UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2007
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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
----------------------------- -----------------------
(Title of Class) (Name of Each Exchange
on which Registered)
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 |X| 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 |X| Non- accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.)
Yes |_| No |X|
As of March 1, 2007, the Registrant had approximately 36,650,300 shares of
Common Stock outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
January 31, 2007
INDEX
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
January 31, 2007 (unaudited) and July 31, 2006 3
Consolidated Statements of Operations
For the three and six months ended January 31, 2007
and 2006 (unaudited) 4
Consolidated Statements of Cash Flows
For the six months ended January 31, 2007 and 2006 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
Part II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits 29
Signatures 29
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS January 31, July 31,
2007 2006
Current assets: (unaudited) (Note 1)
----------- --------
Cash and cash equivalents $110,916 $ 69,854
Accounts receivable, net of allowances 10,249 10,447
Inventories 2,383 2,401
Prepaid expenses 772 1,465
Recoverable and prepaid income taxes 1,807 1,931
-------- --------
Total current assets 126,127 86,098
Property, plant, and equipment, net of accumulated
depreciation and amortization 5,669 5,848
Goodwill 7,452 7,452
Patent costs, net of accumulated amortization 1,218 1,257
Other 989 869
-------- --------
Total assets $141,455 $101,524
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 985 $ 1,304
Accrued liabilities 6,408 4,403
Other current liabilities 470 230
-------- --------
Total current liabilities 7,863 5,937
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: 36,232,800 at
January 31, 2007 and 32,844,200 at July 31, 2006 362 328
Additional paid-in capital 280,258 236,002
Less treasury stock at cost: 582,474 shares at
January 31, 2007 and 569,700 shares at July 31, 2006 (8,686) (8,499)
Accumulated deficit (138,342) (132,244)
-------- --------
Total stockholders' equity 133,592 95,587
-------- --------
Total liabilities and stockholders' equity $141,455 $101,524
======== ========
3
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
January 31, January 31,
Revenues: 2007 2006 2007 2006
------- ------- ------- -------
Product revenues $725 $1,434 $1,816 $2,721
Royalty income 909 675 2,207 1,534
Clinical laboratory services 8,960 8,007 17,014 16,026
------- ------- ------- -------
10,594 10,116 21,037 20,281
Costs and expenses and other (income):
Cost of product revenues 370 385 925 926
Cost of clinical laboratory services 4,067 3,431 7,563 6,912
Research and development expense 2,459 1,911 4,320 3,461
Selling, general, and administrative expense 7,210 7,326 12,781 12,781
Provision for uncollectible accounts receivable 1,180 1,209 2,094 2,354
Legal expense 1,952 1,632 4,110 3,494
Interest income (1,168) (680) (2,079) (1,387)
Other income (699) -- (2,699) --
------- ------- ------- -------
15,371 15,214 27,015 28,541
------- ------- ------- -------
Loss before income taxes (4,777) (5,098) (5,978) (8,260)
(Provision) benefit for income taxes (75) 659 (120) 536
------- ------- ------- -------
Net loss ($4,852) ($4,439) ($6,098) ($7,724)
======= ======= ======= =======
Net loss per common share:
Basic ($0.14) ($0.14) ($0.18) ($0.24)
======= ======= ======= =======
Diluted ($0.14) ($0.14) ($0.18) ($0.24)
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 34,486 32,200 33,382 32,179
======= ======= ======= =======
Diluted 34,486 32,200 33,382 32,179
======= ======= ======= =======
4
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
Six Months Ended
January 31,
OPERATING ACTIVITIES 2007 2006
-------- --------
Net loss ($6,098) ($7,724)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property,
plant and equipment 489 526
Amortization of patent costs 39 37
Provision for uncollectible accounts receivable 2,094 2,354
Deferred taxes -- 640
Share based compensation charges 870 869
Accrual for 401(k) employer match 418 --
Issuance of stock for 401(k) employer match -- 401
Loss on marketable securities -- 153
Other 10 --
Changes in operating assets and liabilities:
Accounts receivable (1,896) (585)
Inventories 18 (104)
Prepaid expenses 693 868
Recoverable and prepaid income taxes 124 (1,204)
Accounts payable - trade (319) (765)
Accrued liabilities 1,587 (1,343)
Other current liabilities 240 (509)
-------- --------
Adjustments 4,367 1,338
-------- --------
Net cash used in operating activities (1,731) (6,386)
-------- --------
INVESTING ACTIVITIES
Capital expenditures (310) (948)
Sales of marketable securities -- 6,761
Purchases of marketable securities -- (69)
Increase in cash surrender values (117) (51)
Increase in security deposits (3) 1
-------- --------
Net cash (used in) provided by
investing activities (430) 5,694
-------- --------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 43,106 --
Proceeds from the exercise of stock options 117 73
-------- --------
Net cash provided by financing activities 43,223 73
-------- --------
Net increase (decrease) in cash and cash equivalents 41,062 (619)
Cash and cash equivalents at the beginning of period 69,854 76,981
-------- --------
Cash and cash equivalents at the end of period $110,916 $76,362
======== ========
5
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of January 31, 2007
and for the three and six month periods ended
January 31, 2007 and 2006
(Unaudited)
Note 1 - Basis of Presentation
------------------------------
The accompanying unaudited 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 (the "Company"
or "Companies"). The consolidated balance sheet as of January 31, 2007 and the
consolidated statements of operations and statements of cash flows for the three
and six month periods ended January 31, 2007 and 2006 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements for the year ended July 31, 2006 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, 2006 has
been derived from the audited financial statements at that date. The results of
operations for the three and six months ended January 31, 2007 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending July 31, 2007.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections ("SFAS 154"), a replacement of APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements". SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Previously, most voluntary
changes in accounting principles required recognition via a cumulative effect
adjustment within net income for the period of the change. SFAS 154 requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes made in
fiscal years beginning after December 15, 2005; however, SFAS 154 does not
change the transition provisions of any existing accounting pronouncements. The
adoption of SFAS 154 did not have a material impact on the Company's financial
condition or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
Accounting for Income Taxes" ("SFAS 109")", to clarify the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS 109. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006. The Company has not evaluated the impact of FIN 48 on its financial
statements at this time.
6
In September 2006, the SEC released Staff Accounting Bulletin No. 108
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
provides interpretative guidance on how public companies quantify financial
statement misstatements. There have been two common approaches used to quantify
such errors. Under an income statement approach, the "roll-over" method, the
error is quantified as the amount by which the current year income statement is
misstated. Alternatively, under a balance sheet approach, the "iron curtain"
method, the error is quantified as the cumulative amount by which the current
year balance sheet is misstated. In SAB 108, the SEC established an approach
that requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the company's financial statements and
the related financial statement disclosures. This model is commonly referred to
as a "dual approach" because it requires quantification of errors under both the
roll-over and iron curtain methods. SAB 108 is effective for the Company as of
August 1, 2007. The adoption of SAB 108 is not expected to have a material
impact on the Company's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosure about fair value measurements, and is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company has not evaluated the
effect that the adoption of this Statement will have on its financial statements
at this time.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS 159"). This statement permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective as of the beginning of fiscal years
that begin after November 15, 2007. The Company has not evaluated the effect
that the adoption of this Statement will have on its financial statements at
this time.
Reclassifications
Certain balances in the prior period have been reclassified to conform with the
presentation in the current period.
Note 2 - Net loss per share
---------------------------
Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the three and six months ended January 31, 2007
and 2006. Diluted net loss per common shares is computed using the weighted
average number of shares outstanding during the three and six months ended
January 31, 2007 and 2006, and excludes the effect of dilutive potential common
shares (consisting of employee stock options and unvested restricted stock
awards) as their inclusion would be antidilutive. Accordingly, basic and diluted
net loss per share is the same during these periods.
7
The following table summarizes the potential number of shares issued from
exercise of "in the money" stock options, net of shares repurchased with the
option exercise proceeds, and potential shares from restricted stock awards,
which are excluded from the computation of diluted net loss per share.
Three months ended Six months ended
(In thousands) January 31, January 31,
2007 2006 2007 2006
---- ---- ---- ----
Potential net shares, issued from 691 427 562 496
exercise of "in the money" employee and ==== ==== ==== ====
director stock options and restricted
stock awards, excluded from diluted net
loss per share calculation
The following table summarizes the number of "out of the money" options excluded
from the computation of diluted net loss per share because the effect of their
potential exercise is anti-dilutive.
Three months ended Six months ended
(In thousands) January 31, January 31,
2007 2006 2007 2006
---- ---- ---- ----
"Out of the money" stock options 905 963 905 963
==== ==== ==== ====
Note 3 - Share-based compensation
---------------------------------
The Company adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)") and
related interpretations effective August 1, 2005. Compensation costs recognized
in the three and six month periods ended January 31, 2007 and 2006 include
compensation costs for all share-based payments granted prior to, but not yet
vested as of July 31, 2005, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, and compensation costs
for all share-based payments granted subsequent to August 1, 2005, based on the
grant fair value estimated in accordance with the provisions of SFAS 123R.
The following table sets forth the amount of share-based compensation expense
upon vesting and per share data related to share-based payment arrangements
included in the accompanying statements of operations:
Three months ended Six months ended
In thousands, except per share data January 31, January 31,
-----------------------------------
2007 2006 2007 2006
---- ---- ---- ----
Stock options $367 $420 $676 $840
Restricted stock awards 133 29 194 29
---- ---- ---- ----
Total $500 $449 $870 $869
==== ==== ==== ====
Impact on basic and diluted net loss per
common share $0.02 $0.01 $0.03 $0.03
===== ===== ===== =====
As included in the statements of operations
-------------------------------------------
Cost of product revenues $ 3 $ 0 $ 6 $ 38
Research and development 51 71 98 142
Selling, general and administrative 446 348 766 689
---- ---- ---- ----
$500 $449 $870 $869
==== ==== ==== ====
No excess tax benefits were recognized during the three and six month periods
ended January 31, 2007 and 2006.
8
STOCK OPTION PLANS
A summary of the activity relating to the Company's stock option plans for the
six month period ended January 31, 2007 is as follows:
Weighted
Average Aggregate
Exercise Intrinsic
Options Price Value
--------- -------- ----------
Outstanding at August 1, 2006 2,877,727 $13.20 $3,700,000
Granted -- -- ==========
Exercised (35,359) $8.59
Cancelled (69,098) $13.09
---------
Outstanding at end of period 2,773,270 $13.27 $8,138,000
========= ==========
Exercisable at end of period 2,588,409 $13.31 $7,733,000
========= ==========
Available for grant at January 31, 2007 600,900
=========
The Company did not grant stock options during the six months ended January 31,
2007. As of January 31, 2007, there was approximately $594,000 of total
unrecognized compensation cost related to nonvested stock option-based
compensation, which will be recognized over a weighted average life of
approximately one year.
During the six months ended January 31, 2007 and 2006, the Company received cash
proceeds of approximately $117,000 and $73,000, respectively, from the exercise
of 35,359 and 227,816 stock options, respectively. The aggregate intrinsic value
of stock options exercised during the six months ended January 31, 2007 and
2006, including the non-cash transactions (Note 4) was approximately $0.2
million and $1.7 million, respectively.
During the year ended July 31, 2006, the Company granted 100,000 options to a
consultant with an exercise price of $24.84, which vested over six months and
have a two year term. The fair value of these options on September 6, 2006 (the
vesting date) was $89,000. The fair value of the options, which was accounted
for as a variable instrument, was fair valued and recognized as expense over the
six month vesting term. The assumptions used to fair value this option grant
were as follows: risk free interest rate of 4.97%, expected term of 2 years,
expected volatility of 49%, and no dividend yield. In connection with the
options issued to this consultant, the Company recognized an expense of
approximately $9,000 in selling, general and administrative expense in the
accompanying statement of operations for the six months ended January 31, 2007.
9
RESTRICTED STOCK AWARDS
During the six months ended January 31, 2007, the compensation committee of the
Company's board of directors approved grants of restricted stock-based
compensation awards (the "Awards") of 72,400 shares to certain independent
directors, executive officers and employees. During the six months ended January
31, 2006, the compensation committee of the Company's board of directors
approved Awards of 45,000 shares to certain independent directors and an
employee.
A summary of the activity pursuant to the Company's Awards for the six months
ended January 31, 2007 is as follows:
Weighted Average
Awards Award Price
-------- ----------------
Nonvested at August 1, 2006 77,450 $12.21
Granted 72,400 $14.85
Vested (14,375) $13.64
Forfeited (6,800) $13.41
-------
Nonvested at end of period 128,675 $13.47
=======
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of January 31, 2007, there was approximately $1.5
million of total unrecognized compensation cost related to nonvested restricted
stock-based compensation to be recognized over a weighted average period of two
years.
Note 4 - Supplemental disclosure for statement of cash flows
------------------------------------------------------------
Supplemental information with respect to the Company's consolidated statements
of cash flows is as follows:
Six months ended January 31,
(In thousands) 2007 2006
---- ----
Taxes (refunded) paid - net $(56) $28
==== ====
During the six months ended January 31, 2007, an officer of the Company
exercised 24,021 stock options in a non-cash transaction. The officer
surrendered 12,774 shares of previously acquired common stock to exercise the
stock options. The Company recorded approximately $0.2 million, the market value
of the surrendered shares, as treasury stock.
During the six months ended January 31, 2006, certain officers of the Company
exercised 221,116 stock options in a non-cash transaction. The officers
surrendered 180,411 shares of previously acquired common stock to exercise the
stock options. The Company recorded approximately $2.4 million, the market value
of the surrendered shares, as treasury stock.
Note 5 - Inventories
--------------------
Inventories, net of reserves for excess and obsolete inventory of $57,000 and
$238,000, respectively, consist of the following, as of:
(In thousands) January 31, 2007 July 31, 2006
-------------- ---------------- -------------
Raw materials $19 $38
Work in process 1,357 1,518
Finished products 1,007 845
------ ------
$2,383 $2,401
====== ======
10
Note 6 - Accrued liabilities and other current liabilities
Accrued liabilities consist of:
In 000's January 31, 2007 July 31, 2006
-------- ---------------- -------------
Legal $1,940 $1,974
Payroll, benefits, and commissions 2,396 868
Research and development 589 408
Professional fees 625 369
Outside reference lab testing 277 122
Other 581 662
------ ------
$6,408 $4,403
====== ======
Other current liabilities consist of:
In 000's January 31, 2007 July 31, 2006
-------- ---------------- -------------
Installment payable $150 $150
Deferred revenue 320 80
------ ------
$470 $230
====== ======
Note 7 - 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 tax provisions for the three and six months ended January 31, 2007 were
based on state and local taxes, and 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 tax benefit for the three months ended January 31, 2006 differed from the
expected net operating loss carryforward benefit at the U.S. federal statutory
rate of 34% primarily due to limitations on the timing of the recognition of the
Company's then available federal tax carryback benefit for taxes paid in prior
years. The tax benefit also differs from the expected net operating loss
carryforward benefit due to the inability to recognize such benefit. The
carryforward benefit could not be recognized because of uncertainties relating
to future taxable income, in terms of both its timing and its sufficiency, which
would have enabled the Company to realize the federal carryforward benefit.
The tax benefit for the six months ended January 31, 2006 differed from the
expected net operating loss carryforward benefit at the U.S. federal statutory
rate of 34% primarily due to limitations on the timing of the recognition of the
Company's then available federal tax carryback benefit for taxes paid in prior
years. The tax benefit also differs from the expected net operating loss
carryforward benefit due to the inability to recognize such benefit. The
carryforward benefit could not be recognized because of uncertainties relating
to future taxable income, in terms of both its timing and its sufficiency, which
would have enabled the Company to realize the federal carryforward benefit. Also
due to these uncertainties, the Company recorded during the first quarter of the
2006 period a valuation allowance equal to its net deferred tax assets,
including the federal net operating loss carryforward benefit generated during
the first quarter of the 2006 period. The Company recorded the valuation
allowance as it concluded that it was not more likely than not that its net
deferred tax assets would be realized in the foreseeable future based on
positive and negative evidence available at the time.
11
In November 2005, the FASB issued FSP FAS 123(R)-3, "Transition Election Related
to Accounting for the Tax Effects of Share-Based Payment Awards", to provide an
alternate transition method for the implementation of SFAS 123(R). Because some
entities do not have, and may not be able to re-create, information about the
net excess tax benefits that would have qualified as such had those entities
adopted SFAS 123(R) for recognition purposes, this FSP provides an elective
alternative transition method. The method comprises (a) a computational
component that establishes a beginning balance of the additional paid in capital
pool ("APIC pool") related to employee compensation and (b) a simplified method
to determine the subsequent impact on the APIC pool of employee awards that are
fully vested and outstanding upon the adoption of SFAS 123(R). The Company
adopted the principles set forth in this FSP to determine its APIC pool.
Note 8 - Royalty income
-----------------------
In fiscal 2005, the Company as plaintiff finalized and executed a settlement and
license agreement with Digene Corporation to settle a patent litigation lawsuit
(the "Agreement"). Subsequent to the settlement, the Agreement provides for the
Company to receive quarterly running royalties on the net sales of Digene
products subject to the license until the expiration of the patent in April
2018. Royalty income arising from the Agreement is included in the Life Sciences
segment (see Note 11).
Note 9 - Other income
---------------------
GAIN ON PATENT LITIGATION SETTLEMENT
The Company as plaintiff and Sigma Aldrich ("Sigma") entered into a Settlement
Agreement and Release effective September 15, 2006 (the "Settlement Agreement").
Pursuant to the Settlement Agreement, the Company's litigation with Sigma was
dismissed and the Company recognized a $2 million gain on patent litigation
settlement included in "Other income" in the accompanying consolidated statement
of operations for the six months ended January 31, 2007.
PAYMENT FROM FORMER DISTRIBUTOR
During the quarter ended January 31, 2007, the Company received a payment of
approximately $699,000 from Perkin Elmer Inc. ("Perkin Elmer") for amounts due
under a Distribution Agreement (the "Distribution Agreement") which terminated
December 31, 2004. The Distribution Agreement is presently subject to a lawsuit
for breach of contract, patent infringement, unfair competition under state law,
unfair competition under federal law, tortuous interference with business
relations, and fraud in the inducement of contract. Perkin Elmer advised in a
letter to the Company that the payment was owed under the Distribution Agreement
and was delayed because of changes to their accounting system and personnel
changes and that it was always their intent to comply with the Distribution
Agreement. The Company advised Perkin Elmer that the payment did not represent
all amounts owed under the Distribution Agreement. Accordingly, the payment has
been included in "Other income" in the accompanying consolidated statements of
operations for the three and six months ended January 31, 2007.
12
Note 10 - Stockholders' Equity
------------------------------
On December 8, 2006, the Securities and Exchange Commission ("SEC") declared
effective the shelf Registration Statement the Company filed on Form S-3 on
November 13, 2006. The shelf Registration Statement allows the Company to offer
and sell up to an aggregate of $100 million of common stock from time to time in
one or more offerings. The terms of any such offering would be established at
the time of such offering.
On December 14, 2006, the Company entered into a Placement Agent Agreement with
Lazard Capital Markets LLC, as exclusive placement agent, relating to a
"registered direct" offering ("Offering") of shares of the Company's common
stock. On December 15, 2006, the Company entered into a definitive Subscription
Agreement with various institutional investors relating to the sale of an
aggregate of 3,285,715 shares of common stock for a purchase price of $14.00 per
share. Net proceeds from the Offering aggregating $43.1 million, net of
placement fees and financing costs of $2.9 million, were credited to common
stock and additional paid-in capital. On December 15, 2006, the Company filed a
prospectus supplement with the SEC relating to the Offering under the
Registration Statement and supplement thereto.
Subsequent to January 31, 2007, the Company entered into a Placement Agent
Agreement with Lazard Capital Markets LLC, as exclusive placement agent,
relating to a "registered direct" offering ("Subsequent Offering") of shares of
the Company's common stock. Further, the Company entered into a definitive
Subscription Agreement with an investor relating to the sale of an aggregate of
1,000,000 shares of common stock for a purchase price of $15.00 per share. Net
proceeds from the Subsequent Offering aggregated $14.2 million, net of placement
fees and financing costs of $800,000 and were received on February 7, 2007. The
shares of common stock were registered under the aforementioned shelf
Registration Statement on Form S-3. On February 5, 2007, the Company filed a
prospectus supplement with the SEC relating to the Subsequent Offering under the
Registration Statement and supplement thereto.
13
Note 11 - Segment reporting
---------------------------
The Company has three reportable segments: Life Sciences, Therapeutics, and
Clinical Labs. The Company's Life Sciences segment develops, manufactures, and
markets products to research and pharmaceutical customers. The Company's
Therapeutic segment conducts research and development activities for therapeutic
drug candidates. The Clinical Labs segment provides diagnostic services to the
medical community. Prior to the fourth quarter ended July 31, 2006, the Life
Sciences and Therapeutics segments were reported together as the Research and
Development segment. The January 31, 2006 segment information has been restated
to reflect this change. 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.
Certain expenses were reclassified among segments in the fiscal 2006 periods for
comparative purposes.
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 critical accounting policies.
The following financial information (in thousands) represents the operating
results of the reportable segments of the Company:
THREE MONTHS ENDED JANUARY 31, 2007
Revenues: Life Sciences Therapeutics Clinical Labs Other Consolidated
-------- ------------- ------------ ------------- ----- ------------
Product revenues $725 -- -- -- $725
Royalty income 909 -- -- -- 909
Clinical laboratory services -- -- $8,960 -- 8,960
------- ------- ------- -------- --------
1,634 -- 8,960 -- 10,594
Cost and expenses and other (income):
Cost of products 370 -- -- -- 370
Cost of clinical laboratory services -- -- 4,067 -- 4,067
Research and development 903 $1,556 -- -- 2,459
Provision for uncollectible accounts -- -- 1,180 -- 1,180
Selling, general and administrative and legal 510 -- 3,807 $4,845 9,162
Interest income -- -- -- (1,168) (1,168)
Other income (699) -- -- -- (699)
------- ------- ------- -------- --------
Income (loss) before income taxes $550 ($1,556) $(94) $(3,677) $(4,777)
======= ======= ======= ======== ========
Depreciation and amortization included above $44 $4 $201 $9 $258
======= ======= ======= ======== ========
Share-based compensation included in above:
Cost of products $3 -- -- -- $3
Research and development 18 $33 -- -- 51
Selling, general and administrative and legal 8 -- $152 $286 446
------- ------- ------- -------- --------
Total $29 $33 $152 $286 $500
======= ======= ======= ======== ========
Capital expenditures $18 $ -- $135 $ -- $153
======= ======= ======= ======== ========
14
THREE MONTHS ENDED JANUARY 31, 2006
Revenues: Life Sciences Therapeutics Clinical Labs Other Consolidated
-------- ------------- ------------ ------------- ----- ------------
Product revenues $1,434 -- -- -- $1,434
Royalty income 675 -- -- -- 675
Clinical laboratory services -- -- $8,007 -- 8,007
------ ------- ------- -------- --------
2,109 -- 8,007 -- 10,116
Cost and expenses and other (income):
-------------------------------------
Cost of products 385 -- -- -- 385
Cost of clinical laboratory services -- -- 3,431 -- 3,431
Research and development 791 $1,120 -- -- 1,911
Provision for uncollectible accounts -- -- 1,209 -- 1,209
Selling, general and administrative and legal 569 -- 3,922 $4,467 8,958
Interest income -- -- -- (680) (680)
------ ------- ------- -------- --------
Income (loss) before income taxes $364 ($1,120) $(555) $(3,787) $(5,098)
====== ======= ======= ======== ========
Depreciation and amortization included above $45 $3 $226 $7 $281
====== ======= ======= ======== ========
Share-based compensation included in above:
-------------------------------------------
Cost of products $30 -- -- -- $30
Research and development 35 $36 -- -- 71
Selling, general and administrative and legal 22 -- $139 $187 348
------ ------- ------- -------- --------
Total $87 $36 $139 $187 $449
====== ======= ======= ======== ========
Capital expenditures $18 $ -- $135 $ -- $153
====== ======= ======= ======== ========
SIX MONTHS ENDED JANUARY 31, 2007
Revenues: Life Sciences Therapeutics Clinical Labs Other Consolidated
-------- ------------- ------------ ------------- ----- ------------
Product revenues $1,816 -- -- -- $1,816
Royalty income 2,207 -- 2,207
Clinical laboratory services -- -- $17,014 -- 17,014
------- -------- ------- -------- --------
4,023 -- 17,014 -- 21,037
Cost and expenses and other (income):
-------------------------------------
Cost of products 925 -- -- -- 925
Cost of clinical laboratory services -- -- 7,563 -- 7,563
Research and development 1,732 $2,588 -- -- 4,320
Provision for uncollectible accounts -- -- 2,094 -- 2,094
Selling, general and administrative and legal 1,008 -- 7,083 $8,800 16,891
Interest income -- -- -- (2,079) (2,079)
Other income (2,699) -- -- -- (2,699)
------- -------- ------- -------- --------
Income (loss) before income taxes $3,057 ($2,588) $274 $(6,721) $(5,978)
======= ======== ======= ======== ========
Depreciation and amortization included above $92 $7 $411 $18 $528
======= ======== ======= ======== ========
Share-based compensation included in above:
-------------------------------------------
Cost of products $6 -- -- -- $6
Research and development 36 $62 -- -- 98
Selling, general and administrative and legal 15 -- $238 $513 766
------- -------- ------- -------- --------
Total $57 $62 $238 $513 $870
======= ======== ======= ======== ========
Capital expenditures $61 $7 $242 $ -- $310
======= ======== ======= ======== ========
15
SIX MONTHS ENDED JANUARY 31, 2006
Revenues: Life Sciences Therapeutics Clinical Labs Other Consolidated
-------- ------------- ------------ ------------- ----- ------------
Product revenues $2,721 -- -- -- $2,721
Royalty income 1,534 -- -- -- 1,534
Clinical laboratory services -- -- $16,026 -- 16,026
------ -------- -------- -------- --------
4,255 -- 16,026 -- 20,281
Cost and expenses and other (income):
-------------------------------------
Cost of products 926 -- -- -- 926
Cost of clinical laboratory services -- -- 6,912 -- 6,912
Research and development 1,780 $1,681 -- -- 3,461
Provision for uncollectible accounts -- -- 2,354 -- 2,354
Selling, general and administrative and legal 1,093 -- 7,252 $7,930 16,275
Interest income -- -- -- (1,387) (1,387)
------ -------- -------- -------- --------
Income (loss) before income taxes $456 ($1,681) $(492) $(6,543) $(8,260)
====== ======== ======== ======== ========
Depreciation and amortization included above $91 $6 $448 $18 $563
====== ======== ======== ======== ========
Share-based compensation included in above:
-------------------------------------------
Cost of products $38 -- -- -- $38
Research and development 70 $72 -- -- 142
Selling, general and administrative and legal 40 -- $292 $357 689
------ -------- -------- -------- --------
Total $148 $72 $292 $357 $869
====== ======== ======== ======== ========
Capital expenditures $12 $ -- $615 $321 $948
====== ======== ======== ======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and related notes.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements. See "Forward-Looking and Cautionary
Statements" in our Form 10-K for the year ended July 31, 2006. Because of those
factors, you should not rely on past financial results as an indication of
future performance. We believe that period-to-period comparisons of our
financial results to date are not necessarily meaningful and expect that our
results of operations might fluctuate from period to period in the future.
The Company is a life sciences and biotechnology company focused on harnessing
genetic processes to develop research tools and therapeutics and the provision
of diagnostic services to the medical community. Since its founding in 1976, the
Company's strategic focus has been on the development, for commercial purposes,
of enabling technologies in the life sciences field. The Company's pioneering
work in genomic analysis coupled with its extensive patent estate and enabling
platforms have strategically positioned the Company to play a crucially
important role in the rapidly growing life sciences and molecular medicine
marketplaces.
The Company is comprised of three interconnected operating companies that have
evolved out of the Company's core competence: the use of nucleic acids as
informational molecules and the use of compounds for immune response modulation.
These wholly owned operating Companies conduct their operations through three
segments (see Note 11 in the notes to consolidated financial statements).
16
The Company's sources of revenue from the Life Sciences segment is from the
direct sales of products consisting of labeling and detection reagents for the
genomics and sequencing markets, as well as through non-exclusive distribution
agreements with other companies and royalty income. The Company's other source
of revenue is from the clinical laboratory service market. Payments for clinical
laboratory testing services are made by the Medicare program, healthcare
insurers and patients. Fees billed to patients, Medicare, and third party payers
are billed on the laboratory's standard gross fee schedule, subject to any
limitations on fees negotiated with the third party payers or with the ordering
physicians on behalf of their patients.
The Company incurs additional costs as a result of our participation in the
Medicare programs, as billing and reimbursement for clinical laboratory testing
is subject to considerable and complex federal regulations. Compliance with
applicable laws and regulations, as well as internal compliance policies and
procedures, adds further complexity and costs to our operations. Government
payers such as Medicare, as well as healthcare insurers have taken steps and may
continue to take steps to control the costs, utilizations and delivery of
healthcare services, including clinical laboratory services. Despite the added
cost and complexity of participating in the Medicare program, we continue to
participate because we believe that our other business may depend, in part, on
continued participation in Medicare since certain ordering physicians may want a
single laboratory capable of performing all of their clinical laboratory testing
services, regardless of who pays for such services.
Information systems are used extensively in virtually all aspects of the
clinical laboratory operations, including testing, billing, customer service,
logistics, and management of medical data. Our success depends, in part, on the
continued and uninterrupted performance of our information technology systems.
Through maintenance, staffing, and investments in our information technology
system, we expect to limit the risk associated with our heavy reliance on these
systems.
The clinical laboratory is subject to seasonal fluctuations in operating results
and cash flows. Typically, testing volume declines during the summer months,
year end holiday periods and other major holidays, reducing net revenues and
operating cash flows. Testing volume is also subject to declines in winter
months due to inclement weather, which varies in severity from year to year.
For the three months ended January 31, 2007 and 2006, approximately 7% and 14%
of the Company's operating revenues were derived from product sales and
approximately 8% and 7% were derived from royalty income, respectively, and
approximately 85% and 79% were derived from clinical laboratory services,
respectively. For the six months ended January 31, 2007 and 2006, approximately
9% and 13% of the Company's operating revenues were derived from product sales
and approximately 10% and 8% were derived from royalty income, respectively, and
approximately 81% and 79% were derived from clinical laboratory services,
respectively.
17
Comparative Operating Data
--------------------------
(in 000's) Three months ended
January 31, Increase %
Revenues: 2007 2006 (Decrease) Change
--------- -------- -------- -------- ------
Product revenues $725 $1,434 $(709) (49)
Royalty income 909 675 234 35
Clinical laboratory services 8,960 8,007 953 12
-------- -------- -----
Total revenues 10,594 10,116 478 5
Costs and expenses and other (income):
--------------------------------------
Cost of products 370 385 (15) (4)
Cost of laboratory services 4,067 3,431 636 19
Research & development 2,459 1,911 548 29
Selling, general and administrative 7,210 7,326 (116) (2)
Provision for uncollectible A/R 1,180 1,209 (29) (2)
Legal expenses 1,952 1,632 320 20
Interest income (1,168) (680) (488) 72
Other income (699) -- (699) --
-------- -------- -----
Total costs and expenses - net 15,371 15,214 157 1
-------- -------- -----
Loss before income taxes ($4,777) ($5,098) $321 6%
======= ======= ====
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2007 AS COMPARED TO JANUARY 31, 2006
CONSOLIDATED RESULTS
Product revenues during the three months ended January 31, 2007 were $0.7
million compared to $1.4 million in the year ago quarter, a decrease of $0.7
million or 49% due to the continuing competitiveness in the industry.
Royalty income during the three months ended January 31, 2007 was $0.9 million
compared to $0.7 million in the year ago quarter, an increase of $0.2 million or
35%. Royalties are earned from net sales of Digene products subject to a
license, as reported to the Company by Digene. There are no expenses relating to
royalty income.
Clinical laboratory revenues during the three month period ended January 31,
2007 was $9.0 million compared to $8.0 million in the year ago quarter, an
increase of $1.0 million or 12%. The Company experienced an increase in service
revenues during the 2007 period due to an expansion of a provider agreement with
an insurance provider, which was partially offset by an increase in the
contractual adjustment expense, which reduces gross billings, to 77.6% of gross
billings as compared to 74.3% in the year ago period. The increase in the
contractual adjustment expense is due to continued competitive pricing
throughout the industry.
The cost of products during both the three month periods ended January 31, 2007
and 2006 was comparable at $0.4 million. Gross profit was negatively affected
during the 2007 period due to the decline in product revenues.
The cost of clinical laboratory services during the three month period ended
January 31, 2007 was $4.1 million as compared to $3.4 million in the year ago
period, an increase of $0.6 million or 19%. The increase was due to the number
of tests performed and higher costs associated with certain routine and esoteric
tests related to the increase in the number of patients being serviced.
18
Research and development expenses were approximately $2.4 million during the
three months ended January 31, 2007, compared to $1.9 million in the year ago
quarter, an increase of $0.5 million or 29%. The increase was primarily due to
an increase in clinical trial activities of $0.3 million and an increase in
payroll costs approximating $0.1 million at the Therapeutic segment.
Selling, general and administrative expenses of approximately $7.2 million
during the three months ended January 31, 2007 were comparable to the year ago
period amount of $7.3 million.
The provision for uncollectible accounts receivable relating to the clinical
laboratory segment for the three months ended January 31, 2007 was comparable to
the year ago period.
Legal expense was $1.9 million during the three months ended January 31, 2007
compared to $1.6 million in the year ago period, an increase of $0.3 million or
20%, due to an increase in ongoing patent litigation and corporate activities.
Interest income increased by $0.5 million or 72% to $1.2 million during the
three months ended January 31, 2007 compared to $0.7 million during the 2006
period, due to an increase in invested cash from the sale of common stock in a
registered direct offering which closed in December 2006. The net cash proceeds
from the offering were $43.1 million. See Liquidity and Capital Resources. The
Company earns interest by investing primarily in short term (30 to 90 days)
commercial paper and money market funds with high credit ratings.
Other income was $0.7 million during the three months ended January 31, 2007 due
to a payment of $0.7 million from Perkin Elmer for amounts due under a
Distribution Agreement (the "Distribution Agreement") which terminated December
31, 2004, compared to $0 during the 2006 period. The Distribution Agreement is
presently subject to a lawsuit for breach of contract, patent infringement,
unfair competition under state law, unfair competition under federal law,
tortuous interference with business relations, and fraud in the inducement of
contract. Perkin Elmer advised in a letter to the Company that the payment under
the Distribution Agreement was delayed because of changes to their accounting
system and personnel changes and that it was always their intent to comply with
the Distribution Agreement. The Company advised Perkin Elmer that the payment
did not represent all amounts owed under the Distribution Agreement.
The tax provision for the three months ended January 31, 2007 was based on state
and local taxes, and 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 tax benefit for the three months ended January 31, 2006 differed from the
expected net operating loss carryforward benefit at the U.S. federal statutory
rate of 34% primarily due to limitations on the timing of the recognition of the
Company's then available federal tax carryback benefit for taxes paid in prior
years. The tax benefit also differs from the expected net operating loss
carryforward benefit due to the inability to recognize such benefit. The
carryforward benefit could not be recognized because of uncertainties relating
to future taxable income, in terms of both its timing and its sufficiency, which
would have enabled the Company to realize the federal carryforward benefit.
19
SEGMENT RESULTS
The Life Sciences segment's income before taxes was approximately $0.6 million
for the three months ended January 31, 2007 as compared to $0.4 million in the
year ago quarter. Segment operating income increased primarily as a result of an
increase in royalty income of $0.2 million. Revenues from product shipments
declined $0.7 million due to the continuing competitiveness in the industry. The
segment's income was positively impacted by a payment of $0.7 million from
Perkin Elmer for amounts due under a Distribution Agreement which terminated
December 31, 2004. Segment operating expenses (research and development and
selling, general and administrative) in both periods were comparable.
The Therapeutics segment's loss before taxes was approximately $1.6 million for
the three months ended January 31, 2007 as compared to a loss of $1.1 million
for the earlier quarter. The 2007 period increase in the segment loss was
primarily due to an increase in clinical trial activities of $0.4 million.
The Clinical Laboratory segment loss before taxes was $0.1 million for the
period ended January 31, 2007 as compared to segment loss of $0.6 million in the
year ago quarter. The 2007 period was positively impacted by an increase in
service revenues of $1.0 million primarily due to the expansion of an insurance
provider agreement which increased gross profit by approximately $0.3 million
and a reduction in selling general and administrative costs of $0.1 million.
The Other segment's loss before income taxes for the three months ended January
31, 2007 was approximately $3.7 million and comparable to the year ago quarter.
The segment loss reflects an increase in interest income of $0.5 million offset
by expense increases.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 2007 AS COMPARED TO JANUARY 31, 2006
Comparative Operating Data
--------------------------
(in 000's) Six months ended
January 31, Increase %
Revenues: 2007 2006 (Decrease) Change
--------- -------- -------- -------- ------
Product revenues $1,816 $2,721 $(905) (33)
Royalty income 2,207 1,534 673 44
Clinical laboratory services 17,014 16,026 988 6
-------- -------- -------
Total revenues 21,037 20,281 756 4
Costs and expenses and other (income):
--------------------------------------
Cost of products 925 926 (1) --
Cost of laboratory services 7,563 6,912 651 9
Research & development 4,320 3,461 859 25
Selling, general and administrative 12,781 12,781 -- --
Provision for uncollectible A/R 2,094 2,354 (260) (11)
Legal expenses 4,110 3,494 616 18
Interest income (2,079) (1,387) (692) 50
Other income (2,699) -- (2,699)
-------- -------- -------
Total costs and expenses - net 27,015 28,541 (1,526) (5)
-------- -------- -------
Loss before income taxes ($5,978) ($8,260) $2,282 28%
======== ======== =======
20
CONSOLIDATED RESULTS
Product revenues during the six months ended January 31, 2007 was $1.8 million
compared to $2.7 million in the year ago quarter, a decrease of $0.9 million or
33%, due to the continuing competitiveness in the industry.
Royalty income during the six months ended January 31, 2007 was $2.2 million
compared to $1.5 million in the year ago quarter, an increase of $0.7 million or
44%. Royalties are earned from net sales of Digene products subject to a
license, as reported to the Company by Digene. There are no expenses relating to
royalty income.
Clinical laboratory revenues during the six month period ended January 31, 2007
were $17.0 million compared to $16.0 million in the 2006 period, an increase of
$1.0 million or 6%. The Company experienced an increase in service revenues
during the 2007 period primarily due to an expansion of an insurance provider
agreement, which was partially offset by an increase in the contractual
adjustment expense, which reduces gross billings, to 77.3% of gross billings as
compared to 74.7% in the prior period. The increase in the contractual
adjustment expense is due to continued competitive pricing throughout the
industry.
The cost of products during both the six month periods ended January 31, 2007
and 2006 was comparable at $0.9 million. Gross profit was negatively affected
during the 2007 period due to the decline in product revenues.
The cost of clinical laboratory services during the six month period ended
January 31, 2007 was $7.6 million as compared to $6.9 million in the prior
period, an increase of $0.7 million or 9%. The increase was due to the number of
tests performed and higher costs associated with certain routine and esoteric
tests related to the increase in the number of patients being serviced.
Research and development expenses were approximately $4.3 million during the six
months ended January 31, 2007, compared to $3.5 million in the 2006 period, an
increase of $0.8 million or 25%. The increase was primarily due to an increase
in clinical trial activities of $0.5 million and an increase in payroll costs
approximating $0.2 million at the Therapeutic segment.
Selling, general and administrative expenses of approximately $12.8 million
during the six months ended January 31, 2007 are comparable to the 2006 period.
The provision for uncollectible accounts receivable relating to the clinical
laboratory segment for the six months ended January 31, 2007 was $2.1 million,
compared to $2.4 million during the year ago period, a decrease of $0.3 million
or 11%. The provision declined due to improved billing and collection
procedures.
Legal expense was $4.1 million during the six months ended January 31, 2007
compared to $3.5 million in the year ago period, an increase of $0.6 million or
18%, due to an increase in ongoing patent litigation and corporate activities.
Other income was $2.7 million during the six months ended January 31, 2007
versus $0 in the year ago period. During the 2007 period, the Company as
plaintiff and Sigma Aldrich ("Sigma") entered into a Settlement Agreement and
Release effective September 15, 2006 (the "Settlement Agreement"). Pursuant to
the Settlement Agreement, the Company's litigation with Sigma was dismissed and
the Company recognized a $2 million gain on patent litigation settlement during
the six months ended January 31, 2007. In addition, during the 2007 period, the
Company received a payment of $0.7 million from Perkin Elmer for amounts due
under a Distribution Agreement which terminated December 31, 2004. The
Distribution Agreement is presently subject to a lawsuit for breach of contract,
patent infringement, unfair competition under
21
state law, unfair competition under federal law, tortuous interference with
business relations, and fraud in the inducement of contract. Perkin Elmer
advised in a letter to the Company that the payment under the Distribution
Agreement was delayed because of changes to their accounting system and
personnel changes and that it was always their intent to comply with the
Distribution Agreement. The Company advised Perkin Elmer that the payment did
not represent all amounts owed under the Distribution Agreement.
Interest income increased by $0.7 million or 50% to $2.1 million during the six
months ended January 31, 2007 compared to $1.4 million during the 2006 period,
due to an increase in invested cash from the sale of common stock in a
registered direct offering which closed in December 2006. The net cash proceeds
from the offering were $43.1 million. See Liquidity and Capital Resources. The
Company earns interest by investing primarily in short term (30 to 90 days)
commercial paper and money market funds with high credit ratings.
The tax provision for the six months ended January 31, 2007 was based on state
and local taxes, and 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 tax benefit for the six months ended January 31, 2006 differed from the
expected net operating loss carryforward benefit at the U.S. federal statutory
rate of 34% primarily due to limitations on the timing of the recognition of the
Company's then available federal tax carryback benefit for taxes paid in prior
years. The tax benefit also differed from the expected net operating loss
carryforward benefit due to the inability to recognize such benefit. The
carryforward benefit could not be recognized because of uncertainties relating
to future taxable income, in terms of both its timing and its sufficiency, which
would have enabled the Company to realize the federal carryforward benefit. Also
due to these uncertainties, the Company recorded during the first quarter of the
2006 period a valuation allowance equal to its net deferred tax assets,
including the federal net operating loss carryforward benefit generated during
the first quarter of the 2006 period. The Company recorded the valuation
allowance as it concluded that it was not more likely than not that its net
deferred tax assets would be realized in the foreseeable future based on
positive and negative evidence available at the time.
SEGMENT RESULTS
The Life Sciences segment's income before taxes was approximately $3.1 million
for the six months ended January 31, 2007 as compared to $0.5 million in the
2006 period. The increase is primarily the result of the Company's $2.0 million
patent litigation settlement with Sigma Aldrich and a payment of $0.7 million
from Perkin Elmer for amounts due under a Distribution Agreement which
terminated December 31, 2004. Revenues from product shipments declined $0.9
million due to the continuing competitiveness in the industry, partially offset
by an increase in royalty income of $0.7 million. Segment operating expenses
(research and development and selling, general and administrative) in both
periods were comparable.
The Therapeutics segment's loss before income taxes was approximately $2.6
million for the six months ended January 31, 2007 as compared to a loss of $1.7
million for the 2006 period. The increase was primarily due to an increase in
clinical trial activities of $0.5 million, an increase in payroll costs
approximating $0.2 million, and an increase in patent related costs of $0.1
million.
22
The Clinical Laboratory segment's income before taxes was $0.3 million for the
six months ended January 31, 2007 as compared to a loss of $0.5 million in the
2006 period. The 2007 period was positively impacted by an increase in service
revenues due to the expansion of an insurance provider agreement, which
increased gross profit by approximately $0.3 million, a reduction of $0.3
million in the provision for uncollectible accounts due to continued improved
billing and collection procedures, and a reduction in selling general and
administrative costs of $0.2 million.
The Other segment's loss before taxes for the six months ended January 31, 2007
was approximately $6.7 million as compared to a loss of $6.5 million in the 2006
period. The increase in the loss before taxes was primarily due to an increase
in legal fees of $0.6 million due to an increase in ongoing patent litigation
and corporate activities and an increase in compensation costs of approximately
$0.2 million, partially offset by an increase in interest income of $0.7
million.
LIQUIDITY AND CAPITAL RESOURCES
On December 14, 2006, the Company entered into a Placement Agent Agreement with
Lazard Capital Markets LLC, as exclusive placement agent, relating to a
"registered direct" offering ("Offering") of shares of the Company's common
stock. On December 15, 2006, the Company entered into a definitive Subscription
Agreement with various institutional investors relating to the sale of an
aggregate of 3,285,715 shares of common stock for a purchase price of $14.00 per
share. Net proceeds from the Offering aggregating $43.1 million, net of
placement fees and financing costs of $2.9 million, were credited to common
stock and additional paid-in capital. On December 15, 2006, the Company filed a
prospectus supplement with the SEC relating to the Offering under a shelf
Registration Statement on Form S-3 which was effective December 8, 2006 and
supplement thereto.
At January 31, 2007, our cash and cash equivalents were $110.9 million, an
increase of $41.1 million from cash and cash equivalents at July 31, 2006. The
increase in cash during the six months ended January 31, 2007 was primarily due
to the Offering proceeds, a $2.0 million settlement gain on patent litigation
and cash flow impacts discussed below. The Company had working capital of $118.3
million at January 31, 2007 compared to $80.2 million at July 31, 2006. The
increase in working capital was primarily the result of the Offering, offset by
an increase in current liabilities of approximately $2.0 million.
Net cash used in operating activities for the six months ended January 31, 2007
was approximately $1.7 million as compared to net cash used in operating
activities of $6.4 million in the 2006 period. The decline in net cash used in
operating activities in the 2007 period over the 2006 period of $4.7 million was
primarily due to a decrease in net loss of $1.6 million, partially attributable
to the other income of $2.7 million in the 2007 period, and by the net changes
of approximately $3.1 million in operating assets and liabilities, primarily due
to the increase in accrued liabilities and the decrease in recoverable income
taxes during the 2007 period.
Net cash used in investing activities for the six months ended January 31, 2007
was approximately $0.4 million as compared to net cash provided by investing
activities of $5.7 million in the year ago period, primarily due to a decline in
the sales of marketable securities of approximately $6.7 million. During the six
months ended January 31, 2006, all investments in marketable securities were
sold and the proceeds reinvested in cash equivalents.
Net cash provided by financing activities for the six months ended January 31,
2007 was $43.2 million as compared to $0.1 million in the year ago period. The
increase was due to the proceeds from the Offering of $43.1 million previously
discussed.
Subsequent to January 31, 2007, the Company completed another "registered
direct" offering ("Subsequent Offering") for an aggregate of 1,000,000 shares of
common stock for a purchase price of $15.00 per share. Net proceeds from the
Subsequent Offering aggregating $14.2 million, net of placement fees and
financing costs of $800,000, were received on February 7, 2007.
The Company believes that its current cash position is sufficient for its
foreseeable liquidity and capital resource needs over the next 12 months,
although there can be no assurance that future events will not alter such view.
23
CONTRACTUAL OBLIGATIONS
There were no significant changes to the Contractual Obligations disclosed in
the Annual Report on Form 10-K for the 2006 fiscal year.
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.
CRITICAL ACCOUNTING POLICIES
General
-------
The Company's discussion and analysis of its financial condition and results of
operations are based upon Enzo Biochem, Inc.'s consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. 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 adjustments, 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, the
sales price is fixed or determinable and collectibility is reasonably assured.
ROYALTIES
---------
Royalty revenues are recorded in the period earned and no royalty related costs
exist. Royalties received in advance of being earned are recorded as deferred
revenues.
REVENUES - CLINICAL LABORATORY SERVICES
---------------------------------------
Revenues from the clinical laboratory are recognized upon completion of the
testing process for a specific patient and reported to the ordering physician.
These revenues and the associated accounts receivable are based on gross amounts
billed or billable for services rendered, net of a contractual adjustment, which
is the difference between amounts billed to payers and the expected approved
reimbursable settlements from such payers. The following are tables of the
clinical laboratory segment's net revenues and percentages by revenue category
for the three and six months ended January 31, 2007 and 2006:
Net revenues Three months ended Three months ended
January 31, 2007 January 31, 2006
-------------------- ---------------------
Revenue category (In 000's) (in %) (In 000's) (in %)
---------------- ---------- ------ ---------- ------
Medicare $2,008 22 $1,968 24
Third party carriers 5,583 62 3,852 48
Patient self-pay 756 9 1,727 22
HMO's 613 7 460 6
------ --- ------ ---
Total $8,960 100% $8,007 100%
====== === ====== ===
24
Net revenues Six months ended Six months ended
January 31, 2007 January 31, 2006
-------------------- ---------------------
Revenue category (In 000's) (in %) (In 000's) (in %)
---------------- ---------- ------ ---------- ------
Medicare $3,962 23 $3,803 24
Third party carriers 10,595 63 8,565 53
Patient self-pay 1,388 8 2,730 17
HMO's 1,069 6 928 6
------ --- ------ ---
Total $17,014 100% $16,026 100%
====== === ====== ===
The Company provides services to certain patients covered by various third-party
payers, including the Federal Medicare program. Revenue, net of contractual
adjustments, from gross billings under the Federal Medicare program during the
three and six months ended January 31, 2007 and 2006 were approximately 22% and
24%, and 23% and 24%, respectively, of the clinical lab segment's revenue. Laws
and regulations governing Medicare are complex and subject to interpretation for
which action for noncompliance includes fines, penalties and exclusion from the
Medicare programs. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing.
CONTRACTUAL ADJUSTMENTS
-----------------------
The Company's estimate of contractual adjustments is based on significant
assumptions and judgments, such as its interpretation of the applicable payer's
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. The Company adjusts the contractual adjustment estimate
periodically, based on its evaluation of historical settlement experience with
payers, industry reimbursement trends, and other relevant factors.
During the three and six months ended January 31, 2007 and 2006, the contractual
adjustment percentages, determined using average historical reimbursement
statistics, were 77.6% and 74.3% and 77.3% and 74.7%, respectively, of gross
billings. The Company estimates (by using a sensitivity analysis) that each 1%
point change in the contractual adjustment percentage could have resulted in a
change in clinical laboratory services revenues of approximately $749,000 for
the six months ended January 31, 2007, and could have resulted in a change in
the net accounts receivable of approximately $245,000 as of January 31, 2007.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------------------------------
Accounts receivable are reported at realizable value, net of allowances for
doubtful accounts, which is estimated and recorded in the period of the related
revenue.
For the clinical laboratory segment, the allowance for doubtful accounts
represents amounts that the Company does not expect to collect after the Company
has exhausted its collection procedures. The Company estimates its allowance for
doubtful accounts in the period the related services are billed and adjusts the
estimate in future accounting periods as necessary. It bases the estimate for
the allowance on the evaluation of historical collection experience, the aging
profile of accounts receivable, the historical doubtful account write-off
percentages, payer mix, and other relevant factors.
25
The allowance for doubtful accounts includes the balances, after receipt of the
approved settlements from third party payers for the insufficient diagnosis
information received from the ordering physician, which result in denials of
payment, and the uncollectible portion of receivables from self payers,
including deductibles and copayments, which are subject to credit risk and
patients' ability to pay. During the three and six months ended January 31, 2007
and 2006, the Company determined an allowance for doubtful accounts less than
210 days and wrote off 100% of accounts receivable (for all payers) over 210
days, as it assumed those accounts are uncollectible. The Company adjusts the
historical collection analysis for recoveries, if any, on an ongoing basis.
The Company's ability to collect outstanding receivables from third party payers
is critical to its operating performance and cash flows. The primary collection
risk lies with uninsured patients or patients for whom primary insurance has
paid but a patient portion remains outstanding. The Company also assesses the
current state of its billing functions in order to identify any known collection
or reimbursement issues in order to assess the impact, if any, on the allowance
estimates, which involves judgment. The Company believes that the collectibility
of its receivables is directly linked to the quality of its billing processes,
most notably, those related to obtaining the 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 is a table of the Company's net accounts receivable by segment.
The clinical laboratory segment's net receivables are detailed by billing
category and as a percent to its total net receivables. At January 31, 2007 and
July 31, 2006, approximately 88% of the Company's net accounts receivable
relates to its clinical laboratory business, which operates in the New York and
New Jersey Metropolitan area.
Net accounts receivable As of As of
January 31, 2007 July 31, 2006
-------------------- ---------------------
Billing category (In 000's) (in %) (In 000's) (in %)
---------------- ---------- ------ ---------- ------
Clinical laboratory
Medicare $1,573 17 $1,367 15
Third party carriers 4,883 54 4,025 44
Patient self-pay 2,008 22 3,294 36
HMO's 586 6 475 5
------- --- ------- ---
Total Clinical laboratory 9,050 100% 9,161 100%
====== ===
Total Life Sciences 1,199 1,286
------- -------
Total accounts receivable $10,249 $10,447
======= =======
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 of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
26
INVENTORY
---------
The Company values inventory at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods inventories consist of material,
labor, and manufacturing overhead. On a quarterly basis, we review inventory
quantities on hand and analyze the provision for excess and obsolete inventory
based on our estimate of sales forecasts based on sales history and anticipated
future demand. Our estimate of future product demand may not be accurate and we
may understate or overstate the provision for excess and obsolete inventory.
Accordingly, unanticipated changes in demand could have a significant impact on
the value of our inventory and results of operations. At January 31, 2007 and
July 31, 2006, respectively, the reserve for excess and obsolete inventory was
$57,000 and $238,000.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections ("SFAS 154"), a replacement of APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements". SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Previously, most voluntary
changes in accounting principles required recognition via a cumulative effect
adjustment within net income for the period of the change. SFAS 154 requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change.
SFAS 154 is effective for accounting changes made in fiscal years beginning
after December 15, 2005; however, SFAS 154 does not change the transition
provisions of any existing accounting pronouncements. The adoption of SFAS 154
did not have a material impact on the Company's financial condition or results
of operations.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
Accounting for Income Taxes" ("SFAS 109")", to clarify the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS 109. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006. The Company has not evaluated the impact of FIN 48 on its financial
statements at this time.
In September 2006, the SEC released Staff Accounting Bulletin No. 108
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
provides interpretative guidance on how public companies quantify financial
statement misstatements. There have been two common approaches used to quantify
such errors. Under an income statement approach, the "roll-over" method, the
error is quantified as the amount by which the current year income statement is
misstated. Alternatively, under a balance sheet approach, the "iron curtain"
method, the error is quantified as the cumulative amount by which the current
year balance sheet is misstated. In SAB 108, the SEC established an approach
that requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the company's financial statements and
the related financial statement disclosures. This model is commonly referred to
as a "dual approach" because it requires quantification of errors under both the
roll-over and iron curtain methods. SAB 108 is effective for the Company as of
August 1, 2007. The adoption of SAB 108 is not expected to have a material
impact on the Company's consolidated financial statements.
27
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosure about fair value measurements, and is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the effect that the adoption of this Statement will have on its
financial statements at this time.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS 159"). This statement permits entities to choose to
measure many financial instruments and certain other items as fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective as of the beginning of fiscal years
that begin after November 15, 2007. The Company has not evaluated the effect
that the adoption of this Statement will have on its financial statements at
this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have an exposure to market risk from changes in foreign
currency exchange rates, commodity price risk or other market risk. We do not
engage in any hedging or market risk management tools. The Company does not have
interest risk with respect to interest rates on cash and cash equivalents that
could impact our results of operations and financial position since the
investments are in highly liquid corporate debt instruments with maturities of
three months or less. There have been no material changes with respect to market
risk previously disclosed in our Annual Report on Form 10-K for our 2006 fiscal
year.
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 Company's most recently completed interim fiscal period that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There have been no material developments with respect to previously reported
legal proceedings except as noted in Note 9. See the annual report on Form 10-K
for the fiscal year ended July 31, 2006 filed with the Securities and Exchange
Commission for a discussion of the Company's ongoing legal proceedings.
28
Item 1A. Risk Factors
------------
Risk and uncertainties that, if they were to occur, could materially adversely
affect our business or that could cause our actual results to differ materially
from the results contemplated by the forward-looking statements contained in
this Report and other public statements we make were set forth in the "Item 1A.
- Risk Factors" section of our Annual Report on Form 10-K for the year ended
July 31, 2006. There have been no material changes from the risk factors
disclosed in that Form 10-K.
Item 4. Submission of matters to a vote of security holders
---------------------------------------------------
(a) The Annual Meeting of Shareholders was held on January 23, 2007.
(b) The following matters were voted upon and the results were as follows:
(1) Shahram Rabbani and Irwin C. Gerson were nominated by management and elected
by the shareholders to serve as Class I Directors until the 2010 Annual Meeting
of Shareholders or until their respective successors are elected and shall
qualify.
The shareholders voted 27,356,311 and 26,892,987 shares in the affirmative for
Shahram Rabbani and Irwin C. Gerson, respectively, and withheld 386,949 and
850,273 shares for Shahram Rabbani and Irwin C. Gerson, respectively.
(2) The shareholders voted 27,604,956 in the affirmative with respect to the
ratification of Ernst & Young LLP as the Company's independent auditors for the
fiscal year ending July 31, 2007, 68,176 shares against and 70,128 shares
abstained.
Item 6. Exhibits
--------
Exhibit No. Exhibit
----------- -------
31(a) Certification of Elazar Rabbani, Ph.D. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of Barry Weiner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32(a) Certification of Elazar Rabbani, Ph.D. pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32(b) Certification of Barry Weiner pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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: March 12, 2007 by: /s/Barry Weiner
---------------
Chief Financial Officer
29