UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Mark one

 

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

 

For the quarterly period ended April 30, 2013

 

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 31, 2013, the Registrant had approximately 39,943,000 shares of common stock outstanding. 

 

ENZO BIOCHEM, INC.
FORM 10-Q
April 30, 2013

 

INDEX

 

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements 3
     
  Consolidated Balance Sheets – April 30, 2013 (unaudited) and July 31, 2012 (audited) 3
     
  Consolidated Statements of Operations for the three and nine months ended April 30, 2013 and 2012 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended April 30, 2013 and 2012 (unaudited) 5
     
  Consolidated Statement of Stockholders’ Equity for the nine months ended April 30, 2013 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the nine months ended April 30, 2013 and 2012 (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 35
     
Item 4. Controls and Procedures 36
     
Part II – OTHER INFORMATION
 
Item 1. Legal Proceedings 37
     
Item 1A. Risk Factors 37
     
Item 6. Exhibits 37
     
Signatures 37
2

Part 1 Financial Information

Item 1 Financial Statements

 

ENZO BIOCHEM, INC.

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

 

    April 30,
2013
(unaudited)
  July 31,
2012
(audited)
 
ASSETS              
Current assets:              
Cash and cash equivalents   $ 5,644   $ 15,076  
Accounts receivable, net of allowances     13,188     14,135  
Inventories     9,271     8,800  
Prepaid expenses and other     2,250     2,357  
Total current assets     30,353     40,368  
               
Property, plant and equipment, net     8,928     9,116  
Goodwill     7,452     7,452  
Intangible assets, net     10,416     11,780  
Other     479     407  
Total assets   $ 57,628   $ 69,123  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Current liabilities:              
Accounts payable – trade   $ 9,185   $ 9,020  
Accrued liabilities     11,234     9,818  
Other current liabilities     313     118  
Total current liabilities     20,732     18,956  
               
Deferred taxes     671     938  
Other liabilities     803     128  
Total liabilities   $ 22,206   $ 20,022  
               
Commitments and contingencies              
               
Stockholders’ equity:              
Preferred Stock, $.01 par value; authorized 25,000,000 shares; no shares issued or outstanding          
Common Stock, $.01 par value; authorized 75,000,000 shares; shares issued: 39,676,518 at April 30, 2013 and 39,495,475 at July 31, 2012     397     395  
Additional paid-in capital     302,525     304,358  
Less treasury stock at cost: 216,566 shares at July 31, 2012         (3,074 )
Accumulated deficit     (269,318 )   (254,183 )
Accumulated other comprehensive income     1,818     1,605  
Total stockholders’ equity     35,422     49,101  
Total liabilities and stockholders’ equity   $ 57,628   $ 69,123  

 

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

3

ENZO BIOCHEM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share data)

 

   Three Months Ended
April 30,
   Nine Months Ended
April 30
 
   2013   2012   2013   2012 
Revenues:                    
Clinical laboratory services  $13,384   $15,242   $41,881   $43,552 
Product revenues   8,265    9,574    24,574    28,819 
Royalty and license fee income   949    1,133    3,982    4,302 
Total revenues   22,598    25,949    70,437    76,673 
                     
Operating expenses:                    
Cost of clinical laboratory services   9,331    9,204    28,466    26,728 
Cost of product revenues   4,219    4,689    12,546    14,511 
Research and development   989    1,588    2,968    4,916 
Selling, general, and administrative   11,032    11,854    33,340    35,727 
Provision for uncollectible accounts receivable   928    1,193    3,857    3,648 
Legal   1,708    943    4,850    2,835 
Total operating expenses   28,207    29,471    86,027    88,365 
                     
Operating loss   (5,609)   (3,522)   (15,590)   (11,692)
                     
Other income (expense):                    
Interest   (10)   (18)   (25)   (6)
Other   25    15    81    94 
Foreign currency income (loss)   (214)   80    119    (243)
Loss before income taxes   (5,808)   (3,445)   (15,415)   (11,847)
Benefit (provision) for income taxes   38    34    280    (279)
                     
Net loss  $(5,770)  $(3,411)  $(15,135)  $(12,126)
                     
Net loss per common share:                    
Basic and diluted  $(0.15)  $(0.09)  $(0.38)  $(0.31)
                     
Weighted average common shares outstanding:                    
Basic and diluted   39,553    38,825    39,381    38,676 

 

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

4

ENZO BIOCHEM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Dollars in thousands)

 

   Three Months Ended
April 30,
   Nine Months Ended
April 30,
 
   2013   2012   2013   2012 
Net loss  $(5,770)  $(3,411)  $(15,135)  $(12,126)
Other comprehensive income (loss):                    
Foreign currency translation adjustments   (39)   165    213    (1,425)
Comprehensive loss  $(5,809)  $(3,246)  $(14,922)  $(13,551)

 

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, 2013
(UNAUDITED)
(Dollars In thousands, except share data)

 

   Common
Stock
Shares
  Treasury
Stock
Shares
  Common
Stock
Amount
  Additional
Paid-in
Capital
  Treasury
Stock
Amount
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
(Loss) Income
  Total
Stockholders’
Equity
 
                                         
Balance at July 31, 2012   39,495,475    216,556   $395   $304,358   $(3,074)  $(254,183)  $1,605   $49,101 
                                         
Net (loss) for the period ended April 30, 2013                       (15,135)       (15,135)
Vesting of restricted stock   99,137        1                    1 
Net proceeds from issuance of common stock   72,487        1    157                158 
Stock based compensation charges               441                441 
Issuance of common stock for employee 401(k) plan match   9,419    (216,556)       (2,431)   3,074            643 
Other comprehensive income                           213    213 
Balance at April 30, 2013   39,676,518       $397   $302,525       $(269,318)  $1,818   $35,422 
6

ENZO BIOCHEM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)

 

   Nine Months Ended
April 30,
 
   2013   2012 
Cash flows from operating activities:          
Net loss  $(15,135)  $(12,126)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization of property, plant and equipment   2,003    2,155 
Amortization of intangible assets   1,494    1,131 
Provision for uncollectible accounts receivable   3,857    3,648 
Income tax benefit   (280)   (89)
Share based compensation charges   437    595 
Share based 401(k) employer match expense   496    453 
Foreign currency transaction loss (gain)   (73)   148 
           
Changes in operating assets and liabilities:          
Accounts receivable   (2,884)   (2,398)
Inventories   (442)   (260)
Prepaid expenses and other   264    379 
Accounts payable – trade   178    (713)
Accrued liabilities, other current liabilities and other liabilities   1,569    681 
Total adjustments   6,619    5,730 
           
Net cash used in operating activities   (8,516)   (6,396)
           
Cash flows from investing activities:          
Purchases of short term investments       (30,000)
Maturities of short term investments       30,000 
Capital expenditures   (772)   (979)
Security deposits and other   (72)   (52)
Earn-out payment       (1,150)
Net cash used in investing activities   (844)   (2,181)
           
Cash flows from financing activities:          
Net proceeds from issuance of common stock   3     
Installment loan and capital lease obligation payments   (187)   (105)
Net cash used in financing activities   (184)   (105)
           
Effect of exchange rate changes on cash and cash equivalents   112    (232)
           
Decrease in cash and cash equivalents   (9,432)   (8,914)
Cash and cash equivalents - beginning of period   15,076    14,161 
Cash and cash equivalents - end of period  $5,644   $5,247 

 

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, 2013
and for the three and nine months ended
April 30, 2013 and 2012
(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 Clinical Labs, Enzo Life Sciences, Enzo Therapeutics and Enzo Realty LLC, collectively referred to as the “Company” or “Companies”. The consolidated balance sheet as of April 30, 2013, the consolidated statements of operations and the consolidated statements of comprehensive income (loss) for the three and nine months ended April 30, 2013 and 2012, the consolidated statements of cash flows for the nine months ended April 30, 2013 and 2012, and the consolidated statement of stockholders’ equity for the nine months ended April 30, 2013 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, 2012 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, 2012 has been derived from the audited financial statements at that date. The results of operations for the three and nine months ended April 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2013.

 

Recent Accounting Pronouncements Adopted

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income” (Topic 220) – Presentation of Comprehensive Income” (ASU No. 2011-05), which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminated the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. The Company adopted ASU 2011-05 in its first quarter of fiscal year 2013 by including the required disclosures in two separate but consecutive statements.

 

In September 2011, the FASB issued Accounting Standards Update No. 2011-08 “Testing Goodwill for Impairment” (ASU No. 2011-08) which is intended to reduce the complexity and costs to test goodwill for impairment. The amendment allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on its qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The ASU also expands upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendment became effective for annual and interim goodwill impairment tests performed for the Company’s fiscal year beginning August 1, 2012. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial statements. 

8

In July 2011, the FASB issued ASU No. 2011-07 “Health Care Entities (Topic 954) - Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities”. This update was issued to provide greater transparency relating to accounting practices used for net patient service revenue and related bad debt allowances by health care entities. Some health care entities recognize patient service revenue at the time the services are rendered regardless of whether the entity expects to collect that amount or has assessed the patient’s ability to pay. These prior accounting practices used by some health care entities resulted in a gross-up of patient service revenue and the provision for bad debts, causing difficulty for users of financial statements to make accurate comparisons and analyses of financial statements among entities. ASU No. 2011-07 requires certain healthcare entities to change the presentation of the statement of operations, reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue and also requires enhanced quantitative and qualitative disclosures relevant to the entity’s policies for recognizing revenue and assessing bad debts. This update is not designed to change and will not change the net income reported by healthcare entities. The Company adopted this update in its first quarter of fiscal year 2013 with no impact on its consolidated financial position or results of operations.

 

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, 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, 2013 and 2012 do not include the potential common shares from stock options and unvested restricted stock because to do so would have been antidilutive, and as such is the same as basic weighted average shares outstanding.

 

During the three and nine months ended April 30, 2013 and 2012, potential shares from unvested restricted stock excluded from the computation of diluted net loss per share were approximately 17,000 and 0 and 31,000 and 55,000 shares, respectively.

 

For the three and nine months ended April 30, 2013 the effect of approximately 726,000 and 731,000 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, 2012, approximately 776,000 and 779,000 shares respectively were excluded from the calculation of diluted net loss per share.

 

Note 3 - Inventories

 

Inventories consist of the following:

 

   April 30,
2013
   July 31,
2012
 
           
Raw materials   $1,071   $1,283 
Work in process    2,597    2,821 
Finished products    5,603    4,696 
   $9,271   $8,800 

 

Note 4 – Goodwill and intangible assets

 

Goodwill

 

At April 30, 2013 and July 31, 2012, the Company’s net carrying amount of goodwill, related to the Clinical Labs segment, is $7,452.

9

Intangible assets

 

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

 

   Gross   Accumulated Amortization   Net 
July 31, 2012  $27,904   $(16,124)  $11,780 
Amortization expense       (1,494)   (1,494)
Foreign currency translation   275    (145)   130 
April 30, 2013  $28,179   $(17,763)  $10,416 

 

Intangible assets consist of the following:

 

   April 30, 2013  July 31, 2012 
   Gross   Accumulated
Amortization
   Net   Gross   Accumulated
Amortization
   Net 
Patents  $11,027    (10,535)  $492   $11,027   $(10,439)  $588 
Customer relationships    12,439    (5,185)   7,254    12,304    (4,356)   7,948 
Website and acquired content    1,026    (964)   62    1,019    (874)   145 
Licensed technology and other    500    (371)   129    485    (300)   185 
Trademarks    3,187    (708)   2,479    3,069    (155)   2,914 
Total  $28,179    (17,763)   10,416   $27,904   $(16,124)  $11,780 

 

At April 30, 2013, information with respect to the intangibles acquired is as follows:

 

    Useful life assigned   Weighted average
remaining useful life
 
Customer relationships   8-15 years   8 years  
Trademarks   5 years   4 years  
Other intangibles   4-10 years   2 years  

 

At April 30, 2013, the weighted average useful lives of amortizable intangible assets were approximately seven years.

 

Note 5 – Accrued Liabilities and Other Current Liabilities

 

Accrued liabilities consist of the following as of:

 

   April 30,
2013
   July 31,
2012
 
Legal  $3,927   $1,475 
Payroll, benefits, and commissions   3,758    5,125 
Professional fees   904    901 
Research and development   701    696 
Other   1,944    1,621 
   $11,234   $9,818 

 

Other current liabilities consist of the following as of:

 

   April 30,
2013
   July 31,
2012
 
Capital lease obligations   $149   $ 
Installment loans    164    118 
   $313   $118 
10

Note 6 – Other Liabilities

 

Other liabilities consist of the following as of:

 

   April 30,
2013
   July 31,
2012
 
Capital lease obligations, net of short term  $540   $ 
Installment loans, net of short term   263    128 
   $803   $128 

 

During the nine months ended April 30, 2013, the Company entered into a five year capital lease arrangement for lab equipment aggregating $768 and into various installment loans for lab and transportation equipment aggregating $288 for the Clinical Labs segment. Future minimum payments under the capital lease net of interest of $89 aggregates $689, including a short term debt portion of $149 included in other current liabilities. Future minimum payments under the installment loans aggregate $427, including a short term portion of $164 included in other current liabilities.

 

Note 7 – 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 Sale 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. The Shares will be issued pursuant to the Company’s Registration Statement which was declared effective on August 5, 2010 and the prospectus supplement, dated March 28, 2013, filed by the Company with the Securities and Exchange Commission. During the quarter ended April 30, 2013, the Company sold an aggregate of 72,487 shares of common stock under the Sales Agreement at an average price of $2.18 per share. Proceeds of $0.2 million which were received by May 3, 2013 are included in prepaid expenses and other in the balance sheet as of April 30, 2013.

 

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 9 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2012. 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,
 
   2013   2012   2013   2012 
Stock options   46        61     
Restricted stock   94    168    380    595 
   $140   $168   $441   $595 
11

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,
 
   2013   2012   2013   2012 
Cost of clinical laboratory services  $2   $3   $7   $8 
Research and development   1    1    2    4 
Selling, general and administrative   137    164    432    583 
   $140   $168   $441   $595 

 

No excess tax benefits were recognized during the three and nine month periods ended April 30, 2013 and 2012.

 

Stock option plans

 

The following table summarizes stock option activity during the nine month period ended April 30, 2013:

 

   Options   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value (000s)
 
Outstanding at July 31, 2012   736,490   $14.53           
Awarded   336,817   $2.88           
Exercised      $           
Cancelled   (346,662)  $11.82           
Outstanding at end of period   726,645   $10.39    2.9 years   $ 
Options vested at end of period   389,828   $2.88     1.2 years   $ 

 

On January 17, 2013, the Company awarded 336,817 options to directors and certain officers with an exercise price of $2.88 and a five year term, of which 247,672 options vest over two years and 89,145 vest over three years. The weighted average assumptions used to fair value this option award were as follows: expected life of 3.3 years, expected volatility 60.8%, risk free interest rate of 0.45% and no dividend yield. As of April 30, 2013, none of these options were vested.

 

As of April 30, 2013, 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 1.9 years.

 

Restricted Stock Awards

 

A summary of the activity pursuant to the Company’s restricted stock awards for the nine months ended April 30, 2013 is as follows:

 

   Awards   Weighted
Average
Award Price
 
Unvested at July 31, 2012   257,583   $3.58 
Awarded   37,000   $1.75 
Vested   (99,137)  $2.91 
Forfeited   (11,667)  $3.45 
Unvested at end of period   183,779   $3.58 
12

The fair value of a restricted stock award is determined based on the closing stock price on the award date. As of April 30, 2013, there was approximately $0.3 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 2,322,000 shares as of April 30, 2013.

 

Note 8 - 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 benefit (provision) for the three months ended April 30, 2013 was a benefit of 0.7% compared to a benefit of 1.0% during the three months ended April 30, 2012. The Company’s effective tax rate benefit (provision) for the nine months ended April 30, 2013 was a benefit of 1.8% compared to a provision of (2.4%) during the nine months ended April 30, 2012. The tax benefit (provision) for the periods were based on state and local taxes and domestic and foreign tax for 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, 2010 through July 31, 2012.

 

Note 9 – 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 running royalties on the net sales of Qiagen products subject to the license until the expiration of the patent on April 24, 2018. During the three months ended April 30, 2013 and 2012, the Company recorded royalty income under the Agreement of approximately $0.9 million and $1.1 million, respectively. During the nine months ended April 30, 2013 and 2012, the Company recorded royalty income under the Agreement of approximately $4.0 million and $4.3 million.

13

Note 10 – 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, 2012.

14

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

 

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   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 income (loss)       (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 
15

Three months ended April 30, 2012

   Clinical
Labs
   Life
Sciences
   Therapeutics   Other   Consolidated 
Revenues:                         
Clinical laboratory services  $15,242               $15,242 
Product revenues      $9,574            9,574 
Royalty and license fee income       1,133            1,133 
    15,242    10,707            25,949 
Operating expenses:                         
Cost of clinical laboratory services   9,204                9,204 
Cost of product revenues       4,689            4,689 
Research and development   109    940   $539        1,588 
Selling, general and administrative   5,301    4,369       $2,184    11,854 
Provision for uncollectible accounts receivable   1,153    40            1,193 
Legal   102    27        814    943 
Total operating expenses   15,869    10,065    539    2,998    29,471 
                          
Operating income (loss)   (627)   642    (539)   (2,998)   (3,522)
                          
Other income (expense)                         
Interest   (2)   (16)           (18)
Other   9            6    15 
Foreign currency gain (loss)       80            80 
Income (loss) before income taxes  $(620)  $706   $(539)  $(2,992)  $(3,445)
                          
Depreciation and amortization included above  $275   $710   $11   $31   $1,027 
                          
Share-based compensation included in above:                         
Cost of clinical laboratory services  $3               $3 
Research and development      $1            1 
Selling, general and administrative   16    10       $138    164 
Total  $19   $11       $138   $168 
                          
Capital expenditures  $264   $177   $   $   $441 
16

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

 

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   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 income (loss)       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 
17

Nine months ended April 30, 2012

   Clinical
Labs
   Life
Sciences
   Therapeutics   Other   Consolidated 
Revenues:                         
Clinical laboratory services  $43,552               $43,552 
Product revenues      $28,819            28,819 
Royalty and license fee income       4,302            4,302 
    43,552    33,121            76,673 
Operating expenses:                         
Cost of clinical laboratory services   26,728                26,728 
Cost of product revenues       14,511            14,511 
Research and development   224    3,125   $1,567        4,916 
Selling, general and administrative   15,322    13,824       $6,581    35,727 
Provision for uncollectible accounts receivable   3,571    77            3,648 
Legal   214    529        2,092    2,835 
Total operating expenses   46,059    32,066    1,567    8,673    88,365 
                          
Operating income (loss)   (2,507)   1,055    (1,567)   (8,673)   (11,692)
                          
Other income (expense)                         
Interest   (3)   (3)           (6)
Other   33    42        19    94 
Foreign currency gain (loss)       (243)           (243)
Income (loss) before income taxes  $(2,477)  $851   $(1,567)  $(8,654)  $(11,847)
                          
Depreciation and amortization included above  $810   $2,350   $33   $93   $3,286 
                          
Share-based compensation included in above:                         
Cost of clinical laboratory services  $8               $8 
Research and development      $4            4 
Selling, general and administrative   41    51       $491    583 
Total  $49   $55       $491   $595 
                          
Capital expenditures  $695   $284   $   $   $979 
18

Note 11 - 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). 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. Prejudgment interest should provide for additional recovery in the tens of millions of dollars. Life Technologies will likely 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.

 

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.

 

Note 12 – Subsequent Event

 

Subsequent to April 30, 2013, the Company entered into a secured Revolving Loan and Security Agreement (the “Credit Agreement”) with an unrelated third party lender (the” Lender”) and borrowed $4.0 million. The Credit Agreement, which expires in December 2016, provides for borrowings against eligible receivables, as defined, of the Clinical Labs and Life Sciences segments, up to $8.0 million at a defined eligibility percentage. The borrowings under the Credit Agreement, which bear interest at the three month U.S. dollars LIBOR rate, which shall not be less than 1.25% per annum plus 4% per annum, 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.

19

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 2012 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

 

The Company 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 114 key issued patents worldwide, and over 250 pending patent applications, along with extensive enabling technologies and platforms.

20

We are comprised of three operating companies that have evolved out of our core competence: the use of nucleic acids as informational molecules and the use of compounds for immune modulation. These wholly owned operating companies conduct their operations through three reportable segments. Below are brief descriptions of each of our operating segments (see note 10 in the Notes to Consolidated Financial Statements):

 

Enzo Clinical Labs is a regional clinical laboratory serving the greater New York, New Jersey and Eastern Pennsylvania medical communities. The Company believes having clinical diagnostic services allows us to capitalize firsthand on our extensive advanced molecular and cytogenetic capabilities and the broader trends in predictive and personalized diagnostics. We offer a menu of routine and esoteric clinical laboratory tests or procedures used in general patient care by physicians to establish or support a diagnosis, monitor treatment or medication, or search for an otherwise undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale, New York, a network of approximately 30 patient service centers throughout greater New York, New Jersey and Eastern Pennsylvania, a standalone “stat” or rapid response laboratory in New York City, and a full-service phlebotomy and an in-house logistics department. Payments for clinical laboratory testing services are made by the Medicare program, healthcare insurers and patients.

 

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 high quality research reagents and kits in the primary key research areas of genomics, cellular analysis, small molecule chemistry, protein homeostasis and epigenetics and 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 company that has developed multiple novel approaches in the areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which are derived from the pioneering work of Enzo Life Sciences. The Company has focused its efforts on developing treatment regimens for diseases and conditions in which current treatment options are ineffective, costly, and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well as more than 130 patents and patent applications.

21

Results of Operations
Three months ended April 30, 2013 as compared to April 30, 2012

 

Comparative Financial Data for the Three Months Ended April 30,

 

  2013   2012   Increase
(Decrease)
   % Change 
Revenues:                    
Clinical laboratory services   $13,384   $15,242   $(1,858)   (12)%
Product revenues    8,265    9,574    (1,309)   (14)
Royalty and license fee income    949    1,133    (184)   (16)
Total revenues    22,598    25,949    (3,351)   (13)
                     
Operating expenses:                    
Cost of clinical laboratory services    9,331    9,204    127    1 
Cost of product revenues    4,219    4,689    (470)   (10)
Research and development    989    1,588    (599)   (38)
Selling, general, and administrative    11,032    11,854    (822)   (7)
Provision for uncollectible accounts receivable    928    1,193    (265)   (22)
Legal    1,708    943    765    81 
Total operating expenses    28,207    29,471    (1,264)   (4)
                     
Operating loss    (5,609)   (3,522)   (2,087)   59 
                     
Other income (expense):                    
Interest    (10)   (18)   8    (44)
Other    25    15    10    67 
Foreign currency (loss) income    (214)   80    (294)   (368)
Loss before income taxes   $(5,808)  $(3,445)  $(2,363)   69 

 

Consolidated Results:

 

The “2013 period” and the “2012 period” refer to the three months ended April 30, 2013 and 2012, respectively.

 

Clinical laboratory services revenues for the 2013 period were $13.4 million compared to $15.2 million in the 2012 period. The 2013 period’s decrease over the 2012 period was $1.9 million or 12%. During the 2013 period, revenues were negatively impacted primarily from lower reimbursements rates from certain payors by $0.5 million, changes in payment policy from one payor of $0.4 million and $0.7 million attributed to reduced billing days in the 2013 period.

 

Product revenues decreased by $1.3 million or 14% in the 2013 period to $8.3 million as compared to $9.6 million in the 2012 period due to a decline in organic sales. During the 2013 period we continue to experience a decline attributed to 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 2013 period was $0.9 million compared to $1.1 million in the 2012 period, a decrease of $0.2 million or 16%. 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.

22

The cost of clinical laboratory services during the 2013 period was $9.3 million as compared to $9.2 million in the 2012 period, an increase of $0.1 million or 1%. The Company incurred increased costs due to increased personnel and related costs of $0.3 and higher outside reference lab costs of $0.1 million partially offset by lower reagent costs and supplies of $0.1 million and lower other lab support costs of $0.1 million all attributed to changes in the mix of tests ordered by the ordering physician. The gross profit margin was 30% as compared to 40% in the 2012 period.

 

The cost of product revenues during the 2013 period was $4.2 million compared to $4.7 million in the 2012 period, a decrease of $0.5 million or 10%. The decrease is attributed to lower payroll costs of $0.1 million due to the business realignments during fiscal 2012 and $0.4 million due to lower product revenue.

 

Research and development expenses were approximately $1.0 million during the 2013 period, compared to $1.6 million in the 2012 period, a decrease of $0.6 million or 38%. The decrease was principally attributed to lower costs of $0.3 million at the Enzo Life Sciences segment due to lower payroll and related costs of $0.2 million and overhead costs of $0.1 million due to a refocus of projects and decrease in patent filing costs. The clinical trial and related activities at the Therapeutics segment decreased by approximately $0.3 million due to lower payroll and related costs and patent filing costs as compared to the 2012 period.

 

The Company’s selling, general and administrative expenses were approximately $11.0 million during the 2013 period and $11.8 million during the 2012 period, a decrease of $0.8 million or 7%. Enzo Life Sciences segment selling, general and administrative decreased by $0.6 million due to the positive effects from the business realignments in fiscal 2012 resulting in lower payroll and related costs of $0.3 million, rent and facility costs of $0.1 million and $0.3 million in other operating costs offset by higher amortization of $0.1 million. The Clinical Lab segment selling, general and administrative decreased $0.2 million primarily due to a decrease in personnel costs. The Other segment’s selling, general and administrative for 2013 was comparable with lower payroll and related costs of $0.1 million offset by increases in other costs of $0.1 million.

 

The provision for uncollectible accounts receivable, primarily related to the Clinical Labs segment, was $0.9 million for the 2013 period as compared to $1.2 million in the 2012 period, primarily due to the change in payor mix and service volume and improvements in collection experience. As a percentage of revenues the provision for uncollectible accounts receivable for the Clinical Lab segment decreased to 6.6% from 7.6% in the 2012 period.

 

Legal expense was $1.7 million during the 2013 period compared to $0.9 million in the 2012 period, an increase of $0.8 million due to overall increases in legal services in the 2013 period for a patent litigation trial and other litigation related matters.

 

During the 2013 period, the loss on foreign currency transactions was $0.2 million as compared to a gain of $0.1 million in the 2012 period. The loss in the period was due to the weakening of foreign currencies relative to the US dollar.

23

Segment Results

 

Clinical Labs

 

The Clinical Labs segment’s loss before taxes was $2.0 million for the 2013 period as compared to a loss of $0.6 million in the 2012 period, an increase of $1.4 million resulting from increased operating costs and the decreased service revenues related to the reduced reimbursement rates from certain payors and a change in payment policy from one payor. The revenue from laboratory services decreased in the 2013 period by $1.9 million or 12%. The 2013 period gross profit of $4.1 million decreased over the 2012 period by $2.0 million or 33% due to the decrease in service revenues and increases in cost of lab services. Selling, general and administrative expense decreased by approximately $0.2 million primarily due to lower payroll costs, directly the result of the decreased service revenues. The provision for uncollectible accounts receivable decreased in the 2013 period by $0.3 million as compared to the 2012 period and as a percentage of revenues decreased to 6.6% from 7.6% in the 2012 period.

 

Life Sciences

 

The Life Sciences segment’s income before taxes was $0.3 million for the 2013 period as compared to $0.7 million for the 2012 period. The segment’s gross profit was $5.0 million in the 2013 period, as compared $6.0 million in the 2012 period. Gross profit was negatively impacted by the decline in product revenues and royalties, offset by reduced payroll, facility and other costs of $0.2 million resulting from realignments during the last three quarters of fiscal 2012. Product revenues decreased by $1.3 million or 14% in the 2013 period to $8.3 million as compared to $9.6 million in the 2012 period due to a decline in organic sales. During the 2013 period we continue to experience a decline attributed to 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 of $0.9 million represented a decrease of $0.2 million as compared to the 2012 period and is primarily from the reported sales of Qiagen products subject to a license agreement. The segment’s other operating expenses, including selling, general and administrative, legal and research and development, provision for uncollectible accounts decreased by approximately $0.9 million during the 2013 period due to reduced research and development and selling, general and administrative expenses resulting from planned business realignments in fiscal 2012. Due to the weakening of foreign currencies during the 2013 period as compared to the 2012 period, the foreign currency loss was $0.2 million compared to a gain of $0.1 million in the 2012 period.

 

Therapeutics

 

Therapeutics loss before income taxes was approximately $0.3 million for the 2013 period as compared to the $0.5 million in 2012 period due to lower payroll costs, overhead costs and lower clinical trial activities.

 

Other

 

The Other loss before taxes for the 2013 period was approximately $3.7 million as compared to $3.0 million for the 2012 period, an increase of $0.7 million. In the 2013 period legal expenses increased by $0.8 million due to overall increases in legal services directly related to a patent litigation trial and other legal activities. General and administrative were comparable to the 2012 period.

24

Results of Operations
Nine months ended April 30, 2013 as compared to April 30, 2012

 

Comparative Financial Data for the Nine Months Ended April 30,

 

   2013   2012   Increase
(Decrease)
   % Change 
Revenues:                    
Clinical laboratory services  $41,881   $43,552   $(1,671)   (4)%
Product revenues   24,574    28,819    (4,245)   (15)
Royalty and license fee income   3,982    4,302    (320)   (7)
Total revenues   70,437    76,673    (6,236)   (8)
                     
Operating expenses:                    
Cost of clinical laboratory services   28,466    26,728    1,738    7 
Cost of product revenues   12,546    14,511    (1,965)   (14)
Research and development   2,968    4,916    (1,948)   (40)
Selling, general, and administrative   33,340    35,727    (2,387)   (7)
Provision for uncollectible accounts receivable   3,857    3,648    209    6 
Legal   4,850    2,835    2,015    71 
Total operating expenses   86,027    88,365    (2,338)   (3)
                     
Operating loss   (15,590)   (11,692)   (3,898)   33 
                     
Other income (expense):                    
Interest   (25)   (6)   (19)   317 
Other   81    94    (13)   (14)
Foreign currency income   119    (243)   362    149 
Loss before income taxes  $(15,415)  $(11,847)  $(3,568)   30 

 

Consolidated Results:

 

The “2013 period” and the “2012 period” refer to the nine months ended April 30, 2013 and 2012, respectively.

 

Clinical laboratory services revenues for the 2013 period were $41.9 million compared to $43.6 million in the 2012 period. The 2013 period’s decrease over the 2012 period was $1.7 million or 4%. During the 2013 period the decrease in revenues was negatively impacted by approximately $1.3 million due to a severe storm affecting our service area in the last three days of the first quarter and the first week of the second quarter, lower reimbursements rates from certain payors of $1.4 million and changes in payment policy from one payor of $0.4 million partially offset by organic growth.

 

Product revenues decreased by $4.2 million or 15% in the 2013 period to $24.6 million as compared to $28.8 million in the 2012 period due to a decline in organic sales. During the 2013 period we continue to experience a decline attributed to 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 2013 period was $4.0 million compared to $4.3 million in the 2012 period a decrease of $0.3 million or 7%. 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.

25

The cost of clinical laboratory services during the 2013 period was $28.5 million as compared to $26.7 million in the 2012 period, an increase of $1.7 million or 7%. The Company incurred increased costs due to increased payroll costs of $0.2 million, higher reagent costs and supplies of $0.3 million, higher outside reference lab costs of $0.7 million and other lab support costs of $0.3 million, all attributed to the changes in the mix of test offered to the ordering physician. In the 2013 period the gross profit margin was 32% as compared to 39% in the 2012 period.

 

The cost of product revenues during the 2013 period was $12.5 million compared to $14.5 million in the 2012 period, a decrease of $2.0 million or 14%.The decrease is attributed to lower payroll costs of $0.8 million and $0.2 in lower overhead costs due to the business realignments during fiscal 2012, and $1.0 million due to lower product revenue.

 

Research and development expenses were approximately $3.0 million during the 2013 period, compared to $4.9 million in the 2012 period, a decrease of $1.9 million or 40%. The decrease was principally attributed to lower costs of $1.3 million at the Enzo Life Sciences segment due to lower payroll and related costs of $0.7 million, lower patent filing costs of $0.3 and overhead costs of $0.3 million due to a refocus of projects. The clinical trial and related activities at the Therapeutics segment decreased by $0.6 million due to lower payroll and related costs and patent filing fees as compared to the 2012 period.

 

The Company’s selling, general and administrative expenses were approximately $33.3 million during the 2013 period and $35.7 million during the 2012 period, a decrease of $2.4 million or 7%. Enzo Life Sciences segment selling, general and administrative decreased by $1.7 million due to the positive effects from the business realignments in fiscal 2012 resulting in lower payroll and related costs of $1.0 million, rent and facility costs of $0.4 million and $0.3 million in other operating costs. The Clinical Lab segment selling general and administrative decreased by $0.4 million primarily due to a decrease in personnel related costs of $0.4 million. The Other selling general and administrative decreased by $0.3 million, primarily due to a decrease of $0.4 million in compensation and related expenses offset by increases in other costs of $0.1 million.

 

The provision for uncollectible accounts receivable primarily related to the Clinical Labs segment, was $3.8 million for the 2013 period as compared to $3.6 million in the 2012 period. The increase was due to increases of $0.1 million at Life Sciences and $0.1 million at Clinical Labs due to the change in the mix of payers. As a percentage of revenues the provision for uncollectible accounts receivable for the Clinical Lab segment increased to 8.7% from 8.2% in the 2012 period.

 

Legal expense was $4.8 million during the 2013 period compared to $2.8 million in the 2012 period, an increase of $2.0 million due to overall increases in legal services in the 2013 period for a patent litigation trial and other litigation related matters.

 

During the 2013 period, the gain on foreign currency transactions was $0.1 million as compared to a loss of $0.2 million in the 2012 period. The gain in the period was due to the strengthening of foreign currencies relative to the US dollar. The Company is impacted by various foreign currencies including the Swiss Franc, Euro and British pound.

26

Segment Results

 

Clinical Labs

 

The Clinical Labs segment’s loss before taxes was $5.7 million for the 2013 period as compared to a loss of $2.5 million in the 2012 period, an increase of $3.2 million resulting from increased operating costs and decreased service volume. The revenue from laboratory services decreased in the 2013 period by $1.7 million due to negative impacts from the severe storm by approximately $1.3 million, the lower reimbursement rates from certain payors, and changes in payment policies from one payor. As a result of these revenue impacts, the 2013 period gross profit of $13.4 million decreased from the 2012 period by $3.4 million or 20%. Selling, general and administrative expense decreased by approximately $0.4 million primarily due to decreases in personnel costs. The provision for uncollectible accounts receivable increased by $0.1 million as compared to the 2012 period due to the changes in the mix of payers and as a percentage of revenues increased to 8.7% from 8.2% in the 2012 period.

 

Life Sciences

 

The Life Sciences segment’s income before taxes was $1.9 million for the 2013 period as compared to $0.9 million for the 2012 period. The segment’s gross profit was $16.0 million in the 2013 period, as compared $18.6 million in the 2012 period. Gross profit was negatively impacted by the decline in product revenues and royalties, offset by reduced payroll, facility and other costs resulting from realignments during fiscal 2012. Product revenues decreased by $4.2 million or 15% in the 2013 period to $24.6 million as compared to $28.8 million in the 2012 period due to a decline in organic sales. During the 2013 period we continue to experience a decline attributed to 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 of $4.0 million represented a decrease of $0.3 million as compared to the 2012 period and is primarily from the reported sales of Qiagen products subject to a license agreement. The segment’s other operating expenses, including selling, general and administrative, legal, provision for uncollectible accounts and research and development, decreased by approximately $3.3 million during the 2013 period due to reduced research and development and selling, general and administrative of $3.0 million and lower legal of $0.5 million offset by an increase in provision for uncollectible accounts of $0.1. Due to the strengthening of foreign currencies during the 2013 period as compared to the 2012 period, the foreign currency gain was $0.1 million as compared to a loss of $0.2 million in the 2012 period.

 

Therapeutics

 

Therapeutics loss before income taxes was approximately $0.9 million for the 2013 period as compared to $1.6 million in 2012 period due to lower payroll costs of $0.2 million, lower materials and overhead costs of $0.4 million and lower clinical trial activities of $0.1 million

 

Other

 

The Other loss before taxes for the 2013 period was approximately $10.8 million as compared to $8.7 million for the 2012 period, an increase of $2.1 million. In the 2013 period legal expenses increased by $2.4 million due to overall increases in legal services directly related to a patent litigation trial and other legal activities. General and administrative costs decreased by $0.3 million due to lower compensation and related costs of $0.4 million offset by increases in other costs of $0.1 million.

27

Liquidity and Capital Resources

 

At April 30, 2013, the Company had cash and cash equivalents of $5.6 million of which $2.1 million was in foreign accounts, as compared to cash and cash equivalents of $15.1 million, of which $2.5 million was in foreign accounts at July 31, 2012. 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 $9.6 million at April 30, 2013 compared to $21.4 million at July 31, 2012. The decrease in working capital of $11.8 million was primarily the result of the net loss and funding capital expenditures offset by changes in net operating assets and liabilities.

 

Net cash used in operating activities for the nine months ended April 30, 2013 was approximately $8.5 million as compared to $6.4 million for the nine months ended April 30, 2012. The increase in net cash used in operating activities in the 2013 period over the 2012 period of approximately $2.1 million was primarily due to an increase in the net loss and non-cash charges of $3.1 million, partially offset by changes in operating assets and liabilities of $1.0 million, relating primarily to an increase in accounts receivable and increases in current liabilities.

 

Net cash used in investing activities was approximately $0.8 million as compared to cash used of $2.2 million in the year ago period. The decrease in the 2013 period of $1.4 million is primarily due to an earnout payment of $1.1 million made in the 2012 period and $0.2 million of lower capital expenditures.

 

Subsequent to April 30, 2013, the Company entered into a secured Revolving Loan and Security Agreement (the “Credit Agreement”) with an unrelated third party lender (the” Lender”) and borrowed $4.0 million. The Credit Agreement, which expires in December 2016, provides for borrowings against eligible receivables, as defined, of the Clinical Labs and Life Sciences segments, up to $8.0 million at a defined eligibility percentage. The borrowings under the Credit Agreement, which bear interest at the three month U.S. dollars LIBOR rate, which shall not be less than 1.25% per annum plus 4% per annum, 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.

 

As previously disclosed in the Company’s Form 10-K for the year ended July 31, 2012, in the fourth quarter of fiscal 2012 the Company completed a review of all operating units and expects to reduce annual cash expenditures by $6.0 million in fiscal 2013 based on actions completed by September 1, 2012 which included, among other items, a realignment of our workforce, final integration of the acquired businesses at Life Sciences, rationalization of low margin products, a refocus of our research and development program toward higher value diagnostic platforms and the reduction in outside consulting costs. Through the nine months ended April 30, 2013, the Company expects the aforementioned cost reductions in annual expenditures will be realized however, such reductions have been partially offset by higher than expected legal costs of approximately $2.0 million relating to patent litigation matters. Despite the challenging global economic environment, declining revenues in the Life Sciences reporting unit in fiscal 2013 attributed to macroeconomic concerns and customer research budgets, impacts of healthcare reform regulations and changes in payer policies affecting reimbursements to providers and the funding of research projects, the Company believes that its current cash and cash equivalents level, utilization of the Controlled Equity Offering program disclosed in Note 7, and available borrowings under the aforementioned Revolving Loan and Security Agreement disclosed in Note 12 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 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, 2012 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, 2012 for Forward Looking Cautionary Statements and Risk Factors.

28

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, 2012, except as noted in Note 7 - Other Liabilities and additional equipment operating leases expiring through 2020 aggregating $1.7 million.

 

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.

 

Off Balance Sheet Arrangements

 

The Company does not have any “off balance sheet arrangements” as such term is defined in Item 303(a)(4) of Regulation S-K.

 

Critical Accounting Policies

 

The Company’s discussion and analysis of its financial condition and results of operations are based upon Enzo Biochem, Inc. consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and judgments also affect related disclosure of contingent assets and liabilities.

 

On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts, inventory, intangible assets and income taxes. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Product revenues

 

Revenues from product sales are recognized when the products are shipped and title transfers, the sales price is fixed or determinable and collectibility is reasonably assured.

 

Royalties

 

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

 

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.

29

The following table represents the clinical laboratory segment’s net revenues and percentages by revenue category:

 

   Three months ended
April 30, 2013
   Three months ended
April 30, 2012
 
Revenue category                    
Medicare  $2,989    22%  $3,292    22%
Third-party payer   6,257    47    7,659    50 
Patient self-pay   2,814    21    2,989    20 
HMO’s   1,324    10    1,302    8 
Total  $13,384    100%  $15,242    100%

 

   Nine months ended
April 30, 2013
   Nine months ended
April 30, 2012
 
Revenue category                    
Medicare  $9,307    22%  $9,340    21%
Third-party payer   19,586    47    21,717    50 
Patient self-pay   9,156    22    8,622    20 
HMO’s   3,832    9    3,873    9 
Total  $41,881    100%  $43,552    100%

 

The Company provides services to certain patients covered by various third-party payers, including the Federal Medicare program. Laws and regulations governing Medicare are complex and subject to interpretation for which action for noncompliance includes fines, penalties and exclusion from the Medicare programs. The Company believes that it is in compliance with all applicable laws and regulations although at times the Company receives inquiries from payors. The Company is not aware of any pending or asserted claims involving allegations of potential wrongdoing.

 

Other than the Medicare program, one provider whose programs are included in the Third-party payers and Health Maintenance Organizations (“HMO’s”) categories represents approximately 23% and 21% of the Clinical Labs net revenues for the three months ended April 30, 2013 and 2012, respectively, and 22% and 21% for the nine months ended April 30, 2013 and 2012, respectively. Another third party provider represents 9% and 13% of Clinical Labs net revenues for the three months ended April 30, 2013 and 2012, respectively and 10% and 13% for the nine months ended April 30, 2013 and 2012 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.

30

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, 2013 and 2012, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were 85.6% and 84.8%, respectively, of gross billings. During the nine months ended April 30, 2013 and 2012, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were 85.4% and 84.7% 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 $2.9 million and $2.8 million for the nine months ended April 30, 2013 and 2012, respectively, and a change in the net accounts receivable of approximately $0.6 million as of April 30, 2013.

 

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.

 

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, 2013 and July 31, 2012, approximately 59% and 55%, respectively, of the Company’s net accounts receivable relates to its Clinical Labs business, which operates in the New York, New Jersey, and Eastern Pennsylvania medical communities.

 

The Life Sciences segment’s accounts receivable, of which $2.3 million or 43% and $2.3 million or 36% represents foreign receivables as of April 30, 2013 and July 31, 2012 respectively, includes royalty receivables of $1.0 million and $1.7 million, as of April 30, 2013 and July 31, 2012, respectively, from Qiagen (Note 9).

31

Net accounts receivable

 

Billing category  As of
April 30, 2013
   As of
July 31, 2012
 
Clinical Labs                    
Medicare  $1,101    14%  $1,270    16%
Third party payers   3,853    50    3,478    45 
Patient self-pay   2,494    32    2,655    35 
HMO’s   327    4    330    4 
Total Clinical Labs   7,775    100%   7,733    100%
Total Life Sciences   5,413         6,402      
Total accounts receivable  $13,188        $14,135      

 

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

 

   Nine months
ended
April 30,
2013
   Twelve
months
ended
July 31,
2012
 
Beginning balance  $3,273   $3,488 
Provision for doubtful accounts   3,857    5,104 
Write-offs, net   (3,803)   (5,319)
Ending balance  $3,327   $3,273 

 

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, 2013 and 2012, the Company determined an allowance for doubtful accounts less than 210 days and wrote off 100% of accounts receivable over 210 days, as it assumed those accounts are uncollectible, except for certain fully reserved balances, principally related to Medicare. These accounts have not been written off because the payer’s filing date deadline has not occurred or the collection process has not been exhausted. The Company’s collection experience on Medicare receivables beyond 210 days has been insignificant. The Company adjusts the historical collection analysis for recoveries, if any, on an ongoing basis.

 

The Company’s ability to collect outstanding receivables from third party payers is critical to its operating performance and cash flows. The primary collection risk lies with 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.

32

The Company believes that the collectibility of its receivables is directly linked to the quality of its billing processes, most notably, those related to obtaining the correct information in order to bill effectively for the services provided. Should circumstances change (e.g. shift in payer mix, decline in economic conditions or deterioration in aging of receivables), our estimates of net realizable value of receivables could be reduced by a material amount.

 

The 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, 2013  Total
Amount
   %   Medicare
Amount
   %   Third
Party
Payers
Amount
   %   Self-pay
Amount
   %   HMO
Amount
   % 
1-30 days  $28,391    52%  $3,967    58%  $17,093    48%  $3,457    45%  $3,874    92%
31-60 days   7,369    14%   624    9%   4,987    14%   1,685    22%   73    2%
61-90 days   6,159    11%   619    9%   3,938    11%   1,559    20%   43    1%
91-120 days   4,332    8%   351    5%   2,999    8%   938    13%   44    1%
121-150 days   2,638    5%   195    3%   2,392    7%       0%   51    1%
Greater than 150 days*   5,549    10%   1,111    16%   4,320    12%       0%   118    3%
Totals  $54,438    100%  $6,867    100%  $35,729    100%  $7,639    100%  $4,203    100%

 

As of July 31, 2012  Total
Amount
   %   Medicare
Amount
   %   Third
Party
Payers
Amount
   %   Self-pay
Amount
   %   HMO’s
Amount
   % 
1-30 days  $27,092    54%  $5,246    56%  $14,529    52%  $3,337    39%  $3,980    89%
31-60 days   8,282    17%   475    5%   4,566    17%   3,092    36%   149    3%
61-90 days   4,922    9%   964    10%   2,561    9%   1,257    15%   140    3%
91-120 days   3,758    8%   512    6%   2,124    8%   977    10%   145    3%
121-150 days   2,301    5%   515    6%   1,733    6%       0%   53    1%
Greater than 150 days*   3,701    7%   1,589    17%   2,072    8%       0%   40    1%
Totals  $50,056    100%  $9,301    100%  $27,585    100%  $8,663    100%  $4,507    100%

 

*Total includes $1,702 fully reserved over 210 days as of April 30, 2013.

 

**Total includes $1,178 fully reserved over 210 days as of July 31, 2012.

 

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.

33

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.

 

Recent Accounting Pronouncements Adopted

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income” (Topic 220) – Presentation of Comprehensive Income” (ASU No. 2011-05), which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminated the option to present the components of other comprehensive income as part of the statement of equity. The Company adopted ASU 2011-05 in its first quarter of fiscal year 2013 by including the required disclosures in two separate but consecutive statements.

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In September 2011, the FASB issued Accounting Standards Update No. 2011-08 “Testing Goodwill for Impairment” (ASU No. 2011-08) which is intended to reduce the complexity and costs to test goodwill for impairment. The amendment allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on its qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The ASU also expands upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendment became effective for annual and interim goodwill impairment tests performed for the Company’s fiscal year beginning August 1, 2012. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial statements.

 

In July 2011, the FASB issued ASU No. 2011-07 “Health Care Entities (Topic 954) - Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities”. This update was issued to provide greater transparency relating to accounting practices used for net patient service revenue and related bad debt allowances by health care entities. Some health care entities recognize patient service revenue at the time the services are rendered regardless of whether the entity expects to collect that amount or has assessed the patient’s ability to pay. These prior accounting practices used by some health care entities resulted in a gross-up of patient service revenue and the provision for bad debts, causing difficulty for users of financial statements to make accurate comparisons and analyses of financial statements among entities. ASU No. 2011-07 requires certain healthcare entities to change the presentation of the statement of operations, reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue and also requires enhanced quantitative and qualitative disclosures relevant to the entity’s policies for recognizing revenue and assessing bad debts. This update is not designed to change and will not change the net income reported by healthcare entities. The Company adopted this update in its first quarter of fiscal year 2013 with no impact on its consolidated financial position or results of operations.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk from changes in foreign currency exchange rates resulting from transactions at foreign locations which 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 decline of 10% in the value of the U.S. dollar versus foreign currencies at April 30, 2013, our assets and liabilities would decrease by $1.1 million and $0.7 million, respectively, and our net sales and net earnings (loss) would decrease by $1.3 million and $0, respectively, on an annual basis.

 

We also maintain intercompany balances and loans receivable 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 at April 30, 2013, our pre-tax earnings (loss) would be unfavorably impacted by approximately $0.4 million on an annual basis.

 

Interest Rate Risk

 

Our excess cash is invested in highly liquid money market accounts. Changes in interest rates may affect the investment income we earn on these funds which are classified as cash equivalents and therefore affect our cash flows and results of operations. As of April 30, 2013, we were exposed to interest rate change market risk with respect to our cash equivalents of $0.5 million. The cash equivalents bear interest rates ranging from 0% to 0.05%. As of April 30, 2013, based on the cash equivalents held, it is determined we have no material interest rate risk.

 

As of April 30, 2013, we have fixed interest rate financing on transportation and equipment leases.

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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, 2012 filed with the Securities and Exchange Commission, other than as noted in Note 11 to the consolidated financial statements as of April 30, 2013 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, 2012.

 

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 10, 2013 by: /s/ Barry Weiner
    President, Chief Financial Officer, Principal
Accounting Officer, Treasurer and Director
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