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ENZO BIOCHEM INC - Quarter Report: 2014 April (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Mark one

 

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2014

 

or

 

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________________ to ___________________

 

Commission File Number 001-09974

 

  ENZO BIOCHEM, INC.  
  (Exact name of registrant as specified in its charter)  

 

New York   13-2866202
(State or Other Jurisdiction   (IRS. Employer
of Incorporation or Organization)   Identification No.)
     
527 Madison Ave, New York, New York   10022
(Address of Principal Executive office)   (Zip Code)
     
212-583-0100    
(Registrant’s telephone number, including area code)    

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes S No £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 45 of Regulation S-T (§232.405 of that chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

 

Yes S No £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer £ Accelerated filer S Non-accelerated filer £ Smaller reporting company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

 

Yes £ No S

 

As of May 28, 2014 the Registrant had approximately 43,826,000 shares of common stock outstanding.

 

ENZO BIOCHEM, INC.
FORM 10-Q
April 30, 2014

 

INDEX

 

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements 3
     
  Consolidated Balance Sheets – April 30, 2014 (unaudited) and July 31, 2013 (audited) 3
     
  Consolidated Statements of Operations for the three and nine months ended April 30, 2014 and 2013 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended April 30, 2014 and 2013 (unaudited) 5
     
  Consolidated Statement of Stockholders’ Equity for the nine months ended April 30, 2014 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the nine months ended April 30, 2014 and 2013 (unaudited) 7
     
  Notes to the Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
     
Item 4. Controls and Procedures 34
     
Part II – OTHER INFORMATION
 
Item 1. Legal Proceedings 35
     
Item 1A. Risk Factors 35
     
Item 6. Exhibits 35
     
Signatures 35
2

Part 1 Financial Information

Item 1 Financial Statements

 

ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

 

   April 30,
2014
(unaudited)
   July 31,
2013
 
ASSETS          
Current assets:          
Cash and cash equivalents  $14,804   $9,007 
Accounts receivable, net of allowances   12,315    12,288 
Inventories   8,976    8,805 
Prepaid expenses and other   2,104    2,456 
Total current assets   38,199    32,556 
           
Property, plant and equipment, net   7,807    8,617 
Goodwill   7,452    7,452 
Intangible assets, net   8,714    9,943 
Other assets   344    390 
Total assets  $62,516   $58,958 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Loan payable  $3,013   $3,264 
Accounts payable – trade   7,411    8,481 
Accrued liabilities   10,960    11,776 
Other current liabilities   761    331 
Total current liabilities   22,145    23,852 
           
Deferred taxes   138    200 
Other liabilities   2,310    774 
Total liabilities  $24,593   $24,826 
           
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: 43,818,211 at April 30, 2014 and 40,569,393 at July 31, 2013   439    406 
Additional paid-in capital   314,966    304,288 
Accumulated deficit   (279,228)   (272,420)
Accumulated other comprehensive income   1,746    1,858 
Total stockholders’ equity   37,923    34,132 
Total liabilities and stockholders’ equity  $62,516   $58,958 

 

The accompanying notes are an integral part of these consolidated financial statements.

3

ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)

 

   Three Months Ended
April 30,
   Nine Months Ended
April 30,
 
   2014   2013   2014   2013 
Revenues:                    
Clinical laboratory services  $14,542   $13,384   $43,250   $41,881 
Product revenues   8,707    8,265    24,424    24,574 
Royalty and license fee income   729    949    3,366    3,982 
Total revenues   23,978    22,598    71,040    70,437 
                     
Operating expenses:                    
Cost of clinical laboratory services   9,784    9,331    28,785    28,466 
Cost of product revenues   3,800    4,219    11,511    12,546 
Research and development   849    989    2,498    2,968 
Selling, general, and administrative   10,605    11,032    31,217    33,340 
Provision for uncollectible accounts receivable   684    928    2,468    3,857 
Legal fee expense   1,911    1,708    4,788    4,850 
Legal settlements, net   (3,100)       (3,100)    
Total operating expenses   24,533    28,207    78,167    86,027 
                     
Operating loss   (555)   (5,609)   (7,127)   (15,590)
                     
Other income (expense):                    
Interest   (47)   (10)   (161)   (25)
Other   10    25    85    81 
Foreign currency gain   144    (214)   460    119 
Loss before income taxes   (448)   (5,808)   (6,743)   (15,415)
(Provision) benefit for income taxes   (7)   38    (65)   280 
Net loss  $(455)  $(5,770)  $(6,808)  $(15,135)
                     
Net loss per common share:                    
Basic and diluted  $(0.01)  $(0.15)  $(0.16)  $(0.38)
                     
Weighted average common shares outstanding:                    
Basic and diluted   43,243    39,553    42,062    39,381 

 

The accompanying notes are an integral part of these consolidated financial statements.

4

ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)

 

   Three Months Ended
April 30,
   Nine Months Ended
April 30,
 
   2014   2013   2014   2013 
Net loss  $(455)  $(5,770)  $(6,808)  $(15,135)
Other comprehensive income (loss):                    
Foreign currency translation adjustments   (21)   (39)   (112)   213 
Comprehensive loss  $(476)  $(5,809)  $(6,920)  $(14,922)

 

The accompanying notes are an integral part of these consolidated financial statements.

5

ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Nine months ended April 30, 2014
(UNAUDITED)
(in thousands, except share data)

 

   Common
Stock
Shares
   Common
Stock
Amount
   Additional
Paid-in
Capital
   Accumulated
Deficit
   Accumulated
Other
Comprehensive
Income
   Total
Stockholders’
Equity
 
                         
Balance at July 31, 2013   40,569,393   $406   $304,288   $(272,420)  $1,858   $34,132 
                               
Net (loss) for the period ended April 30, 2014               (6,808)       (6,808)
                               
Share based compensation charges           497            497 
                               
Vesting of restricted stock   65,060    1                1 
                               
Net proceeds from issuance of common stock   3,018,112    30    9,457            9,487 
                               
Options issued in lieu of cash payment of incentive compensation award           90            90 
                               
Issuance of stock for employee 401(k) plan match   165,646    2    634            636 
                               
Foreign currency translation adjustments                   (112)   (112)
                               
Balance at April 30, 2014   43,818,211   $439   $314,966   $(279,228)  $1,746   $37,923 

 

The accompanying notes are an integral part of these consolidated financial statements.

6

ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

 

   Nine Months Ended
April 30,
 
   2014   2013 
Cash flows from operating activities:          
Net loss  $(6,808)  $(15,135)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization of property, plant and equipment   1,628    2,003 
Amortization of intangible assets   1,387    1,494 
Provision for uncollectible accounts receivable   2,468    3,857 
Income tax benefit   (65)   (280)
Share based compensation charges   497    437 
Accrual for share based 401(k) employer match   472    496 
Foreign currency transaction (gain)   (454)   (73)
           
Changes in operating assets and liabilities:          
Accounts receivable   (2,482)   (2,884)
Inventories   (144)   (442)
Prepaid expenses and other   385    264 
Accounts payable – trade   (1,063)   178 
Accrued liabilities, other current liabilities and other liabilities   1,445    1,569 
Total adjustments   4,074    6,619 
           
Net cash used in operating activities   (2,734)   (8,516)
           
Cash flows from investing activities:          
Capital expenditures   (570)   (772)
Security deposits and other   46    (72)
Net cash used in investing activities   (524)   (844)
           
Cash flows from financing activities:          
Net proceeds from issuance of common stock   9,455    3 
Proceeds from borrowings under Credit Agreement   56,826     
Repayments under Credit Agreement   (57,077)    
Installment loan and capital lease obligation payments   (280)   (187)
Net cash provided by (used in) financing activities   8,924    (184)
           
Effect of exchange rate changes on cash and cash equivalents   131    112 
           
Increase (decrease) in cash and cash equivalents   5,797    (9,432)
Cash and cash equivalents - beginning of period   9,007    15,076 
Cash and cash equivalents - end of period  $14,804   $5,644 

 

The accompanying notes are an integral part of these consolidated financial statements.

7

ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of April 30, 2014
and for the three and nine months ended
April 30, 2014 and 2013

(Unaudited)
(Dollars in thousands, except share data)

 

Note 1 – Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of Enzo Biochem, Inc. and its wholly-owned subsidiaries, Enzo Life Sciences, Enzo Clinical Labs, Enzo Therapeutics and Enzo Realty LLC, collectively referred to as the “Company” or “Companies”. The consolidated balance sheet as of April 30, 2014, the consolidated statements of operations and the consolidated statements of comprehensive income (loss) for the three and nine months ended April 30, 2014 and 2013, the consolidated statements of cash flows for the nine months ended April 30, 2014 and 2013, and the consolidated statement of stockholders’ equity for the nine months ended April 30, 2014 are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position and operating results for the interim periods have been made. Certain information and footnote disclosure, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended July 31, 2013 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated balance sheet at July 31, 2013 has been derived from the audited financial statements at that date. The results of operations for the three and nine months ended April 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2014.

 

Note 2 – Net 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 if any, consisting of outstanding stock options and unvested restricted stock is determined using the treasury stock method. Diluted weighted average shares outstanding for the three and nine months ended April 30, 2014 and 2013 do not include the potential common shares from stock options and unvested restricted stock because to do so would be antidilutive, and as such is the same as basic weighted average shares outstanding.

 

During the three and nine months ended April 30, 2014, potential shares from unvested restricted stock excluded from the computation of diluted net loss per share were approximately 34,000 and 36,000 shares, respectively. During the three and nine months ended April 30, 2013, potential shares from unvested restricted stock excluded from the computation of diluted net loss per share were approximately 17,000 and zero shares, respectively. For the three and nine months ended April 30, 2014, potential shares for “in the money” stock options excluded from the computation of diluted net loss per share were approximately 273,000 shares. During the three and nine months ended April 30, 2013, there were no potential shares from “in the money” stock options.

 

For the three and nine months ended April 30, 2014 the effect of approximately 170,000 and 744,000 shares 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. During the three and nine months ended April 30, 2013, approximately 726,000 and 731,000 shares respectively, were excluded from the calculation of diluted net loss per share.

 

Note 3 - Supplemental disclosure for statement of cash flows

 

For the nine months ended April 30, 2014 and 2013, income taxes paid by the Company were $33 and $46, respectively.

 

For the nine months ended April 30, 2014 and 2013, interest paid by the Company was $161 and $25, respectively.

 

For the nine months ended April 30, 2014 and 2013, the Company financed $246 and $282 respectively, in machinery and transportation equipment under installment loans.

8

For the nine months ended April 30, 2014, no capital leases were entered into. For the nine months ended April 30, 2013, the Company entered into a capital lease for machinery and equipment with a cost basis of $768.

 

For the nine months ended April 30, 2014 and 2013, the Company issued shares of common stock in settlement of its accrued share-based 401(k) employer match in the amount of $636 and $643, respectively.

 

For the nine months ended April 30, 2014, the Company recorded $90 in additional paid in capital and reduced accrued liabilities by the same amount for options issued in lieu of cash payment of incentive compensation awards.

 

Note 4 - Inventories

 

Inventories consist of the following:

 

   April 30,
2014
   July 31,
2013
 
Raw materials  $1,154   $922 
Work in process   2,586    2,628 
Finished products   5,236    5,255 
   $8,976   $8,805 

 

Note 5 – Goodwill and intangible assets

 

At April 30, 2014 and July 31, 2013, the Company’s net carrying amount of goodwill, related to the Clinical Labs segment, is $7,452.

 

The Company’s change in the net carrying amount of intangible assets, all of which is included in the Life Sciences segment is as follows:

 

   Gross   Accumulated Amortization   Net 
July 31, 2013  $28,214   $(18,271)  $9,943 
Amortization expense       (1,387)   (1,387)
Foreign currency translation   435    (277)   158 
April 30, 2014  $28,649   $(19,935)  $8,714 

 

Intangible assets consist of the following:

 

   April 30, 2014   July 31, 2013 
   Gross   Accumulated
Amortization
   Net   Gross   Accumulated
Amortization
   Net 
Patents  $11,027   $(10,655)  $372   $11,027   $(10,587)  $440 
Customer relationships   12,692    (6,349)   6,343    12,446    (5,448)   6,998 
Website and acquired content   1,042    (1,039)   3    1,026    (980)   46 
Licensed technology and other   536    (426)   110    513    (382)   131 
Trademarks   3,352    (1,466)   1,886    3,202    (874)   2,328 
Total  $28,649   $(19,935)  $8,714   $28,214   $(18,271)  $9,943 
9

At April 30, 2014, information with respect to intangibles assets acquired is as follows:

 

    Useful life assigned   Weighted average
remaining useful life
 
Customer relationships   8-15 years   6.5 years  
Trademarks   5 years   3.5 years  
Other intangibles   4-5 years   1.5 years  

 

At April 30, 2014, the weighted average useful lives of amortizable intangible assets were approximately five and a half years.

 

Note 6 - Loan Payable

 

On June 7, 2013, the Company entered into a secured Revolving Loan and Security Agreement (the “Credit Agreement”) among the Company and certain of its subsidiaries, with Enzo Therapeutics as a guarantor, and Healthcare Finance Group, LLC (the “Lender). The Credit Agreement, which expires in December 2016, provides for borrowings against eligible US receivables, as defined, of the Clinical Lab and Life Science segments up to $8.0 million at defined eligibility percentages and provides for additional borrowings of $4.0 million for increased eligible assets. Debt issuance costs of $281 are being amortized over the life of the Credit Agreement. If the amount of borrowings outstanding under the revolving credit facility exceeds the borrowing base then in effect, or the Lender requires a reserve, the Company will be required to repay such borrowings in an amount sufficient to eliminate such excess. Interest on advances, payable monthly, is based on the three month LIBOR rate, with a floor of 1.25% plus an applicable margin of 4.0%, In the event of any default, the interest rate may be increased 3.0% over the current rate. The facility also carries a non-utilization fee of 0.50% per annum, payable monthly, on the unused portion of the Credit Agreement. The Credit Agreement requires a minimum borrowing of $2.0 million. During the 2014 first quarter the Company notified the Lender to allow for borrowings against the eligible Life Science receivables. At April 30, 2014, the borrowings under the Credit Agreement related to the Clinical Lab and Life Science receivables aggregated $3.0 million with $1.1 million in additional availability based on current eligible receivables and permitted borrowing levels, as defined.

 

The Company’s obligations under the Credit Agreement are secured by primarily all the unencumbered U.S. assets of the Company, excluding buildings and intellectual property which the Lender has a negative pledge, and the capital stock of subsidiaries. The Credit Agreement includes customary affirmative and negative covenants and events of default and requires maximum levels of cash usage and minimum levels of liquidity, as defined, and provides for increased liquidity levels if operating results are not achieved. Negative covenants include among others, limitations on additional debt, liens, loans or investments, distributions, asset sales and affiliate transactions. Events of default include non-payment of principal and interest on debt outstanding, non-performance of covenants, material change in business, breach of representations, bankruptcy and insolvency, material judgments and changes in control. As of and during the nine months ended April 30, 2014, the Company is in compliance with the covenants.

 

Note 7 – Accrued Liabilities and Other Current Liabilities

 

Accrued liabilities consist of the following:

 

   April 30,
2014
   July 31,
2013
 
Payroll, benefits, and commissions  $3,811   $4,794 
Legal fee expense   3,344    3,104 
Research and development   696    863 
Professional fees   635    721 
Other   2,474    2,294 
   $10,960   $11,776 

 

Other current liabilities consist of the following as of:

 

   April 30,
2014
   July 31,
2013
 
Accrued legal settlement  $400     
Installment loans   212   $182 
Capital lease obligation   149    149 
   $761   $331 
10

Note 8 – Other Liabilities

 

Other liabilities consist of the following:

 

   April 30,
2014
   July 31,
2013
 
Accrued legal settlement  $1,600   $ 
Capital lease obligation, net of short term   398    505 
Installment loans, net of short term   312    269 
   $2,310   $774 

 

As of April 30, 2014, future minimum payments under the capital lease, net of interest of $52 aggregates $535, including a short term debt portion of $149 included in other current liabilities. Future minimum payments under the installment loans aggregate $524, including a short term portion of $212 included in other current liabilities. A total of $1.6 million was recorded as accrued legal settlement which is further discussed in Note 13 Contingencies.

 

Note 9 – Stockholders’ Equity

 

Controlled Equity Offering

 

On March 28, 2013, the Company entered into a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent (“Cantor”). Under the Sales Agreement, the Company may offer and sell, from time to time, through Cantor, shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), having an aggregate offering price of up to $20.0 million (the “Shares”). The Company will pay Cantor a commission of 3.0% of the aggregate gross proceeds received under the Sales Agreement. The Company is not obligated to make any sales of the Shares under the Sales Agreement. The offering of Shares pursuant to the Sales Agreement will terminate upon the earlier of (a) the sale of all of the Shares subject to the Sales Agreement or (b) the termination of the Sales Agreement by Cantor or the Company, as permitted therein. During the nine months ended April 30, 2014, the Company sold an aggregate of 3,018,112 of common stock under the Sales Agreement at an average price of $3.14 per share and received proceeds of approximately $9.5 million, net of expenses.

 

Share-based compensation

 

The Company has an incentive stock option plan (the “1999 Plan”), an incentive stock option and restricted stock award plan (the “2005 Plan”), and a long term incentive share award plan, (the “2011 Incentive Plan”), which are more fully described in Note 10 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2013. The 2011 Plan, which is the only plan from which awards may now be granted, provides for the award to eligible employees, officers, directors, consultants and other persons of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, performance awards, and other stock-based awards.

 

The amounts of share-based compensation expense recognized in the periods presented are as follows:

 

   Three months ended
April 30,
   Nine months ended
April 30,
 
   2014   2013   2014   2013 
Stock options  $255   $46   $367   $61 
Restricted stock   28    94    130    380 
   $283   $140   $497   $441 

 

The following table sets forth the amount of expense related to share-based payment arrangements included in specific line items in the accompanying statements of operations:

 

   Three months ended
April 30,
   Nine months ended
April 30,
 
   2014   2013   2014   2013 
Cost of clinical laboratory services  $3   $2   $7   $7 
Research and development       1    1    2 
Selling, general and administrative   280    137    489    432 
   $283   $140   $497   $441 

 

No excess tax benefits were recognized during the nine month periods ended April 30, 2014 and 2013.

11

Stock Option Plans

 

The following table summarizes stock option activity during the nine month period ended April 30, 2014:

 

   Options   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value (000s)
 
Outstanding at July 31, 2013   726,645   $10.39           
Awarded   665,117   $2.82           
Exercised      $           
Cancelled or expired   (219,734)  $17.08           
Outstanding at end of period   1,172,028   $4.84    3.6 years   $1,525 
Exercisable at end of period   391,261   $7.22     3.1 years   $163 

 

On October 3, 2013, the Company awarded 10,000 options to an officer with an exercise price of $2.53 and a five year term, which vest annually over four years. The fair value of the options granted was $1.23 per share. The assumptions used to fair value this option award were as follows: expected life of 4.75 years, expected volatility 57.6%, risk free interest rate of 1.3% and no dividend yield. As of April 30, 2014, none of these options were vested.

 

On November 26, 2013, the Company awarded 271,591 options to two senior officers with an exercise price of $3.00 and a four year term, which vest after one year. The award satisfies $0.2 million of their fiscal 2013 incentive compensation award liability in lieu of cash. The fair value of the options granted was $0.66 per share. The assumptions used to fair value this option award were as follows: expected life of 2.5 years, expected volatility 54.79%, risk free interest rate of 0.42% and no dividend yield. As of April 30, 2014, none of these options were vested.

 

On January 17, 2014, the Company awarded 267,797 options to two senior officers and the board of directors with an exercise price of $2.70 and a five year term, which vest annually over two years. The fair value of the options granted was $1.05 per share. The assumptions used to fair value this option award were as follows: expected life of 3.25 years, expected volatility 54.78%, a risk free interest rate of 0.90% and no dividend yield. As of April 30, 2014, none of these options were vested. Further on January 17, 2014, the Company awarded 95,729 options to executive officers with an exercise price of $2.70 and a five year term, which vest annually over three years. The fair value of the options granted was $1.10 per share. The assumptions used to fair value this option award were as follows: expected life of 3.5 years, expected volatility 55.45%, a risk free interest rate of 1.00% and no dividend yield. As of April 30, 2014, none of these options were vested.

 

On February 3, 2014, the Company awarded 20,000 options to an executive officer with an exercise price of $2.75 and a five year term, which vest annually over three years. The fair value of the options granted was $1.11 per share. The assumptions used to fair value this option award were as follows: expected life of 3.5 years, expected volatility 55.07%, risk free interest rate of 0.84% and no dividend yield. As of April 30, 2014, none of these options were vested.

 

As of April 30, 2014, the total future compensation cost related to non-vested options, not yet recognized in the statements of operations, was $0.4 million and the weighted average period over which the remaining expense of these awards is expected to be recognized is sixteen months.

12

Restricted Stock Awards

 

A summary of the activity pursuant to the Company’s restricted stock awards for the nine months ended April 30, 2014 is as follows:

 

   Awards   Weighted
Average
Award Price
 
Outstanding at July 31, 2013   125,133   $3.45 
Awarded   3,000    3.35 
Vested   (65,063)   (2.48)
Expired or forfeited   (11,160)   (1.70)
Unvested at end of period   51,910   $5.05 

 

The fair value of a restricted stock award is determined based on the closing stock price on the award date. As of April 30, 2014, there was approximately $0.1 million of unrecognized compensation cost related to unvested restricted stock-based compensation to be recognized over a weighted average remaining period of approximately one year.

 

The total number of shares available for grant as equity awards from the 2011 Incentive Plan is approximately 1,664,000 shares as of April 30, 2014.

 

During the nine months ended April 30, 2013, the Company issued 216,556 shares from treasury stock and 9,419 newly issued shares to match a portion of its employees’ 401(k) contributions. The Company recorded an expense of $643 for the match, representing the fair value of the shares at the date of issuance, reducing treasury stock by $3,074 for the average acquisition cost of such shares and adjusted additional paid in capital by $2,458.

 

During the nine months ended April 30, 2014, the Company issued 165,646 shares to match a portion of its employees’ 401(k) contributions. The Company recorded an expense of $636 for the match, representing the fair value of the shares at the date of issuance and adjusted common stock and additional paid in capital by the same amount.

 

Note 10 - Income taxes

 

At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods.

 

The Company’s effective tax rate (provision) benefit for the three months ended April 30, 2014 was (2.1%) compared to a benefit of 0.7% during the three months ended April 30, 2013. The Company’s effective tax rate (provision) benefit for the nine months ended April 30, 2014 was a provision of (1.0%) compared to a benefit of 1.8% during the nine months ended April 30, 2013. The tax (provision) benefit for the periods were based on state and local taxes and domestic and foreign tax for tax deductible intangibles. The Company’s effective tax rate for both periods differed from the expected net operating loss carryforward benefit at the U.S. federal statutory rate of 34% primarily due to the inability to recognize such benefit. The carryforward benefit cannot be recognized 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 federal carryforward benefit.

 

The Company files a consolidated Federal income tax return. The Company files combined returns with California, Michigan and New York State and City for certain subsidiaries. Other subsidiaries file separate state and foreign tax returns. With few exceptions, the periods that remain subject to examination are fiscal years ended July 31, 2011 through July 31, 2013. The Company’s Federal income tax return for the fiscal year ended July 31, 2011 is currently under examination which is ongoing.

 

Note 11 – Royalty and licensing income

 

The Company’s Life Science segment has a license agreement with QIAGEN Gaithersburg Inc. (“Qiagen”) that began in 2005, whereby the Company earns quarterly royalties on the net sales of Qiagen products subject to the license until the expiration of the patent on April 24, 2018. During each of the three months ended April 30, 2014 and 2013, the Company recorded royalty income under the agreement of approximately $0.7 million and $0.9 million

13

respectively. During the nine months ended April 30, 2014 and 2013, the Company recorded royalty income under the agreement of approximately $3.4 million and $4.0 million, respectively.

 

Note 12 – Segment reporting

 

The Company has three reportable segments: Clinical Labs, Life Sciences, and Therapeutics. The Clinical Labs segment provides diagnostic services to the health care community. The Company’s Life Sciences segment develops, manufactures, and markets products to research and pharmaceutical customers. The Company’s Therapeutic segment conducts research and development activities for therapeutic drug candidates. The 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 contained in the Company’s Annual Report on Form 10-K for the year ended July 31, 2013.

14

The following financial information represents the operating results of the reportable segments of the Company:

 

Three months ended April 30, 2014

   Clinical
Labs
   Life
Sciences
   Therapeutics   Other   Consolidated 
Revenues:                         
Clinical laboratory services  $14,542               $14,542 
Product revenues      $8,707            8,707 
Royalty and license fee income       729            729 
    14,542    9,436            23,978 
Operating expenses:                         
Cost of clinical laboratory services   9,784                9,784 
Cost of product revenues       3,800            3,800 
Research and development       599   $250        849 
Selling, general and administrative   5,091    3,278       $2,236    10,605 
Provision for uncollectible accounts receivable   684                684 
Legal fee expense   282    766         863    1,911 
Legal settlements, net   2,000    (5,100)           (3,100)
Total operating expenses   17,841    3,343    250    3,099    24,533 
                          
Operating income (loss)   (3,299)   6,093    (250)   (3,099)   (555)
                          
Other income (expense)                         
Interest   (10)   4        (41)   (47)
Other   7    (2)       5    10 
Foreign currency gain       144            144 
Income (loss) before income taxes  $(3,302)  $6,239   $(250)  $(3,135)  $(448)
                          
Depreciation and amortization included above  $351   $614   $   $23   $988 
                          
Share-based compensation included in above:                         
Cost of clinical laboratory services  $2    1           $3 
Research and development                    
Selling, general and administrative   9   $(4)      $275    280 
Total  $11   $(3)      $275   $283 
                          
Capital expenditures  $90   $36   $   $   $126 
15

Three months ended April 30, 2013

   Clinical
Labs
   Life
Sciences
   Therapeutics   Other   Consolidated 
Revenues:                         
Clinical laboratory services  $13,384               $13,384 
Product revenues      $8,265            8,265 
Royalty and license fee income       949            949 
    13,384    9,214            22,598 
Operating expenses:                         
Cost of clinical laboratory services   9,331                9,331 
Cost of product revenues       4,219            4,219 
Research and development   61    625   $303        989 
Selling, general and administrative   5,041    3,813       $2,178    11,032 
Provision for uncollectible accounts receivable   887    41            928 
Legal fee expense   115    21        1,572    1,708 
Total operating expenses   15,435    8,719    303    3,750    28,207 
                          
Operating income (loss)   (2,051)   495    (303)   (3,750)   (5,609)
                          
Other income (expense)                         
Interest   (12)   2            (10)
Other   6    12        7    25 
Foreign currency gain       (214)           (214)
Income (loss) before income taxes  $(2,057)  $295   $(303)  $(3,743)  $(5,808)
                          
Depreciation and amortization included above  $354   $778   $4   $25   $1,161 
                          
Share-based compensation included in above:                         
Cost of clinical laboratory services  $2               $2 
Research and development       1            1 
Selling, general and administrative   11   $       $126    137 
Total  $13   $1       $126   $140 
                          
Capital expenditures  $148   $18   $   $   $166 
16

Nine months ended April 30, 2014

   Clinical
Labs
   Life
Sciences
   Therapeutics   Other   Consolidated 
Revenues:                         
Clinical laboratory services  $43,250               $43,250 
Product revenues      $24,424            24,424 
Royalty and license fee income       3,366            3,366 
    43,250    27,790            71,040 
Operating expenses:                         
Cost of clinical laboratory services   28,785                28,785 
Cost of product revenues       11,511            11,511 
Research and development   14    1,668   $816        2,498 
Selling, general and administrative   15,122    10,098       $5,997    31,217 
Provision for uncollectible accounts receivable   2,448    20            2,468 
Legal fees expense   572    803        3,413    4,788 
Legal settlements, net   2,000    (5,100)             (3,100)
Total operating expenses   48,941    19,000    816    9,410    78,167 
                          
Operating income (loss)   (5,691)   8,790    (816)   (9,410)   (7,127)
                          
Other income (expense)                         
Interest   (32)   13        (142)   (161)
Other   34    18        33    85 
Foreign currency gain       460            460 
Income (loss) before income taxes  $(5,689)  $9,281   $(816)  $(9,519)  $(6,743)
                          
Depreciation and amortization included above  $1,061   $1,876   $6   $72   $3,015 
                          
Share-based compensation included in above:                         
Cost of clinical laboratory services  $6   $1           $7 
Research and development       1            1 
Selling, general and administrative   28    5       $456    489 
Total  $34   $7       $456   $497 
                          
Capital expenditures  $453   $117   $   $   $570 
17

Nine months ended April 30, 2013

   Clinical
Labs
   Life
Sciences
   Therapeutics   Other   Consolidated 
Revenues:                         
Clinical laboratory services  $41,881               $41,881 
Product revenues      $24,574            24,574 
Royalty and license fee income       3,982            3,982 
    41,881    28,556            70,437 
Operating expenses:                         
Cost of clinical laboratory services   28,466                28,466 
Cost of product revenues       12,546            12,546 
Research and development   236    1,800   $932        2,968 
Selling, general and administrative   14,914    12,165       $6,261    33,340 
Provision for uncollectible accounts receivable   3,656    201            3,857 
Legal fee expense   272    58        4,520    4,850 
Total operating expenses   47,544    26,770    932    10,781    86,027 
                          
Operating income (loss)   (5,663)   1,786    (932)   (10,781)   (15,590)
                          
Other income (expense)                         
Interest   (34)   6        3    (25)
Other   31    32        18    81 
Foreign currency gain       119            119 
Income (loss) before income taxes  $(5,666)  $1,943   $(932)  $(10,760)  $(15,415)
                          
Depreciation and amortization included above  $1,017   $2,382   $19   $79   $3,497 
                          
Share-based compensation included in above:                         
Cost of clinical laboratory services  $7               $7 
Research and development      $2            2 
Selling, general and administrative   37    6       $389    432 
Total  $44   $8       $389   $441 
                          
Capital expenditures  $579   $193   $   $   $772 
18

Note 13 – Contingencies

 

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., now Life Technologies, Inc. (NASDAQ:LIFE) which was acquired by Thermo Fisher Scientific, Inc. (NYSE:TMO) on February 3, 2014. The complaint alleged 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. On November 12, 2012, a jury in New Haven found that one of these patents (United States Patent No. 5,449,667) was infringed and not proven invalid. The jury awarded $48.5 million for this infringement. On January 6, 2014, the judge awarded prejudgment interest of approximately $12.5 million and additional post-interest on the full amount will also be awarded starting November 7, 2012 until the total award is satisfied. The final award to Enzo could be reduced or be subject to possible claims from third parties. On February 3, 2014, Life Technologies filed a notice of appeal and 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.

 

As of August 1, 2013, the Company, as plaintiff, was engaged in litigation in the United States District Court for the Southern District of New York against six parties (and certain of their related companies): Amersham plc, PerkinElmer, Inc., Molecular Probes, Inc., Orchid Biosciences, Inc., Affymetrix, Inc., and Roche Diagnostic GmbH (“Roche”). These cases were commenced at various times from October 2002 to June 2004. In each of the six cases, the Company had asserted similar (with some differences) causes of action against the defendants which can be generally described as contract, tort, fraud, and patent claims, except that no patent claims are asserted against Affymetrix. In the Roche case, Roche seeks a declaratory judgment of non-breach and patent invalidity against the Company. The cases were consolidated for pre-trial purposes in 2004 and there has been extensive discovery among the parties. In 2011, the defendants moved for summary judgment of non-infringement regarding the Company’s patent claims. In 2012, those motions were granted in part and denied in part. In December 2012, all six defendants moved for summary judgment on the Company’s non-patent claims. Additional discovery was taken and the Company responded to the motions in May 2013. On October 22, 2013, the Court granted Amersham’s motion for summary judgment. Thereafter, on November 26, 2013, the parties settled and dismissed the Amersham case. On October 28, 2013, the Court granted in part and denied in part PerkinElmer’s motion for summary judgment. A jury trial in that case was postponed on March 18, 2014 and rescheduled for June 30, 2014. By decisions dated December 6, 2013, the Court granted in part and denied in part the summary judgment by Roche and Affymetrix. A jury trial was been ordered in Roche’s case on a date to be determined. On the same date, the Court granted the summary judgment for the remaining two motions by Molecular Probes and Orchid.

 

On April 22, 2014, the Company as plaintiff finalized and executed a settlement agreement with Affymetrix, Inc. to settle a patent litigation lawsuit (the “Agreement”) in the amount of $5.1 million. Under terms of the Agreement, Affymetrix paid to the Company $4.3 million and paid to the Company’s attorneys $0.8 million, which is included in legal fees in the statements of operations for the three and nine months ended April 30, 2014. The amount of the settlement is included in the statement of operations under Legal settlements, net within the Life Science segment.

 

In 2012, the Company received a Subpoena Duces Tecum (the “Subpoena”) from the Department of Health and Human Services, Office of Inspector General (“OIG”). The Subpoena was issued as part of an investigation being conducted by the US Attorney’s Office for the Eastern District of New York in conjunction with the OIG. While a number of potential issues were raised initially by the government, the investigation came to focus primarily on an alleged failure to collect diagnosis codes from physicians who ordered tests through Enzo Clinical Labs. The time period initially covered by the investigation was from 2004 through 2011. In response to the Subpoena, the Company cooperated with the government. At this time, the Company and the U.S. Department of Justice have reached a preliminary agreement on the principal terms of a settlement to resolve this matter. As a result, the Company believes that an estimate of the settlement is approximately $2.0 million and has reserved this amount in the statement of operations under legal settlements, net within the Clinical Labs segment. The Company believes that the settlement amount, upon conclusion, will be paid over a five year period and has recorded $0.4 million as other current liabilities and $1.6 million as a non-current liability at April 30, 2014. Under certain circumstances, the Company may be required to accelerate payments and/or pay up to an additional $1.5 million based upon a favorable recovery and collection related to the judgment in the Life Technologies matter discussed above or sale of the Company. The settlement covers the time period 2004-2013.

 

Due to the on-going settlement discussions, it is possible that a settlement may not be reached under the terms above. The final outcome, if different than the Company’s preliminary estimate, could have a material effect on the Company’s business, results of operations, financial condition and cash flow.

19

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 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 consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q.

 

Forward-Looking Statements

 

Our disclosure and analysis in this report, including but not limited to the information discussed in this Item 2, contain forward-looking information about our Company’s financial results and estimates, business prospects and products in research and development that involve substantial risks and uncertainties. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as “anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe”, “will”, and other words and terms of similar meaning in connection with any discussion of future operations or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign currency rates, intellectual property matters, the outcome of contingencies, such as legal proceedings, and financial results.

 

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. As a result, investors are cautioned not to place undue reliance on any of our forward-looking statements. Investors should bear this in mind as they consider forward-looking statements. We do not assume any obligation to update or revise any forward-looking statement that we make, even if new information becomes available or other events occur in the future. We are also affected by other factors that may be identified from time to time in our filings with the Securities and Exchange Commission, some of which are set forth in Item 1A - Risk Factors in our Form 10-K filing for the July 31, 2013 fiscal year. You are advised to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. Although we have attempted to provide a list of important factors which may affect our business, investors are cautioned that other factors may prove to be important in the future and could affect our operating results. You should understand that it is not possible to predict or identify all such factors or to assess the impact of each factor or combination of factors on our business. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

 

Overview

 

Enzo Biochem, Inc. (the “Company” “we”, “our” or “Enzo”) is a growth-oriented integrated life sciences and biotechnology company focused on harnessing biological processes to develop research tools, diagnostics and therapeutics and serves as a provider of test services, including esoteric tests, 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 our 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.

 

In the course of our research and development activities, we have built a substantial portfolio of intellectual property assets, comprising 145 key issued patents worldwide, and over 160 pending patent applications, along with extensive enabling technologies and platforms.

 

We are comprised of three operating segments, of which the Therapeutics and Life Sciences segments have evolved out of our core competencies: the use of nucleic acids as informational molecules and the use of compounds for immune modulation and augmented by the previous acquisitions of a number of related companies. The Company’s Enzo Clinical Labs and Enzo Life Sciences reporting units, as described below, are affected by different US and

20

global economic conditions which are included in Item 1A, Risk Factors in our Form 10-K filing for the July 31, 2013 fiscal year.

 

Below are brief descriptions of each of our operating segments (See Note 12 in the Notes to Consolidated Financial Statements):

 

Enzo Clinical Labs is a regional clinical laboratory serving the New York, New Jersey and Eastern Pennsylvania medical communities. The Company believes having clinical diagnostic services allows us to capitalize first hand on our extensive advanced technological capabilities and the broader trends in predictive and personalized diagnostics. Enzo Clinical Labs offers 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, and search for an otherwise undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale, New York, a network of over 35 patient service centers throughout New York and New Jersey, a stand-alone “stat” or rapid response laboratory in New York City and a full-service phlebotomy, in-house logistics department, and information technology department.

 

Enzo Life Sciences manufactures, develops and markets products and tools to life sciences, drug development and clinical research 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 strong 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 7,500 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 diagnostic platforms and high quality research reagents and kits in the primary key research areas of genomics, cellular analysis, small molecule chemistry, protein homeostasis epigenetics immunoassays and assay development.

 

The segment is an established source for a comprehensive panel of products to scientific experts in the fields of cancer, cardiovascular disease, neurological disorders, diabetes and obesity, endocrine disorders, infectious and autoimmune disease, hepatotoxicity and renal injury.

 

Enzo Therapeutics is a biopharmaceutical venture 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. Enzo Therapeutics has focused its efforts on developing treatment regimens for diseases and conditions for 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 45 patents and patent applications.

21

Results of Operations
Three months ended April 30, 2014 compared to April 30, 2013

 

(in 000s)

 

Comparative Financial Data for the Three Months Ended April 30,

 

   2014   2013   Increase
(Decrease)
   % Change 
Revenues:                    
Clinical laboratory services  $14,542   $13,384   $1,158    9%
Product revenues   8,707    8,265    442    5 
Royalty and license fee income   729    949    (220)   (23)
Total revenues   23,978    22,598    1,380    6 
                     
Operating expenses (income):                    
Cost of clinical laboratory services   9,784    9,331    453    5 
Cost of product revenues   3,800    4,219    (419)   (10)
Research and development   849    989    (140)   (14)
Selling, general, and administrative   10,605    11,032    (427)   (4)
Provision for uncollectible accounts receivable   684    928    (244)   (26)
Legal fee expense   1,911    1,708    203    12 
Legal settlements, net   (3,100)       (3,100)   ** 
Total operating expenses   24,533    28,207    (3,674)   (13)
                     
Operating loss   (555)   (5,609)   (5,054)   (90)
                     
Other income (expense):                    
Interest   (47)   (10)   37    ** 
Other   10    25    (15)   (60)
Foreign currency gain (loss)   144    (214)   358    ** 
Loss before income taxes  $(448)  $(5,808)  $(5,360)   (92)

 

** not meaningful

 

Consolidated Results:

 

The “2014 period” and the “2013 period” refer to the three months ended April 30, 2014 and 2013, respectively.

 

Clinical laboratory services revenues for the 2014 period were $14.5 million compared to $13.4 million an increase of $1.1 million or 9%. The 2014 period’s increase over the 2013 period was primary attributable to higher reimbursement rates and higher sales volume with higher margins from certain new molecular diagnostics test offerings.

 

Product revenues for the 2014 period were $8.7 million compared to $8.3 million in the 2013 period, an increase of $0.4 million or 5%. The increase was due to higher margin sales volume over the prior year period.

 

Royalty and license fee income for the 2014 period was $0.7 million compared to $0.9 million in the 2013 period. Royalties are primarily earned from the reported sales of Qiagen products subject to a license agreement. There are no direct expenses relating to royalty and licensing income.

 

The cost of clinical laboratory services during the 2014 period was $9.8 million compared to $9.3 million in the 2013 period, an increase of $0.5 million or 5%. During the 2014 period, outside reference lab testing increased $0.5 million and salaries and other costs increased $0.1 million, offset by a decrease of $0.1 million for reagent costs. Certain expense variances are affected by the changes in the mix of tests performed.

 

The cost of product revenues during the 2014 period was $3.8 million compared to $4.2 million in the 2013 period, a decrease of $0.4 million or 10%. The decrease is attributed to sales volume of products with lower cost of goods.

22

Research and development expenses were approximately $0.8 million during the 2014 period, compared to $1.0 million in the 2013 period, a decrease of $0.2 million or 14%. The decrease was principally attributed to lower payroll and other costs.

 

Selling, general and administrative expenses were approximately $10.6 million during the 2014 period and $11.0 million during the 2013 period, a decrease of $0.4 million or 4%. During the 2014 period, the Company recognized $0.5 million for the cost of restructuring its administrative group. This cost was offset by the positive impact of restructuring and realignments completed in the last two quarters of fiscal 2013 in the Life Sciences segment.

 

The provision for uncollectible accounts receivable, primarily related to the Clinical Labs segment, was $0.7 million for the 2014 period as compared to $0.9 million in the 2013 period, a decrease of $0.2 million or 26%. The decrease is primarily due to the change in payer mix and service volume and improvements in collection experience. As a result, the provision for uncollectible accounts receivable as a percentage of Clinical laboratory service revenues decreased to 4.7% in the 2014 period from 6.6% in the 2013 period.

 

Legal fee expense was $1.9 million during the 2014 period compared to $1.7 million in the 2013 period, an increase of $0.2 million or 12% primarily due to the timing of patent litigation costs. In the 2014 period approximately $0.8 million in legal fees was paid to our attorneys for the Affymetrix patent litigation settlement.

 

Legal settlements, net was $(3.1) million in the 2014 period. The Company as plaintiff finalized and executed a settlement agreement with Affymetrix, Inc. to settle a patent litigation lawsuit in the amount of $5.1 million. Also during the 2014 period, the Company reached a preliminary agreement on the principal terms of a settlement with the U.S. Department of Justice relating to their investigation of an alleged failure to collect diagnosis codes from physicians who ordered tests through Enzo Clinical Labs. As a result, the Company believes that an estimate of the settlement is approximately $2.0 million. Both settlements are more fully described in Note 13 in the Notes to Consolidated Financial Statements.

 

During the 2014 period, the gain on foreign currency transactions was $0.1 million as compared to a loss of $0.2 million in the 2013 period. The Company has loans and receivables with its foreign subsidiaries denominated in US dollars. The Company recognizes a gain if foreign currencies including the Swiss Franc, Euro and British pound strengthen relative to the US dollar during the period and recognizes a loss if those foreign currencies weaken relative to the US dollar during the period.

 

Segment Results

 

Clinical Labs

 

The Clinical Labs segment’s loss before taxes was $3.3 million for the 2014 period as compared to $2.1 million in the 2013 period, an increase of $1.2 million or 57%. The 2014 period loss includes a $2.0 million charge for an estimated legal settlement with the U.S. Department of Justice. Excluding this charge, the segment’s loss before taxes would be $1.3 million compared to $2.1 million in the 2013 period, a decrease of $0.8 million, attributable to an increase in laboratory service revenue of higher margin tests performed. The revenue from laboratory services increased in the 2014 period by $1.1 million due to incremental growth related to new test offerings of $2.5 million offset by weather related impacts during the period of $0.4 million and lower reimbursements of $1.0 million. The 2014 period gross profit of $4.8 million increased from the 2013 period by $0.7 million as a result of higher revenues and lower costs of services, primarily reference testing. The provision for uncollectible accounts receivable decreased by $0.2 million as compared to the 2013 period due to improved collection procedures implemented and changes in the mix of payers and as a percentage of revenues decreased to 4.7% in the 2014 period from 6.6% in the 2013 period.

 

Life Sciences

 

The Life Sciences segment’s income before taxes was $6.2 million for the 2014 period as compared to $0.3 million for the 2013 period an increase of $5.9 million. The 2014 period income includes $5.1 million for a patent litigation settlement agreement with Affymetrix, Inc. The segment’s gross profit was $5.6 million in the 2014 period, as compared $5.0 million in the 2013 period, an increase of $0.6 million or 13% due to the sales mix of higher margin products. The segment’s selling, general and administrative expense decreased approximately $0.5 million during the 2014 period primarily due to lower payroll and related expenses, but was offset by an increase in legal fee expense of $0.7 million primarily related to the settlement agreement. Due to the strengthening of foreign currencies during the 2014 period as compared to the 2013 period, the foreign currency gain increased by $0.4 million in the 2014 period.

23

Therapeutics

 

Therapeutics loss before income taxes was approximately $0.3 million in both the 2014 and 2013 period.

 

Other

 

The Other loss before taxes for the 2014 period was approximately $3.1 million as compared to $3.7 million for the 2013 period, a decrease of $0.6 million or 16% due to decreases in legal services for other Corporate activities.

24

Results of Operations
Nine months ended April 30, 2014 as compared to April 30, 2013

 

   2014   2013   Increase
(Decrease)
   % Change 
Revenues:                    
Clinical laboratory services   $43,250   $41,881   $1,369    3%
Product revenues    24,424    24,574    (150)   (1)
Royalty and license fee income    3,366    3,982    (616)   (15)
Total revenues    71,040    70,437    603    1 
                     
Operating expenses (income):                    
Cost of clinical laboratory services    28,785    28,466    319    1 
Cost of product revenues    11,511    12,546    (1,035)   (8)
Research and development    2,498    2,968    (470)   (16)
Selling, general, and administrative    31,217    33,340    (2,123)   (6)
Provision for uncollectible accounts receivable    2,468    3,857    (1,389)   (36)
Legal fee expense    4,788    4,850    (62)   (1)
Legal settlements, net   (3,100)       (3,100)   ** 
Total operating expenses    78,167    86,027    (7,860)   (9)
                     
Operating loss    (7,127)   (15,590)   (8,463)   (54)
                     
Other income (expense):                    
Interest    (161)   (25)   136    ** 
Other    85    81    4    5 
Foreign currency gain    460    119    341    ** 
Loss before income taxes   $(6,743)  $(15,415)  $(8,672)  (56)

 

** not meaningful

 

Consolidated Results:

 

The “2014 period” and the “2013 period” refer to the nine months ended April 30, 2014 and 2013, respectively.

 

Clinical laboratory services revenues for the 2014 period were $43.3 million compared to $41.9 million in the 2013 period an increase of $1.4 million or 3%. The increase is primarily attributable to higher reimbursement rates and higher sales volume related to molecular diagnosis test offerings offset by negative reimbursement rates from certain payers for non-molecular tests and weather related issues.

 

Product revenue in the 2014 period was $24.4 million as compared to $24.6 million in the 2013 period, a decrease of $0.2 million or 1%. Targeted sales and marketing of higher margin products are replacing declines in certain distributed products for certain customer types and declines in resale products due to market softness in research reagent products.

 

Royalty and license fee income during the 2014 period was $3.4 million compared to $4.0 million in the 2013 period a decrease of $0.6 million or 15%. Royalties are primarily earned from the reported sales of Qiagen products subject to a license agreement. There are no direct expenses relating to royalty and licensing income.

 

The cost of clinical laboratory services during the 2014 period was $28.8 million as compared to $28.5 million in the 2013 period, an increase of $0.3 million or 1%. During the 2014 period, reagent costs and supplies declined $0.7 million offset by higher outside reference testing of $0.9 million and payroll and other costs of $0.1 million. Certain expense variances are affected by the changes in the mix of tests performed.

 

The cost of product revenues during the 2014 period was $11.5 million compared to $12.5 million in the 2013 period, a decrease of $1.0 million or 8%. The decrease is attributed to a favorable mix of products with a lower cost of goods particularly in the second and third quarters of the 2014 period.

25

Research and development expenses were approximately $2.5 million during the 2014 period, compared to $3.0 million in the 2013 period, a decrease of $0.5 million or 16%. The decrease was principally attributed to payroll and other related costs of $0.3 million and lower material costs of $0.1 million.

 

Selling, general and administrative expenses were approximately $31.2 million during the 2014 period and $33.3 million during the 2013 period, a decrease of $2.1 million or 6%. The Enzo Life Sciences segment selling, general and administrative decreased by $2.0 million due to the positive effects from the business realignments in the last three quarters of fiscal 2013 resulting in lower payroll and related costs of $1.7 million, lower depreciation and amortization of $0.3 million and $0.1 in other expenses, offset by a $0.1 million increase in marketing costs. Other segment selling, general and administrative decreased by $0.3 million, primarily due to lower salary and related costs of $0.1 million and $0.2 million in lower professional and other fees. The Clinical Lab segment selling, general and administrative increased by $0.2 million primarily due to increases in payroll related costs. During the 2014 period, the Company recognized $0.5 million for the cost of restructuring its administrative group.

 

The provision for uncollectible accounts receivable, primarily related to the Clinical Labs segment, was $2.5 million for the 2014 period as compared to $3.9 million in the 2013 period, a decrease of $1.4 million or 36%. The decrease is primarily due to the change in payer mix and service volume and improvements in collection experience at the Clinical Labs. As a percentage of clinical laboratory revenues the provision for uncollectible accounts receivable decreased to 5.7% in the 2014 period from 8.7% in the 2013 period.

 

Legal fee expense was $4.8 million during the 2014 period compared to $4.9 million in the 2013 period, a decrease of $0.1 million or 2% due to a decline in legal services spending in the 2014 period primarily attributed to patent litigation.

 

Legal settlements, net was $(3.1) million in the 2014 period. The Company as plaintiff finalized and executed a settlement agreement with Affymetrix, Inc. to settle a patent litigation lawsuit in the amount of $5.1 million. Also during the 2014 period, the Company reached a preliminary agreement on the principal terms of a settlement with the U.S. Department of Justice relating to their investigation of an alleged failure to collect diagnosis codes from physicians who ordered tests through Enzo Clinical Labs. As a result, the Company believes that an estimate of the settlement is approximately $2.0 million. Both settlements are more fully described in Note 13 in the Notes to Consolidated Financial Statements.

 

Interest expense was $0.2 million during the 2014 compared to zero in the 2013 period due to interest incurred on the credit agreement entered into in the fourth quarter of 2013.

 

During the 2014 and the 2013 periods, the gain on foreign currency transactions was $0.5 million and $0.1 million, respectively. The Company has loans and receivables with its foreign subsidiaries denominated in US dollars and recognizes a gain if foreign currencies including the Swiss Franc, Euro and British pound strengthen relative to the US dollar during the period and recognizes a loss if those foreign currencies weaken relative to the US dollar during the period. The gain in both periods was due to the strengthening of these foreign currencies relative to the US dollar.

26

Segment Results

 

Clinical Labs

 

The Clinical Labs segment’s loss before taxes was $5.7 million for the both the 2014 and 2013 periods. The 2014 period loss includes a $2.0 million charge for an estimated legal settlement with the U.S. Department of Justice. Excluding this charge, the segment’s 2014 loss before taxes would be $3.7 million. The $2.0 million or 35% decrease in the loss before taxes in the 2014 period is the result of an increase in service volume and a decrease in the provision for uncollectible accounts receivable. The revenue from laboratory services increased in the 2014 period by $1.4 million due to incremental growth related to new test offerings of $5.9 million offset by weather related impacts during the period of $0.9 million and lower reimbursements of $3.6 million. As a result of these revenue impacts and changes in costs of services, the 2014 period gross profit of $14.5 million increased from the 2013 period by $1.1 million. The provision for uncollectible accounts receivable decreased by $1.2 million as compared to the 2013 period due to the improved implemented collection procedures and changes in the mix of payers and as a percentage of revenues decreased to 5.7% in the 2014 period from 8.7% in the 2013 period. Research and development decreased $0.2 million. Selling, general and administrative expense increased by approximately $0.2 million primarily due to increases in payroll costs, and legal fee expense increased approximately $0.3 million due to settlement activities.

 

Life Sciences

 

The Life Sciences segment’s income before taxes was $9.3 million for the 2014 period as compared to $1.9 million for the 2013 period, an increase of $7.4 million or 389%. The 2014 period income includes $5.1 million for a patent litigation settlement agreement with Affymetrix, Inc. The segment’s gross profit was $16.3 million in the 2014 period, as compared to $16.0 million in the 2013 period, an increase of $0.3 million or 2%. Gross profit was negatively impacted by lower royalty income, offset by reduced payroll, facility and other costs resulting from realignments during the last three quarters of fiscal 2013. Product revenues decreased by $0.2 million or 1% in the 2014 period to $24.4 million. Royalty and license fee income declined $0.6 million in the 2014 period and is primarily from the reported sales of Qiagen products subject to a license agreement. The segment’s operating expenses, excluding legal settlements, net, decreased by approximately $1.6 million during the 2014 period due to reduced selling, general and administrative of $2.0 million attributed to cost reductions from headcount realignments and continued centralization of activities since the second quarter of fiscal 2013, research and development of $0.1 million and lower provision for doubtful accounts of $0.2 million offset by legal expense of $0.7 million due primarily to the patent litigation settlement agreement. Due to the greater strengthening of foreign currencies during the 2014 period, the foreign currency gain increased $0.3 million.

 

Therapeutics

 

Therapeutics loss before income taxes was approximately $0.8 million in the 2014 period and $0.9 million in 2013 period, due to lower payroll costs in 2014.

 

Other

 

The Other loss before taxes for the 2014 period was approximately $9.5 million as compared to $10.8 million for the 2013 period, a decrease of $1.3 million or 12%. In the 2014 period legal expenses decreased by $1.1 million due to the timing of legal services for legal activities. General and administrative costs decreased by $0.3 million due to decreases in professional fees of $0.2 million and compensation and related costs of $0.1 million.

27

Liquidity and Capital Resources

 

At April 30, 2014, the Company had cash and cash equivalents of $14.8 million of which $1.8 million was in foreign accounts, as compared to cash and cash equivalents of $9.0 million, of which $1.5 million was in foreign accounts at July 31, 2013. It is the Company’s current intent to permanently reinvest these funds outside of the United States, and its current plans do not demonstrate a need to repatriate them to fund its United States operations. The Company had working capital of $16.1 million at April 30, 2014 compared to $8.7 million at July 31, 2013. The increase in working capital of $7.4 million was primarily due to the result of the settlement agreement with Affymetrix, Inc. in the amount of $5.1 million and by proceeds from issuance of common stock under the Controlled Equity Offering program of $9.5 million offset by the net loss and changes in net operating assets and liabilities.

 

Net cash used in operating activities for the nine months ended April 30, 2014 was approximately $2.7 million as compared to $8.5 million for the nine months ended April 30, 2013. The decrease in the 2014 period of approximately $5.8 million was primarily due to the reduction in net loss of $8.3 million which includes $5.1 million from the settlement agreement with Affymetrix, Inc., offset by non-cash charges of $2.0 million and changes in operating assets and liabilities of $0.5 million.

 

Net cash used in investing activities for the nine months ended April 30, 2014 was approximately $0.5 million as compared to cash used of $0.8 million for the nine months ended April 30, 2103. The decrease in the 2014 period was primarily due to lower capital expenditures of $0.2 million.

 

Net cash provided by financing activities for the nine months ended April 30, 2014 was approximately $8.9 million as compared to cash used of $0.1 million for the nine months ended April 30, 2013. The increase was due to the proceeds from the issuance of common stock of $9.5 million offset by a net decrease in borrowings of $0.3 million under the Credit Agreement and an increase in payments of installment loans and capital leases of $0.3 million.

 

Despite the challenging global economic environment, affecting Life Sciences revenues in fiscal 2013 and continuing in the beginning of fiscal 2014 at reduced levels and attributed to macroeconomic concerns, reduced funding of customer research budgets and the impact of the Company’s rationalization of low margin products, and at the Clinical Labs the impact of healthcare reform regulations and changes in payer policies affecting reimbursements to providers, as well as weather, the Company believes that its current cash and cash equivalents level, utilization of the Controlled Equity Offering program disclosed in Note 9, and future available borrowings under the Revolving Loan and Security Agreement disclosed in Note 6 are sufficient for its foreseeable liquidity and capital resource needs over the next twelve (12) months, although there can be no assurance that future events will not alter such view. Although there can be no assurances, in the event additional capital is required, the Company believes it has the ability to raise additional funds through other equity offerings or other sources of funds. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the Item 1A. “Risk Factors” section of the Form 10-K for the year ended July 31, 2013 and referred to above are unchanged, some of which are outside our control. Macroeconomic conditions could limit our ability to successfully execute our business plans and therefore adversely affect our liquidity plans.

 

See our Form 10-K for the fiscal year ended July 31, 2013 for Forward Looking Cautionary Statements and Risk Factors.

 

Contractual Obligations

 

There have been no material changes to our Contractual Obligations as reported in our Form 10-K for the fiscal year ended July 31, 2013.

 

Management is not aware of any material claims, disputes or settled matters concerning third party reimbursement that would have a material effect on our financial statements, except as disclosed in Note 13, to the Consolidated Financial Statement.

 

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.

28

Critical Accounting Policies

 

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 collectability is reasonably assured.

 

Royalties

 

Royalty revenues are recorded in the period earned. Royalties received in advance of being earned are recorded as deferred revenues.

 

Revenues – Clinical laboratory services

 

Revenues from Clinical Labs 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:

 

   Three months ended
April 30, 2014
   Three months ended
April 30, 2013
 
Revenue category                    
Third-party payer  $7,832    54%  $6,257    47%
Medicare   3,090    21    2,989    22 
Patient self-pay   2,415    17    2,814    21 
HMO’s   1,205    8    1,324    10 
Total  $14,542    100%  $13,384    100%

 

   Nine months ended
April 30, 2014
   Nine months ended
April 30, 2013
 
Revenue category                    
Third-party payer  $21,074    49%  $19,586    47%
Medicare   9,405    22    9,307    22 
Patient self-pay   8,824    20    9,156    22 
HMO’s   3,947    9    3,832    9 
Total  $43,250    100%  $41,881    100%

 

The Company provides services to certain patients covered by various third-party payers, including the Federal Medicare program. Laws and regulations governing Medicare are complex and subject to interpretation for which action for noncompliance includes fines, penalties and exclusion from the Medicare programs. See Note 13 in the Notes to Consolidated Financial Statements.

29

Other than the Medicare program, one provider whose programs are included in the Third-party payers and the Health Maintenance Organizations (“HMO’s”) categories represents approximately 27% and 23% of the Clinical Labs net revenues for the three months ended April 30, 2014 and 2013, respectively, and 24% and 22% for the nine months ended April 30, 2014 and 2013. Another Third-party payer represents 10% and 9% of Clinical Labs net revenues for the three months ended April 30, 2014 and 2013, respectively and 9% and 10% for the nine months ended April 30, 2014 and 2013, 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, 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 three months ended April 30, 2014 and 2013, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were 86.4% and 85.6%, respectively, of gross billings. During the nine months ended April 30, 2014 and 2013, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were 85.7% and 85.4% respectively. 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.

 

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 $3.0 million and $2.9 million for the nine months ended April 30, 2014 and 2013, respectively, and a change in the net accounts receivable of approximately $0.5 million as of April 30, 2014.

 

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. Adjustments to our standard fee schedule will impact the contractual adjustment recorded. Therefore, we are unable to quantify the effect of contractual adjustment recorded during the current period that relates to revenue recorded in a previous period. However, we can reasonably estimate our contractual adjustment to revenue on a timely basis based on our quarterly review process, which includes:

 

an analysis of industry reimbursement trends;

 

an evaluation of third-party reimbursement rates changes and changes in reimbursement arrangements with third-party payers;

 

a rolling monthly analysis of current and historical claim settlement and reimbursement experience statistics with payers;

 

an analysis of current gross billings and receivables by payer.
30

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. At April 30, 2014 and July 31, 2013, approximately 62% and 60%, 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 $1.3 million or 28% and $1.7 million or 35% represents foreign receivables as of April 30, 2014 and July 31, 2013 respectively, includes royalty receivables of $0.7 and $1.2 million, as of April 30, 2014 and July 31, 2013, respectively, from Qiagen (Note 11).

 

Net accounts receivable

 

Billing category  As of
April 30, 2014
   As of
July 31, 2013
 
Clinical Labs                    
Third party payers  $3,292    43%  $3,395    46%
Patient self-pay   2,684    35    2,696    37 
Medicare   1,415    19    930    13 
HMO’s   290    3    300    4 
Total Clinical Labs   7,681    100%   7,321    100%
Total Life Sciences   4,634         4,967      
Total accounts receivable  $12,315        $12,288      

 

Changes in the Company’s allowance for doubtful accounts are as follows:

 

   Nine months
ended
April 30,
2014
   Twelve months
ended
July 31,
2013
 
           
Beginning balance  $2,707   $3,273 
Provision for doubtful accounts   2,468    4,496 
Write-offs, net   (2,454)   (5,062)
Ending balance  $2,721   $2,707 

 

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 primarily related to the Clinical Labs segment includes the balances, after receipt of the approved settlements from third party payers, for the insufficient diagnosis information received from the ordering physician which result in denials of payment, and the uncollectible portion of receivables from self payers, including deductibles and copayments, which are subject to credit risk and patients’ ability to pay.

 

During the nine months ended April 30, 2014 and 2013, 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.

31

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 patients initially determined to have primary insurance and patients for whom primary insurance has paid but a co-pay or deductible 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 collectability 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 following table indicates the Clinical Labs aged gross receivables by payer group 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.

 

As of April 30, 2014   Total
Amount
  %     Medicare
Amount
  %     Third
Party
Payers
Amount
  %     Self-pay
Amount
  %     HMO
Amount
  %  
1-30 days   $ 27,998   57 %   $ 5,225   62 %   $ 15,681   52 %   $ 3,512   51 %   $ 3,580   96 %
31-60 days     6,151   13 %     917   11 %     3,517   12 %     1,679   24 %     38   1 %
61-90 days     3,959   8 %     606   7 %     2,031   7 %     1,292   18 %     30   1 %
91-120 days     2,689   5 %     568   7 %     1,569   5 %     522   8 %     30   1 %
121-150 days     1,478   3 %     257   3 %     1,203   4 %     1   0 %     17   0 %
Greater than 150 days*     6,822   14 %     801   10 %     6,090   20 %     (89 ) -1 %     20   1 %
Totals   $ 49,097   100 %   $ 8,374   100 %   $ 30,091   100 %   $ 6,917   100 %   $ 3,715   100 %

 

As of July 31, 2013   Total
Amount
  %     Medicare
Amount
  %     Third
Party
Payers
Amount
  %     Self-pay
Amount
  %     HMO’s
Amount
  %  
1-30 days   $ 25,565   50 %   $ 3,741   62 %   $ 14,915   44 %   $ 3,341   48 %   $ 3,568   96 %
31-60 days     6,238   12 %     452   7 %     4,254   12 %     1,492   21 %     40   1 %
61-90 days     5,923   12 %     357   6 %     3,845   11 %     1,686   24 %     35   1 %
91-120 days     4,287   8 %     216   4 %     3,484   10 %     546   8 %     41   1 %
121-150 days     2,319   5 %     166   3 %     2,140   6 %       0 %     13   0 %
Greater than 150 days**     6,847   13 %     1,058   18 %     5,824   17 %     (73 ) -1 %     38   1 %
Totals   $ 51,179   100 %   $ 5,990   100 %   $ 34,462   100 %   $ 6,992   100 %   $ 3,735   100 %

 

*Total includes $3,516 fully reserved over 210 days as of April 30, 2014.

 

**Total includes $3,775 fully reserved over 210 days as of July 31, 2013.

 

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.

 

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. 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.

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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

 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company tests goodwill and other indefinite lived intangibles for impairment annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist. Goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment test requires the identification of the reporting units and comparison of the fair value of each of these reporting units to their respective carrying value. If the carrying value of the reporting unit is less than its fair value, no impairment exists and the second step is not performed. If the carrying value of the reporting unit is higher than its fair value, the second step must be performed to compute the amount of the goodwill impairment, if any. In the second step, the impairment is computed by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for the excess.

 

Intangible Assets

 

Intangible assets (exclusive of patents), arose primarily from acquisitions and primarily consist of customer relationships, trademarks, licenses, 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.

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Item 3.

 

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 section of the Form 10-K for the fiscal year ended July 31, 2013) 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 increase of 10% in the value of the U.S. dollar versus foreign currencies at April 30, 2014, our assets and liabilities would decrease by $0.9 million and $0.1 million, respectively, and our net sales and net earnings (loss) would decrease by $1.2 million and $0.1 million, respectively, on an annual basis.

 

We also maintain intercompany balances and loans with subsidiaries in different local currencies. These amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical increase of 10% in the value of the U.S. dollar versus foreign currencies, our pre-tax earnings (loss) would be unfavorably impacted by approximately $1.0 million on an annual basis.

 

Interest Rate Risk

 

We are exposed to interest rate risk with our variable rate Credit Agreement which bears interest at the three month LIBOR with a floor of 1.25% plus 4% per annum. A 3% change in the LIBOR rate would impact our interest expense by $0.1 million.

 

As of April 30, 2014, we have fixed interest rate financing on transportation and equipment leases.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, the Company’s management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of the Company’s “disclosure controls and procedures” (as such term is defined under the Exchange Act), under the supervision and with the participation of the principal executive officer and the principal financial officer. Based on this evaluation, the principal executive officer and the principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

 

(b) Changes in Internal Controls over Financial Reporting

 

There was no change in the Company’s internal controls over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no other material developments with respect to previously reported legal proceedings discussed in the annual report on Form 10-K for the fiscal year ended July 31, 2013 filed with the Securities and Exchange Commission, other than as noted in Note 13 to the Consolidated Financial Statements as of April 30, 2014 and the nine months then ended.

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors disclosed in Part 1, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2013.

 

Item 6. Exhibits

 

Exhibit No.   Exhibit
     
31.1   Certification of Elazar Rabbani, Ph.D. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Barry Weiner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Elazar Rabbani, Ph.D. pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Barry Weiner pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101. INS*   XBRL Instance Document
     
101. SCH*   XBRL Taxonomy Extension Schema Document
     
101. CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definitions Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

*XBRL (Extensible Business Reporting Language) information is being furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

SIGNATURES

 

Pursuant to the requirements 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.  
  (Registrant)  
       
Date: June 9, 2014 by: /s/ Barry Weiner
    President, Chief Financial Officer, Principal Accounting Officer, Treasurer and Director
35