed above and at least a minimum
royalty of $3.5 for each of the next four annual periods. In addition, the
agreement provides for the Company to receive quarterly running royalties on the
net sales of Digene products subject to the license until the expiration of the
patent on April 24, 2018. These quarterly running royalties will be fully
creditable against the minimum royalty payments due in the first five years of
the agreement. The balance, if any, of the minimum royalty payment will be
recognized in the final quarter of the applicable annual royalty period. As a
result of this settlement and license agreement with Digene (the "Digene
agreement"), the Company recorded a gain on patent litigation settlement of
$14.0 million in the first quarter of Fiscal 2005. During the fiscal six months
ended January 31, 2005, the Company recognized royalties from the Digene
agreement, which is included in research product revenues and royalty income.
See Legal Proceedings.
Net cash provided by investing activities was approximately $4.0 million
during the six months ended January 31, 2005, as compared to net cash used in
investing activities of $(0.8) during the six months ended January 31, 2004. The
increase during the 2005 period was primarily the result of the net sales of
marketable securities totaling $4.7 million. Net cash provided by financing
activities was approximately $0.3 million during the six months ended January
31, 2005, as compared to $0.5 during the six months ended January 31, 2004. The
cash provided in both periods was from the exercise of stock options. There was
less option exercise activity during the 2005 period than the 2004 period.
We believe that our current cash position is sufficient for our
foreseeable liquidity and capital resource needs, although there can be no
assurance that future events will not alter such view. Management is not aware
of any material claims, disputes or settled matters concerning third-party
reimbursements that would have a material effect on our financial statements.
Critical Accounting Policies
General
The Company's discussion and analysis of its financial condition and
results of operations are based upon Enzo Biochem, Inc. consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses; these estimates
and judgments also affect related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to contractual allowance, allowance for uncollectible accounts,
intangible assets and income taxes. The Company bases its estimates on
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
11
REVENUE RECOGNITION
Revenues from the clinical reference laboratory are recognized when
services are provided. The Company's revenue is based on amounts billed or
billable for services rendered, net of contractual adjustments and other
arrangements made with third-party payors to provide services at less than
established billing rates. Revenues from research product sales, excluding
certain non-exclusive distribution agreement revenues, are recognized when the
products are shipped.
The Company has certain non-exclusive distribution agreements, which
provide for consideration to be paid to the distributors for the manufacture of
certain products. The Company records such consideration provided to
distributors under these non-exclusive distribution agreements as a reduction to
research product revenues. The revenue from these non-exclusive distribution
agreements are recognized when shipments are made to their respective customers
and reported to the Company. Under the Digene agreement, the Company records
royalty income based on the net sales of products subject to the license, as
reported by Digene to the Company.
CONTRACTUAL ALLOWANCES
The percentage of the Company's revenues derived from Medicare, third
party payers, commercial insurers and managed care patients continue to
increase. The Medicare regulations and various managed care contracts are often
complex and may include multiple reimbursement mechanisms for different types of
services provided in our clinical laboratory. We estimate the allowance for
contractual allowances on a payer-specific basis given our interpretation of the
applicable regulations and historical calculations. However, the services
authorized and provided and related reimbursement are often subject to
interpretation that could result in payments that differ from our estimates.
Additionally, updated regulations occur frequently that necessitates continual
review and assessment of the estimation process by management.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
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 estimates the allowance for doubtful accounts primarily based upon the
age of the accounts since invoice date. The Company continually monitors its
accounts receivable balances and utilizes cash collections data to support the
basis for its estimates of the provision for doubtful accounts. Significant
changes in payer mix or regulations could have a significant impact on the
Company's results of operations and cash flows. In addition, the Company has
implemented a process to estimate and review the collections of its receivables
based on the period they have been outstanding. Historical collection and payor
reimbursement experience is an integral part of the estimation process related
to reserves for doubtful accounts. 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 reserve
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. Revisions in reserve for doubtful
accounts estimates are recorded as an adjustment to bad debt expense. The
Company believes that its collection and reserves processes, along with the
close monitoring of its billing processes, helps reduce the risk associated with
material revisions to reserve estimates resulting from adverse changes in
collection and reimbursement experience and billing operations.
12
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting for income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The liability method requires
that any tax benefits recognized for net operating loss carry forwards and other
items be reduced by a valuation allowance where it is more likely than not the
benefits may not be realized. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
the liability method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the requirement to recognize impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. As of January 31, 2005, the Company has
not recorded an impairment charge.
Results of Operations
THREE MONTHS ENDED JANUARY 31, 2005 COMPARED WITH THREE MONTHS ENDED
JANUARY 31, 2004
Revenues for the three months ended January 31, 2005 increased by $0.2
million to $11.2 million from $11.0 million as compared to the 2004 period. The
increase was attributable to an increase of $0.9 million at the clinical
laboratory offset by a decrease of $0.7 million in research product sales and
royalty income. This decrease in research products sales was primarily due to
the dispute with Roche Diagnostics ("ROCHE"), on the sales of certain licensed
products and partially offset by the royalty income from Digene. The increase in
revenue at the clinical laboratory is primarily due to the increase in the
number of customer accounts being serviced.
The cost of research products sold was comparable to the 2004 period.
The cost of clinical laboratory services increased by $0.3 million
during this period primarily due to an increase in costs associated with certain
esoteric tests and an increase in the volume of tests performed.
Research and development expenses decreased by approximately $0.3
million as a result of timing of certain expenses related to the clinical trial
activities and other research projects.
Selling, general and administrative expenses increased by $1.1 million
during the three months ended January 31, 2005, as compared to the 2004 period.
This increase was primarily due to an increase in direct selling expenditures
for both our clinical reference laboratory and life science divisions and an
increase in information technology costs, related to the expansion of the data
processing connectivity program and infrastructure.
The Company's legal expenses decreased by $0.6 million during the 2005
period to $1.2 million from $1.8 million as compared to the previous year. This
decrease is primarily due to the reduction of legal activities because of the
settlement with Digene Corporation during the first quarter ended October 31,
2004.
13
The Company's provision for uncollectible accounts receivable decreased
by $2.0 million during the 2005 period to $1.2 million from $3.1 million as
compared to the 2004 period at the clinical reference laboratory division. The
percentage of the provision for uncollectible accounts receivable as a
relationship to clinical reference laboratory revenue decreased to 14% for the
three months ended January 31, 2005 as compared to 44% for the 2004 period. This
decrease was primarily due to the change in the mix of payors.
Interest income was comparable to the 2004 period.
For the three months ended January 31, 2005 the Company recorded a
benefit for income taxes of $0.4 million which was based on the combined
effective federal, state and local income tax rates.
Income before provision for taxes on income from the activities of the
research and development segment was $0.1 million for the three month period
ended January 31, 2005, compared to $0.6 million for the 2004 period. This
decrease was primarily due to the dispute with Roche Diagnostics "ROCHE", on the
sales of certain licensed products. Income before provision for taxes on income
from the activities of the clinical reference laboratory segment was $0.9
million for the three month period ended January 31, 2005, compared to a loss of
$(1.1) million for the 2004 period. This increase is due to higher revenues and
a lower provision for uncollectible accounts. Loss before provision (benefit)
for taxes on income at the other segment was $(1.9) million for the three month
period ended January 31, 2005, compared to $(2.3) million for the 2004 period,
primarily due to lower legal costs in the 2005 period.
SIX MONTHS ENDED JANUARY 31, 2005 COMPARED WITH SIX MONTHS ENDED
JANUARY 31, 2004
On October 14, 2004, the Company finalized and executed a settlement and
license agreement with Digene Corporation to settle its patent litigation
lawsuit. Under the terms of the agreement, the Company received an initial
payment of $16.0 million, of which $2.0 million is to be used to offset royalty
income payments based upon net sales of licensed products covered by the
agreement during the first year. The Company will receive in the first annual
period (October 1, 2004 to September 30, 2005) a minimum royalty payment of $2.5
million inclusive of the $2 million discussed above and at least a minimum
royalty of $3.5 for each of the next four annual periods. In addition, the
agreement provides for the Company to receive quarterly running royalties on the
net sales of Digene products subject to the license until the expiration of the
patent on April 24, 2018. These quarterly running royalties will be fully
creditable against the minimum royalty payments due in the first five years of
the agreement. The balance, if any, of the minimum royalty payment will be
recognized in the final quarter of the applicable annual royalty period. As a
result of this settlement and license agreement with Digene (the "Digene
agreement"), the Company recorded a gain on patent litigation settlement of
$14.0 million in the first quarter of fiscal 2005. During the fiscal six months
ended January 31, 2005, the Company recognized royalties from the Digene
agreement, which is included in research product revenues and royalty income.
See Legal Proceedings.
Revenues for the six months ended January 31, 2005 increased by $0.2
million to $21.5 million from $21.3 million as compared to the 2004 period. The
revenue increase was attributable to the increase of $1.2 million at the
clinical laboratory offset by a decrease of $1.0 million of research product
sales and royalty income. This decrease in research products sales was primarily
due to the dispute with Roche Diagnostics ("ROCHE"), on the sales of certain
licensed products and partially offset by the royalty income from Digene. The
increase in revenue at the clinical laboratory is primarily due to the increase
in volume of customer accounts being serviced.
14
The cost of research products sold for the six months was comparable to
the 2004 period.
The cost of clinical laboratory services increased by $0.9 million
during the 2005 period primarily due to an increase in costs associated with
certain esoteric tests and an increase in the volume of tests performed.
Research and development expenses for the six months ended January 31,
2005 were comparable to the 2004 period.
Selling, general and administrative expenses increased by $1.9 million
during the six months ended, as compared to the 2004 period. This increase was
primarily due to an increase in direct selling expenditures for both our
clinical reference laboratory and life science divisions, and higher information
technology costs associated with the expansion of the data processing
connectivity program and infrastructure.
The Company's legal expenses decreased by $0.5 million during the 2005
period to $2.3 million from $2.8 million as compared to the 2004 period. This
decrease is primarily due to the reduction of legal activities because of the
settlement with Digene Corporation during the first quarter ended October 31,
2004.
The Company's provision for uncollectible accounts receivable decreased
by $2.9 million during the 2005 period to $2.6 million from $5.5 million as
compared to the 2004 period at the clinical reference laboratory division. The
percentage of the provision for uncollectible accounts receivable as a
relationship to clinical reference laboratory revenue decreased to 17% for the
2005 period as compared to 38% for the 2004 period. This decrease was primarily
due to the change in the mix of payors.
As a result of the settlement agreement with Digene Corporation as
discussed above, the Company recorded a gain on patent litigation settlement of
$14.0 million in the six months ended January 31, 2005.
Interest income was comparable to last year's period.
For the six months ended January 31, 2005, the Company recorded a
provision for income taxes of $4.7 million which was based on the combined
effective federal, state and local income tax rates.
Income before provision for taxes on income from the activities of the
research and development segment was $13.1 million for the six month period
ended January 31, 2005, compared to $0.6 million for the 2004 period. The
increase in the fiscal 2005 period resulted from recording the $14 million gain
from the Digene agreement during the first fiscal quarter ended October 31,
2004. Income before provision for taxes on income from the activities of the
clinical reference laboratory segment was $1.5 million for the six month period
ended January 31, 2005, compared to a loss of $(0.4) million for the 2004
period. This increase is due to higher revenues and a lower provision for
uncollectible accounts. Loss before provision for taxes on income at the other
segment was $(3.4) million for the six month period ended January 31, 2005,
compared to $(3.7) million for the 2004 period, primarily due to lower legal
costs in the 2005 period.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14c within
90 days of the filing date of this quarterly report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation.
PART II - Other Information
Item 1. Legal Proceedings
-----------------
In March 2002, Enzo Life Sciences, a subsidiary of the Company, filed suit in
the United States District Court for the District of Delaware against Digene
Corp., charging it with infringing the Company's U.S. Patent No. 6,221,581 B1,
which concerns a novel process for detecting nucleic acids of interest. On May
31, 2002, Digene filed counterclaims in that suit against Enzo Life Sciences and
the Company, including business tort counterclaims relating to the '581 patent.
On October 13, 2004, the Company, its wholly owned subsidiary Enzo Life
Sciences, Inc. ("Enzo Life Sciences") and Digene Corporation ("Digene") entered
into a Settlement and License Agreement (the "Agreement") and a Joint
Stipulation and Order of Dismissal with Prejudice (the "Stipulation"). The
Agreement provides for (i) the full and final settlement of the Litigation and
(ii) the grant to Digene of a non-exclusive, worldwide, royalty-bearing license
with respect to such '581 Patent and the remaining patents in the '581 patents
global family. The '581 patent is set to expire on April 24, 2018. Pursuant to
the Agreement Digene is irrevocably required to pay Enzo Life Sciences an
aggregate of $30.5 million of which Life Sciences received $16 million (the
"First Payment") from Digene on October 14, 2004. Digene will pay to Enzo $16.5
million (subject to the $2 million credit discussed below) ("Additional
Irrevocable Payments"), $2.5 million of which shall be paid by November 14, 2005
and $3.5 million per year by November 14 of each of 2006, 2007 2008 and 2009. In
addition, Digene shall pay Enzo Life Sciences Running Royalties on Net Sales of
Licensed Products. Each Additional Irrevocable Payment is fully creditable by
Digene against the Running Royalties that are due under the Agreement. Digene at
it discretion may credit $2 million of the First Payment against either the
payment required to be paid by Digene by November 14, 2005 or the Running
Royalties due Enzo Life Sciences under the Agreement. The Stipulation, which was
filed with the Court on October 15, 2004, dismisses with prejudice all claims,
counterclaims and defenses brought or raised by any party to the Litigation.
Information relating to certain other legal proceedings in which the Company is
a party can be found in the Company's Annual Report on form 10-K for the period
ended July 31, 2004.
16
Item 6. Exhibits
--------
Exhibit No. Exhibit
31(a) Certification of Elazar Rabbani, Ph.D. pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of Barry Weiner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32(a) Certification of Elazar Rabbani, Ph.D. pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32(b) Certification of Barry Weiner pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENZO BIOCHEM, INC.
------------------
(registrant)
Date: March 10, 2005 by: /s/ Barry Weiner
-------------------------
Chief Financial Officer
18