-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SATI8mZ72I3hmGH5C5J+QWwXVQfceWfAh3dhbgn1ey/j9rxthHlI0ZWbUQf35kUI xlMe7I6OGbeyuOAGGD40RQ== 0000930413-06-002011.txt : 20060313 0000930413-06-002011.hdr.sgml : 20060313 20060313162032 ACCESSION NUMBER: 0000930413-06-002011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060131 FILED AS OF DATE: 20060313 DATE AS OF CHANGE: 20060313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENZO BIOCHEM INC CENTRAL INDEX KEY: 0000316253 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 132866202 STATE OF INCORPORATION: NY FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09974 FILM NUMBER: 06682347 BUSINESS ADDRESS: STREET 1: 60 EXECUTIVE BLVD CITY: FARMINGDALE STATE: NY ZIP: 11735 BUSINESS PHONE: 5167555500 MAIL ADDRESS: STREET 1: ENZO BIOCHEM INC STREET 2: 60 EXECUTIVE BLVD CITY: FARMINGDALE STATE: NY ZIP: 11735 10-Q 1 c41432_10-q.txt 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, 2006 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.) 60 Executive Blvd., Farmingdale, New York 11735 - ----------------------------------------- ----------- (Address of Principal Executive office) (Zip Code) 631-755-5500 - ------------------------------ (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 Par Value New York Stock Exchange - ----------------------------- ----------------------- (Title of Class) (Name of Each Exchange on which Registered) Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 |_| 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, 2006 the Registrant had 32,234,450 shares of Common Stock outstanding. ENZO BIOCHEM, INC. FORM 10-Q January 31, 2006 INDEX PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets January 31, 2006 (unaudited) and July 31, 2005 3 Consolidated Statements of Operations For the three and six months ended January 31, 2006 and 2005 (unaudited) 4 Consolidated Statements of Cash Flows For the six months ended January 31, 2006 and 2005 (unaudited) 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Item 4. Controls and Procedures 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings 23 Item 4. Submission of matters to a vote of security holders 24 Item 6. Exhibits 24 Signatures 24
2 PART 1 - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS ENZO BIOCHEM, INC. CONSOLIDATED BALANCE SHEETS
January 31, July 31, ASSETS 2006 2005 (unaudited) -------------- -------------- Current assets: (In thousands) Cash and cash equivalents ............................................................... $ 76,362 $ 76,981 Marketable securities ................................................................... -- 6,714 Accounts receivable, net of allowances .................................................. 11,652 13,421 Inventories ............................................................................. 2,980 2,876 Prepaid expenses ........................................................................ 1,763 2,580 Recoverable income taxes ................................................................ 2,533 1,329 Deferred taxes .......................................................................... -- 900 --------- --------- Total current assets ....................................................................... 95,290 104,801 Property and equipment, net of accumulated depreciation and amortization ........................................................................ 3,093 2,669 Goodwill ................................................................................... 7,452 7,452 Patent costs, net of accumulated amortization .............................................. 1,296 1,333 Other ...................................................................................... 210 211 --------- --------- Total assets ............................................................................... $ 107,341 $ 116,466 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accrued legal fees ...................................................................... $ 1,442 $ 2,717 Trade accounts payable .................................................................. 1,710 2,414 Other accrued expenses .................................................................. 1,288 1,348 Accrued payroll ......................................................................... 570 515 Deferred revenue ........................................................................ -- 359 Accrued research and development expenses ............................................... 163 286 Installment payable ..................................................................... -- 150 --------- --------- Total current liabilities .................................................................. 5,173 7,789 Deferred taxes ............................................................................. -- 260 Long term installment payable .............................................................. 150 150 Commitments Stockholders' equity: Preferred Stock, $.01 par value; authorized 25,000,000 shares; no shares issued or outstanding ........................................................ -- -- Common Stock, $.01 par value; authorized 75,000,000 shares; shares issued: 32,787,000 at January 31, 2006 and 32,526,800 at July 31, 2005 ............. 328 325 Additional paid-in capital .............................................................. 234,420 230,644 Less treasury stock at cost: 564,860 shares at January 31, 2006 and 384,400 shares at July 31, 2005 ................................................ (8,428) (5,994) Accumulated deficit ..................................................................... (124,302) (116,577) Accumulated other comprehensive loss .................................................... -- (131) --------- --------- Total stockholders' equity ................................................................. 102,018 108,267 --------- --------- Total liabilities and stockholders' equity ................................................. $ 107,341 $ 116,466 ========= =========
3 See accompanying notes ENZO BIOCHEM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended January 31, January 31, 2006 2005 2006 2005 --------------------------------------------------------------- (In Thousands) (In Thousands) Revenues: Research product revenues and royalty income ............ $ 2,109 $ 3,271 $ 4,255 $ 5,727 Clinical laboratory services ............................ 8,007 7,964 16,026 15,809 -------- -------- -------- -------- 10,116 11,235 20,281 21,536 Costs and expenses and other (income): Cost of research product revenues ....................... 385 555 926 1,130 Cost of clinical laboratory services .................... 3,431 2,859 6,912 5,773 Research and development expense ........................ 1,911 2,030 3,461 4,243 Selling, general, and administrative expense ............ 7,326 4,738 12,781 8,875 Provision for uncollectible accounts receivable ......... 1,209 1,146 2,354 2,623 Legal expense ........................................... 1,632 1,160 3,494 2,303 Interest income ......................................... (680) (309) (1,387) (639) Gain on patent litigation settlement .................... -- -- -- (14,000) -------- -------- -------- -------- 15,214 12,179 28,541 10,308 (Loss) income before income taxes .......................... (5,098) (944) (8,260) 11,228 Benefit (provision) for income taxes ....................... 659 416 536 (4,736) -------- -------- -------- -------- Net (loss) income .......................................... ($ 4,439) ($ 528) ($ 7,724) $ 6,492 ======== ======== ======== ======== Net (loss) income per common share: Basic ................................................... ($ 0.14) ($ 0.02) ($ 0.24) $ 0.20 ======== ======== ======== ======== Diluted ................................................. ($ 0.14) ($ 0.02) ($ 0.24) $ 0.20 ======== ======== ======== ======== Weighted average common shares outstanding: Basic ................................................... 32,200 32,076 32,179 32,062 Diluted ................................................. 32,200 32,076 32,179 32,739
4 See accompanying notes ENZO BIOCHEM, INC CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended January 31, 2006 2005 -------- -------- OPERATING ACTIVITIES (in thousands) Net (loss) income .................................................................... ($ 7,724) $ 6,492 Adjustments to reconcile net (loss) income to net cash (used in)/provided by operating activities: Depreciation and amortization of property and equipment ....................... 526 383 Amortization of patent costs .................................................. 37 660 Provision for uncollectible accounts receivable ............................... 2,354 2,623 Deferred taxes ................................................................ 640 425 Stock option compensation charge .............................................. 840 -- Restricted stock awards compensation charge ................................... 29 -- Issuance of stock for 401(k) employer match ................................... 401 -- Deferred rent ................................................................. -- (87) Loss on sales of marketable securities ........................................ 153 98 Changes in operating assets and liabilities: Accounts receivable before provision for uncollectible amounts ......................................................... (585) (2,509) Inventories ................................................................... (104) 150 Prepaid expenses .............................................................. 817 318 Recoverable income taxes ...................................................... (1,204) 533 Trade accounts payable and other accrued expenses ............................. (765) (797) Accrued research and development expenses ..................................... (123) (28) Deferred revenue .............................................................. (359) 1,503 Income taxes payable .......................................................... -- 1,978 Accrued legal fees ............................................................ (1,275) (1,540) Accrued payroll ............................................................... 55 148 Installment payable ........................................................... (150) -- -------- -------- Adjustments - net ................................................................... 1,287 3,858 Net cash (used in)/provided by operating activities ....................... (6,437) 10,350 INVESTING ACTIVITIES Capital expenditures ............................................................. (948) (715) Patent costs deferred ............................................................ -- (21) Sales of marketable securities ................................................... 6,761 5,000 Purchases of marketable securities ............................................... (69) (275) Security deposits ................................................................ 1 (5) -------- -------- Net cash provided by investing activities ................................. 5,745 3,984 FINANCING ACTIVITIES Proceeds from the exercise of stock options ...................................... 73 290 -------- -------- Net cash provided by financing activities ................................. 73 290 Net (decrease) increase in cash and cash equivalents ................................. (619) 14,624 Cash and cash equivalents at the beginning of the period ............................. 76,981 54,499 -------- -------- Cash and cash equivalents at the end of the period ................................... $ 76,362 $ 69,123 ======== ========
SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS In October 2005, certain officers of the Company exercised incentive stock options in a non-cash transaction. The officers surrendered 180,411 shares of previously acquired common stock in exchange for 221,116 shares. The Company recorded approximately $2.4 million, the market value of the surrendered shares, as treasury stock. In December 2004, a director of the Company exercised incentive stock options in a non-cash transaction. The director surrendered 17,056 shares of previously acquired common stock in exchange for 31,660 shares. The Company recorded approximately $0.3 million, the market value of the surrendered shares, as treasury stock. 5 See accompanying notes ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS as of January 31, 2006 and for the three and six month periods ended January 31, 2006 and 2005 (Unaudited) NOTE 1. BASIS OF PRESENTATION The consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended July 31, 2005 and notes thereto contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the three and six months ended January 31, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year ending July 31, 2006. RECLASSIFICATIONS Certain amounts in prior years have been reclassified to conform to current year presentation. NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS - SFAS NO. 123(R) ACCOUNTING FOR SHARE BASED PAYMENT In December 2004, the Financial Accounting Standards Board ("FASB") issued revised SFAS No. 123 "Accounting for Share Based Payment" ("SFAS 123(R)"), which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. Accordingly, pro forma disclosure of the compensation effect of share based payment transactions with employees on net income and earnings per share is no longer an alternative to recognition in the statements of operations. The compensation cost recognized is measured based on the fair value of the equity or liability instrument issued. The statement covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company was required to adopt SFAS 123(R) as of August 1, 2005, the first day of its fiscal year ending July 31, 2006. The Company adopted the provisions of SFAS 123(R) using the modified prospective transition method, which allows for recognition of compensation expense for awards that vest after August 1, 2005 and awards granted subsequent to that date. 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 No. 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 No. 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 No. 123(R). The Company is considering applying the principles set forth in this FSP to determine its APIC pool. 6 As a result of the adoption of SFAS 123(R), the Company recognized in its consolidated statements of operations approximately $420,000 and $840,000 of compensation expense relating to the fair value of employee stock options that vested during the three and six months ended January 31, 2006, and approximately $29,000 of compensation expense relating to the fair value of restricted stock that vested during the three and six months ended January 31, 2006. The following table sets forth the amount of expense related to share-based payment arrangements included in specific line items in the statements of operations: Three months ended Six months ended (in thousands) January 31, 2006 January 31, 2006 -------------- ---------------- ---------------- Cost of research product revenues $30 $38 Research and development 71 142 Selling, general and administrative 348 689 --- --- $449 $869 ==== ==== The aggregate intrinsic value of stock options exercised during the six months ended January 31, 2006 and 2005 was $1.7 million and $0.6 million, respectively. As of January 31, 2006, there was $2.7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company's stock option and restricted stock plans, which will be recognized over a weighted average life of approximately 2 years as of January 31, 2006. During the six months ended January 31, 2006, the Company granted awards for 45,000 shares of restricted stock, which vest over two and four year periods. There were no stock options awards. On June 3, 2005, the Board of Directors approved the acceleration of vesting of unvested "out of the money" stock options held by employees, including executive officers and directors. The stock options considered as out of the money were those with an exercise price that was $1.50 or more than the closing price of the Company's common stock on June 3, 2005 of $14.82. All other terms and conditions of these "out of the money" options remain unchanged. As a result of the acceleration, options to purchase approximately 666,000 shares of the Company's common stock (which represents approximately 21% of the Company's then outstanding stock options) became exercisable immediately. The accelerated options ranged in exercise prices from $16.39 to $19.02 and the weighted average exercise price of the accelerated options was $17.55 per share. The total number of options subject to acceleration included options to purchase 575,000 shares held by executive officers and directors of the Company. This action was taken to avoid expense recognition in future financial statements upon adoption of SFAS 123(R). The accelerated vesting of the "out of the money" options did not result in a charge in the Company's statement of operations for the fiscal year ended July 31, 2005 based on U.S. generally accepted accounting principles. The Company reported approximately $10.1 million of pro forma compensation expense for the fiscal year ended July 31, 2005, of which $6.0 million was applicable to the accelerated "out of the money" options. Up to and including the fiscal year that ended July 31, 2005, the Company accounted for stock option grants to employees under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Under APB No. 25, because the exercise price of the Company's employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recorded. Pro forma information regarding net income (loss) applicable to common stockholders was required by FASB Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which also required that the information be determined as if the Company had accounted for its stock options under the fair value method of that statement. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation for the periods ended January 31, 2005: 7 Three months ended Six months ended (in thousands, except for share data) January 31, 2005 January 31, 2005 - ------------------------------------- ---------------- ---------------- Reported net (loss) income $ (528) $ 6,492 Pro forma compensation expense (1,051) (2,032) ------- ------- Pro forma net (loss) income $(1,579) $ 4,460 ======= ======= (Loss) earnings per share: Basic - as reported $(.02) $.20 Basic - pro forma $(.05) $.14 Diluted - as reported $(.02) $.20 Diluted - pro forma $(.05) $.14 NOTE 3 (LOSS) EARNINGS PER SHARE The Company applies SFAS No. 128, "Earnings per Share" which establishes standards for computing and presenting earnings per share. Basic net (loss) income per share represents net (loss) income 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 restricted stock awards, is determined using the treasury stock method in accordance with SFAS No. 128. Diluted weighted average shares outstanding for the three and six months ended January 31, 2006 and the three months ended January 31, 2005 does not include the effect of dilutive employee and director stock options in all periods and restricted stock awards in the 2006 periods because to do so would have been antidilutive. Accordingly, basic and diluted net loss per share for these periods is the same. The following table sets forth the computation of basic and diluted net (loss) income per share pursuant to SFAS 128.
Three months ended Six months ended (In thousands, except for share data) January 31, January 31, 2006 2005 2006 2005 ---- ---- ---- ---- Numerator: Net (loss) income ($4,439) ($528) ($7,724) $6,492 ======= ===== ======= ====== Denominator: Weighted average number of common shares outstanding (basic) 32,200 32,076 32,179 32,062 Dilutive stock options --- --- --- 677 --- --- --- --- Weighted average number of common and common equivalent shares outstanding (diluted) 32,200 32,076 32,179 32,739 ====== ====== ====== ====== Basic net (loss) income per share ($.14) ($.02) ($.24) $0.20 ===== ===== ===== ===== Diluted net (loss) income per share ($.14) ($.02) ($.24) $0.20 ===== ===== ===== =====
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 above computation of diluted net (loss) per share because the effect of their potential issuance is anti-dilutive. 8
Three months ended Six months ended (In thousands) January 31, January 31, 2006 2005 2006 2005 ---- ---- ---- ---- Potential net shares, issued from exercise of 427 861 496 -- "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) and net income per share because the effect of their potential exercise is anti-dilutive.
Three months ended Six months ended (In thousands) January 31, January 31, 2006 2005 2006 2005 ---- ---- ---- ---- "Out of the money" employee and director 963 111 963 111 stock options === === === ===
The Company declared a 5% stock dividend on October 5, 2004 which was paid on November 15, 2004 to shareholders of record as of October 25, 2004. The Company recorded a charge to accumulated deficit and a credit to common stock and additional paid-in-capital in the amount of $23.4 million which reflected the fair value of the dividend on the date of declaration. NOTE 4. INVENTORIES Inventories consist of the following, as of: January 31, July 31, (In thousands) 2006 2005 -------------- ---- ---- Raw Materials $29 $52 Work in process 1,777 1,767 Finished products 1,174 1,057 ----- ----- $2,980 $2,876 ====== ====== 9 NOTE 5 - STOCKHOLDERS' EQUITY INCENTIVE STOCK OPTION PLANS A summary of the information relating to the Company's stock option plans for the six months ended January 31, 2006 and 2005 is as follows:
January 31, 2006 January 31, 2005 -------------------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price ------- ----- ------- ----- Outstanding at beginning of period 3,154,125 $11.86 2,856,801 $11.86 Granted --- --- 431,975 $16.57 Exercised (227,816) $11.01 (69,535) $7.54 Cancelled (15,300) $14.05 (6,271) $7.00 -------- -------- Outstanding at end of period 2,911,009 $12.74 3,212,970 $12.56 ========= ========= Exercisable at end of period 1,898,628 $11.32 2,174,400 $11.23 ========= ========= Weighted average fair value of options granted during period --- $11.76
The following table summarizes information for stock options outstanding at January 31, 2006:
Options outstanding Options exercisable Weighted- Weighted- Weighted- Average Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life Price Shares Price ------ ------ ---- ----- ------ ----- $5.45-8.08 291,451 2.7 years $5.64 291,451 $5.64 $8.33-12.25 1,602,275 4.8 years $11.06 1,312,250 $10.89 $12.93-19.02 937,406 7.9 years $16.73 215,050 $16.60 $20.20-24.42 61,644 5.5 years $21.42 61,644 $21.42 $36.05 18,233 4.0 years $36.05 18,233 $36.05 --------- --------- 2,911,009 1,898,628 ========= =========
As of January 31, 2006, there were approximately 806,800 shares available for grant under the Company's stock option plans. During the six months ended January 31, 2006, the Company granted 45,000 shares of restricted stock and no stock options. NOTE 6. INCOME TAXES For the three months ended January 31, 2006, the Company's benefit for income taxes was $0.6 million, which represents its federal tax carryback benefit for taxes paid in fiscal 2005, net of minimum state and local taxes due for the period. In computing this federal tax carryback benefit, the effective rate used considered limitations on the Company's ability to carryback its estimated net operating loss for the full fiscal year which ends July 31, 2006. 10 For the six months ended January 31, 2006, the Company's benefit for income taxes was $0.5 million, which is the net of a benefit for income taxes of $1.2 million which will be carried back against federal taxes paid for fiscal 2005, offset by a valuation allowance of $0.6 million equal to net deferred tax assets at the beginning of the period and by minimum state and local taxes due for the six months. In computing the $1.2 million federal tax carryback benefit, the effective rate used considered limitations on the Company's ability to carryback its estimated net operating loss for the full fiscal year which ends July 31, 2006. Pursuant to SFAS 109 "Accounting for Income Taxes", during the six months ended January 31, 2006 the Company recorded a valuation allowance equal to its net deferred tax assets. The Company believes that the valuation allowance is necessary as it is more likely than not that the deferred tax assets will not be realized in the foreseeable future based on positive and negative evidence available at this time. This conclusion was reached because of uncertainties relating to future taxable income, in terms of both its timing and its sufficiency, which would enable the Company to realize the deferred tax assets. The benefit (provision) for income taxes is as follows: (000's) (000's) Three months ended Six months ended January 31, January 31, 2006 2005 2006 2005 Current benefit (provision): ---- ---- ---- ---- Federal $676 $162 $1,209 $(4,048) State and local (17) 37 (33) (262) Deferred benefit (provision) -- 217 (640) (426) ---- ---- ------ ------- Benefit (provision) for income taxes $659 $416 $ 536 $(4,736) ==== ==== ====== ======= The components of deferred tax assets (liabilities) as of January 31, 2006 and July 31, 2005 are as follows:
(000's) January 31, July 31, Current deferred tax assets (liabilities): 2006 2005 - ------------------------------------------ ---- ---- Provision for uncollectible accounts receivable $733 $889 State and local tax carry forward losses 595 245 Other, net 7 (234) Realized and unrealized losses on marketable securities 138 129 Less: valuation reserve for losses on marketable securities - (129) ----- ----- Current deferred tax assets, net 1,473 $900 ----- ---- Non Current Deferred Tax Assets (Liabilities): - ---------------------------------------------- Deferred patent costs (287) (293) Research and development tax credit carry forward 44 - Depreciation 97 33 ----- ----- Non current deferred tax (liabilities), net (146) (260) ----- ----- Net deferred tax assets - before valuation allowance 1,327 640 Less: valuation allowance (1,327) - ------ ----- Deferred tax assets, net $ - - $640 ===== ====
11 NOTE 7. GAIN ON PATENT LITIGATION SETTLEMENT 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 "Digene agreement"). Under the terms of the agreement, the Company received an initial payment of $16.0 million, would earn in the first "annual period" (October 1, 2004 to September 30, 2005) a minimum royalty payment of $2.5 million, and receive a minimum royalty of $3.5 million in each of the next four annual periods. In addition, the agreement provides for the Company to receive quarterly running royalties on the net sales of Digene products subject to the license until the expiration of the patent on April 24, 2018. These quarterly running royalties are fully creditable against the minimum royalty payments due in the first five years of the agreement. The balance, if any, of the minimum royalty payment is recognized in the final quarter of the applicable annual royalty period. As a result of the Digene agreement, the Company recorded a gain on patent litigation settlement of $14.0 million during the six months ended January 31, 2005 and deferred $2 million which was earned from net sales of the Company's licensed products covered by the agreement during the first annual period. The following table summarizes royalty income recognized: Three months ended Six months ended (In thousands) January 31, January 31, 2006 2005 2006 2005 ---- ---- ---- ---- Royalty income $675 $497 $1,534 $497 ==== ==== ====== ==== NOTE 8 - COMMITMENT In December 2005, the Company entered into a contract to purchase for approximately $3.1 million a 23,000 square foot building adjacent to its corporate headquarters in Farmingdale, NY to expand its manufacturing and research and development operations. The Company expects to close on the purchase transaction by the fourth quarter of fiscal year ending July 31, 2006. Upon execution of the purchase contract, the Company made a $310,000 escrow deposit which is included in property and equipment. 12 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2006 (UNAUDITED) Note 9--Segment Reporting The Company applies SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. The chief operating decision maker or decision-making group, in making decisions on how to allocate resources and assess performance, identifies operating segments as components of an enterprise about which separate discrete financial information is available for evaluation. The Company has two reportable segments: research and development and clinical laboratories. The Company's research and development segment conducts research and development activities and sells products derived from these activities. The clinical laboratories segment provides diagnostic services to the health care community. 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 two reportable segments. Management of the Company assesses assets on a consolidated basis only and therefore, assets by reportable segment have not been included in the reportable segments below. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The following financial information (in thousands) represents the operating results of the reportable segments of the Company: THREE MONTHS ENDED JANUARY 31,
Research and Clinical Development Laboratories Other Consolidated ----------- ------------ ----- ------------ 2006 2005 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ---- ---- OPERATING REVENUES: Research product revenues and royalty income $ 2,109 $ 3,271 -- -- -- -- $ 2,109 $ 3,271 Clinical laboratory services ............... -- -- $ 8,007 $ 7,964 -- -- 8,007 7,964 COST AND EXPENSES (INCOME): Cost of research product revenues .......... 385 555 -- -- -- -- 385 555 Cost of clinical laboratory services ....... -- -- 3,431 2,859 -- -- 3,431 2,859 Research and development expense ........... 1,911 2,030 -- -- -- -- 1,911 2,030 Provision for uncollectible accounts ....... -- -- 1,209 1,146 -- -- 1,209 1,146 Depreciation and amortization .............. 48 327 226 112 7 14 281 453 Other costs and expenses ................... 521 298 3,446 2,948 4,710 2,199 8,677 5,445 Interest income ............................ -- -- -- -- (680) (309) (680) (309) ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes .......... $ (756) $ 61 $ (305) $ 899 ($4,037) ($1,904) $(5,098) $ (944) ======= ======= ======= ======= ======= ======= ======= ======= STOCK BASED COMPENSATION INCLUDED IN ABOVE COST AND EXPENSES: Cost of research product revenues .......... $ 30 -- -- -- -- -- $ 30 -- Research and development expense ........... 71 -- -- -- -- -- 71 -- Other costs and expenses ................... 20 -- $ 153 -- $ 175 -- 348 -- ------- ------- ------- ------- ------- ------- ------- ------- Totals ..................................... $ 121 -- $ 153 -- $ 175 -- $ 449 -- ======= ======= ======= ======= ======= ======= ======= =======
13 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2006 (UNAUDITED) Note 9--Segment Reporting SIX MONTHS ENDED JANUARY 31,
Research and Clinical Development Laboratories Other Consolidated ----------- ------------ ----- ------------ 2006 2005 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- ---- ---- OPERATING REVENUES: Research product revenues and royalty income $ 4,255 $ 5,727 -- -- -- -- $ 4,255 $ 5,727 Clinical laboratory services ............... -- -- $ 16,026 $ 15,809 -- -- 16,026 15,809 COST AND EXPENSES (INCOME): Cost of research product revenues .......... 926 1,130 -- -- -- -- 926 1,130 Cost of clinical laboratory services ....... -- -- 6,912 5,773 -- -- 6,912 5,773 Research and development expense ........... 3,461 4,243 -- -- -- -- 3,461 4,243 Provision for uncollectible accounts ....... -- -- 2,354 2,623 -- -- 2,354 2,623 Depreciation and amortization .............. 97 684 447 332 18 27 562 1,043 Other costs and expenses ................... 996 575 6,555 5,535 8,162 4,025 15,713 10,135 Gain on patent litigation settlement ....... -- (14,000) -- -- -- -- -- (14,000) Interest income ............................ -- -- -- -- (1,387) (639) (1,387) (639) -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes .......... $ (1,225) $ 13,095 $ (242) $ 1,546 $ (6,793) $ (3,413) $ (8,260) $ 11,228 ======== ======== ======== ======== ======== ======== ======== ======== STOCK BASED COMPENSATION INCLUDED IN ABOVE COST AND EXPENSES: Cost of research product revenues .......... $ 38 -- -- -- -- -- $ 38 -- Research and development expense ........... 142 -- -- -- -- -- 142 -- Other costs and expenses ................... 40 -- $ 292 -- $ 357 -- 689 -- -------- -------- -------- -------- -------- -------- -------- -------- Totals ..................................... $ 220 -- $ 292 -- $ 357 -- $ 869 -- ======== ======== ======== ======== ======== ======== ======== ========
14 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, 2005. Because of those factors, you should not rely on past financial results as an indication of future performance, and be aware that our consolidated results of operations may fluctuate significantly from quarter to quarter. Enzo Biochem, Inc. (the "Company" or "Enzo") is a leading life sciences and biotechnology company focused on harnessing genetic processes to develop research tools, diagnostics and therapeutics. Enzo also provides clinical laboratory services to the medical community. In addition, our work in gene analysis has led to our development of significant therapeutic product candidates, several of which are currently in clinical trials, and several in preclinical studies. The business activities of the Company are performed by the Company's three wholly owned subsidiaries. These activities are: (1) research and development, manufacturing and marketing of biomedical research products and tools through Enzo Life Sciences and research and development of therapeutic products through Enzo Therapeutics, and (2) the operation of a clinical reference laboratory through Enzo Clinical Labs. For information relating to the Company's business segments, see Note 9 of the Notes to Consolidated Financial Statements. The Company's source of revenue has been from the direct sales of research products of labeling and detection reagents for the genomics and sequencing markets, as well as from non-exclusive distribution agreements. The other source of revenue has been from the clinical laboratory service market. Clinical laboratory services are provided to patients covered by various third party insurance programs, including Medicare, and to patients who are self payers. 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 allowance, which is the difference between amounts billed to payers and the expected receipts from such payers. The clinical laboratory is subject to seasonal fluctuations in operating results. Volume of testing generally declines during the summer months, the year-end holiday period and other major holidays. In addition, volume declines due to inclement weather may reduce net revenues. Therefore, comparison of the results of successive quarters may not accurately reflect trends or results for the full year. For the six months ended January 31, 2006 and 2005, respectively, approximately 21% and 27% of the Company's operating revenues were derived from research product sales and royalty income and approximately 79% and 73% were derived from clinical laboratory services. LIQUIDITY AND CAPITAL RESOURCES At January 31, 2006, cash and cash equivalents and marketable securities totaled $76.4 million, a decrease of $7.3 million from July 31, 2005. We had working capital of $90.1 million at January 31, 2006 compared to $97.0 million at July 31, 2005. 15 Net cash used in operating activities for the six month period ended January 31, 2006 was approximately $6.4 million as compared to net cash provided by operating activities of $10.4 million for the six months ended January 31, 2005. The decrease in net cash provided by operating activities was primarily due to the 2006 period's net loss as compared to net income which was the result of the $14 million settlement and license agreement with Digene Corporation recognized in the 2005 period. During the six months ended January 31, 2005, the Company as plaintiff finalized and executed a settlement and license agreement with Digene Corporation to settle a patent litigation lawsuit. Under the terms of the agreement, the Company received an initial payment of $16.0 million, of which $2.0 million was used to offset royalty income payments due based on net sales of licensed products covered by the agreement during the first year. As a result of this settlement and license agreement with Digene (the "Digene agreement"), the Company recorded a gain on patent litigation settlement of $14.0 million during the six months ended January 31, 2005. Net cash provided by investing activities was approximately $5.7 million during the six months ended January 31, 2006, as compared $4.0 million during the six months ended January 31, 2005. The increase during the 2006 period was primarily the result of the net sales of marketable securities of approximately $6.7 million, versus net sales of approximately $4.7 million during the 2005 period. During the six months ended January 31, 2006, the Company disbursed approximately $948,000 for capital expenditures, including a $310,000 escrow deposit toward the purchase, for approximately $3.1 million, of a 23,000 square foot building to expand its manufacturing and research and development operations. The Company expects to close on the purchase transaction by the fourth quarter of fiscal year ending July 31, 2006. Net cash provided by financing activities was approximately $0.1 million during the six months ended January 31, 2006, as compared $0.3 million during the six months ended January 31, 2005, and was from the exercise of stock options. We believe that our current cash position is sufficient for our foreseeable liquidity and capital resource needs, although there can be no assurance that future events will not alter such view. Management is not aware of any material claims, disputes or settled matters concerning third-party reimbursements that would have a material effect on our financial statements. CRITICAL ACCOUNTING POLICIES GENERAL Management's discussion and analysis of financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses; these estimates and judgments also affect related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to contractual allowance, allowance for uncollectible accounts, intangible assets and income taxes. The Company bases its estimates on experience and on various 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. 16 REVENUE RECOGNITION RESEARCH PRODUCT REVENUES AND ROYALTY INCOME Revenues from research product sales are recognized when the products are shipped, the sales price is fixed or determinable and collectibility is reasonably assured. Under the terms of a settlement and license agreement to settle a patent litigation lawsuit, the Company earned in the "first annual period" (October 1, 2004 to September 30, 2005) a minimum royalty payment of $2.5 million, and will receive a minimum royalty of $3.5 million in each of the next four annual periods. In addition, the agreement provides for the Company to receive quarterly running royalties on the net sales of products subject to the license until the expiration of the patent in April 2018. The quarterly running royalties are fully creditable against the minimum royalty payments due in the first five years of the agreement. The balance, if any, of the minimum royalty payment is recognized in the final quarter of the applicable annual royalty period. CLINICAL LABORATORY SERVICES - REVENUES AND ACCOUNTS RECEIVABLE 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 allowance, 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 billings and billing percentages by billing category for the three and six months ended January 31, 2006 and 2005: Net billings Three months ended Three months ended January 31, 2006 January 31, 2005 ---------------- ---------------- Billing category (In 000's) (in %) (In 000's) (in %) - ---------------- ---------- ------ ---------- ------ Medicare $1,968 24 $1,539 19 Third party carriers 3,852 48 3,729 47 Patient self-pay 1,727 22 2,418 30 HMO's 460 6 278 4 ------ ---- ------ ---- Total $8,007 100% $7,964 100% ====== ==== ====== ==== Net billings Six months ended Six months ended January 31, 2006 January 31, 2005 ---------------- ---------------- Billing category (In 000's) (in %) (In 000's) (in %) - ---------------- ---------- ------ ---------- ------ Medicare $3,803 24 $3,340 21 Third party carriers 8,565 53 8,166 52 Patient self-pay 2,730 17 3,688 23 HMO's 928 6 615 4 ------- ---- ------- ---- Total $16,026 100% $15,809 100% ======= ==== ======= ==== 17 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: Net accounts receivable As of As of January 31, 2006 July 31, 2005 ---------------- ---------------- Billing category (In 000'S) (in %) (In 000'S) (in %) - ---------------- ---------- ------ ---------- ------ Medicare $1,447 14 $1,594 13 Third party carriers 4,973 47 6,742 54 Patient self-pay 3,420 33 3,819 30 HMO's 603 6 394 3 ------- ---- ------- ---- Total clinical laboratory $10,443 100% $12,549 100% ==== ==== Research and development 1,209 872 ------- ------- Net accounts receivable $11,652 $13,421 ======= ======= CONTRACTUAL ALLOWANCES The Company's estimate of contractual allowances 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 a rolling monthly analysis of the experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The difference between the gross billing and the reimbursement percentage is the contractual allowance percentage and represents the proportion of the gross billed amounts the Company does not expect to become approved reimbursable settlements. In summary, the contractual allowance is an estimate that reduces gross revenue, based on gross billing rates, to amounts expected to be approved and reimbursable. The Company adjusts revenues in the period that approved settlements are received. The Company adjusts the contractual allowance estimate periodically, based on its evaluation of historical settlement experience with payers, industry reimbursement trends, and other relevant factors. If the Company experiences a significant change in reimbursement policies or procedures for a particular payer, the contractual allowance percentage is reviewed by management for that payer. However, services authorized by an insured's healthcare provider and rendered by the Company, and the corresponding approval of those services and their settlement by the insured's payer are often subject to interpretation which could result in payments that differ from our estimates. During the six months ended January 31, 2006 and 2005, the contractual allowance percentages, determined using the rolling monthly average historical reimbursement statistics, were 75.7% and 74.3%, respectively. The Company projects (by using a sensitivity analysis) that each 1% point change in the contractual allowance percentage could result in a change in the net accounts receivable of approximately $461,000 and $476,000 as of January 31, 2006 and 2005, respectively, and a change in clinical laboratory services revenues of approximately $635,000, and $591,000 for the six months ended January 31, 2006 and 2005, respectively. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company determines the estimated allowance for doubtful accounts after the estimated contractual allowance expense has been applied to the gross open receivables. The allowance for doubtful accounts represents amounts that the Company does not expect to collect after the Company has exhausted its collection procedures. 18 In summary, the Company estimates its allowance for doubtful accounts in the period the related services are billed and adjusts the estimate in future accounting periods as necessary. It bases the estimate for the allowance on the evaluation of historical collection experience, the aging profile of accounts receivable, the historical doubtful account write-off percentages, payer mix, and other relevant factors. The allowance for doubtful accounts includes the balances, after receipt of the approved settlements, from third party payers for the insufficient diagnosis information received from the ordering physician, which result in denials of payment, and the uncollectible portion of receivables from self payers, including deductibles and copayments, which are subject to credit risk and patients' ability to pay. The Company wrote off 100% of all accounts receivable (for all payers) over 210 days during the six months ended January 31, 2006 as it assumed all these accounts are uncollectible. The written off amounts are kept on the aging for patient billing and demographic information. The Company also set up an allowance for accounts less than 210 days during the six months ended January 31, 2006. The Company adjusts the historical collection analysis for any recoveries 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. INCOME TAXES The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items be reduced by a valuation allowance where it is more likely than not the benefits may not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Pursuant to SFAS 109 "Accounting for Income Taxes", the Company recorded a valuation allowance charge of $0.6 million for its net deferred tax assets during the three months ended October 31, 2005, and subsequent to that date has applied a full valuation allowance against increases in its net deferred tax assets. The Company believes that the full valuation allowance is necessary as it is more likely than not that the net deferred tax assets will not be realized in the foreseeable future based on positive and negative evidence available at this time. This conclusion was reached because of uncertainties relating to future taxable income, in terms of both its timing and its sufficiency, which would enable the Company to realize the net deferred tax assets. 19 RESULTS OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 2006 AS COMPARED TO JANUARY 31, 2005 Research product revenues and royalty income was $2.1 million during the three months ended January 31, 2006 compared to $3.3 million in the year ago quarter, a decrease of $1.2 million or 36%. The decrease was due to both a decline in direct sales of research products and the dispute with former distributors, whereby the Company did not record revenue in the 2006 quarter as compared to $0.8 million of revenue recorded from these distributors in the 2005 quarter. Clinical laboratory revenues were comparable at $8.0 million during the three months ended January 31, 2006 and 2005. The cost of research products revenues during the three months ended January 31, 2006 was $0.4 million compared to $0.6 million in the year ago quarter, a decrease of $0.2 million or 31%, due to lower research product sales. The cost of clinical laboratory services during the three months ended January 31, 2006 was $3.4 million compared to $2.8 million in the year ago quarter, an increase of $0.6 million or 20%, due to the higher cost of esoteric tests and the higher volume of test performed. Research and development expenses were $1.9 million during the three months ended January 31, 2006 compared to $2.0 million in the year ago quarter, a decrease of $0.1 million or 6%. During the 2006 quarter, an increase in clinical trial study activities for the therapeutics program was offset by a decrease in the amortization of deferred patent expenses. Selling, general and administrative expenses were $7.3 million during the three months ended January 31, 2006 compared to $4.7 million in the year ago quarter, an increase of $2.6 million or 55%. The increase was due to the recognition of stock option compensation charges required by the adoption of SFAS 123(R) during the quarter ended January 31, 2006.In addition, there was an increase in expenditures for corporate governance, consulting and other professional fees, and an increase in administrative personnel costs. The provision for uncollectible accounts receivable in the clinical reference laboratory segment during the three months ended January 31, 2006 was comparable to the year ago quarter. Legal expenses were $1.6 million during the three months ended January 31, 2006 compared to $1.1 million in the year ago quarter, an increase of $0.5 million or 41%, due to an increase in on going patent litigation activities. Interest income increased $0.4 million or 120% to $0.7 million during the three months ended January 31, 2006 compared to $0.3 million during the year ago quarter, due to higher interest rates offered on cash and cash equivalents. The Company earns interest on its cash and cash equivalents by investing primarily in short term (30 days) financial instruments with high credit ratings. For the three months ended January 31, 2006, the Company's benefit for income taxes was $0.6 million, which represents a current carryback benefit for federal income taxes paid in fiscal 2005. In computing this federal tax carryback benefit, the effective rate used considered limitations on the Company's ability to carryback its estimated net operating loss for the full fiscal year which ends July 31, 2006. During the 2006 quarter, the Company recognized no benefit for deferred taxes. Pursuant to SFAS 109 "Accounting for Income Taxes", the Company believes it is more likely than not that net deferred tax assets generated during the 2006 quarter will not be realized in the foreseeable future based on positive and negative evidence available at this time. This conclusion was reached because of uncertainties relating to future taxable income, in terms of both its timing and its sufficiency, which would enable the Company to realize deferred tax assets. 20 For the three months ended January 31, 2005, the Company's benefit for income taxes was $0.4 million, based on the combined effective federal, state and local income tax rates applied to the period's loss before taxes. SEGMENT (LOSS) INCOME BEFORE INCOME TAXES THREE MONTHS ENDED JANUARY 31, 2006 AS COMPARED TO JANUARY 31, 2005 The research and development segment's loss before income taxes was approximately $0.8 million for the three months ended January 31, 2006, compared to income of $0.1 million in the 2005 period. The 2006 loss was the result of both a decline in direct sales of research products and the dispute with former distributors, whereby the Company did not record revenue in the 2006 quarter as compared to $0.8 million of revenue recorded from these distributors in the 2005 quarter. The clinical reference laboratory segment's loss before income taxes was $0.3 million in the 2006 quarter versus income of $0.9 million in the 2005 quarter. The 2006 period was impacted by higher cost of services due to an increase in the number of tests performed, the higher cost of esoteric tests, and an increase in administrative personnel costs and other service support departments to support the expansion into the New Jersey market. The Other segment's loss before income taxes was ($4.0) million in the 2006 quarter versus ($1.9) million in 2005, due to the recognition of stock option compensation charges required by the adoption of SFAS 123(R) during the 2006 quarter. In addition, there was an increase in expenditures for corporate governance, consulting and legal fees, partially offset by higher interest income earned on cash equivalents. RESULTS OF OPERATIONS SIX MONTHS ENDED JANUARY 31, 2006 AS COMPARED TO JANUARY 31, 2005 Research product revenues and royalty income was $4.2 million during the six months ended January 31, 2006 compared to $5.7 million in the year ago period, a decrease of $1.5 million or 26%. The decrease was due to both a decline in direct sales of research products and the dispute with former distributors, whereby the Company did not record revenue in the 2006 period as compared to $1.5 million of revenue recorded from these distributors in the 2005 period. Clinical laboratory revenues during the six months ended January 31, 2006 and 2005 were comparable. The cost of research products revenues during the six months ended January 31, 2006 was $0.9 million versus $1.1 million in the 2005 period, a decrease of $0.2 million or 18%, due to the decline in direct sales of research products. The cost of clinical laboratory services during the six months ended January 31, 2006 was $6.9 million compared to $5.8 million in the year ago period, an increase of $1.1 million or 20%, due to an increase in the number of tests being performed and the higher cost of esoteric tests. Research and development expenses were $3.4 million during the six months ended January 31, 2006 compared to $4.2 million in the year ago period, a decrease of $0.8 million or 18%. During the 2006 period, there was a decrease in the amortization of deferred patent expenses as compared to the 2005 period. Selling, general and administrative expenses were $12.8 million during the six months ended January 31, 2006 compared to $8.9 million in the year ago period, an increase of $3.9 million or 44%. The increase was due to the recognition of stock option compensation charges required by the adoption of SFAS 123(R) during the 2006 period. 21 In addition, there was an increase in expenditures for corporate governance, consulting and other professional fees, and an increase in administrative personnel costs. The provision for uncollectible accounts receivable in the clinical reference laboratory segment during the six months ended January 31, 2006 was $2.3 million, compared to $2.6 million during the year ago period, a decrease of $0.3 million or 10%. The decrease was primarily due to improved billing procedures and new customer accounts from the New Jersey region, which improved the overall mix of patient demographics. Legal expenses were $3.5 million during the six months ended January 31, 2006 compared to $2.3 million in the year ago period, an increase of $1.2 million or 52%, due to an increase in on going patent litigation activities. Interest income increased $0.7 million or 117% to $1.4 million during the six months ended January 31, 2006 compared to $0.6 million during the year ago period, due to higher interest rates offered on cash and cash equivalents. The Company earns interest on its cash and cash equivalents by investing primarily in short term (30 days) financial instruments with high credit ratings. For the six months ended January 31, 2006, the Company's net benefit for income taxes was $0.5 million, comprised of a current carryback benefit of $1.2 million for federal income taxes paid in the fiscal year ended July 31, 2005, offset by a valuation allowance charge of $0.6 million equal to net deferred tax assets as of July 31, 2005, and by state and local minimum taxes of $0.1 million. In computing the $1.2 million carryback benefit, the effective rate used considered limitations on the Company's ability to carryback its estimated net operating loss for the full fiscal year which ends July 31, 2006. Pursuant to SFAS 109 "Accounting for Income Taxes", the Company recorded a valuation allowance charge during the period ended January 31, 2006 equal to its net deferred tax assets at July 31, 2005 and has applied a full valuation allowance against increases in its net deferred tax assets during the 2006 period. The Company believes that the valuation charge and valuation allowance are necessary as it is more likely than not that net deferred tax assets will not be realized in the foreseeable future based on positive and negative evidence available at this time. This conclusion was reached because of uncertainties relating to future taxable income, in terms of both its timing and its sufficiency, which would enable the Company to realize the net deferred tax assets. For the six months ended January 31, 2005, the Company's (provision) for income taxes was $4.7 million which was based on the effective federal, state and local income tax rates applied to 2005 period's taxable income, which was primarily comprised of the $14 million gain from the Digene agreement. The provision for income taxes, at an effective rate of 42%, was different from the U.S. federal statutory rate of 34% due to state income taxes net of federal of 7%, and other of 1%. SEGMENT (LOSS) INCOME BEFORE INCOME TAXES SIX MONTHS ENDED JANUARY 31, 2006 AS COMPARED TO JANUARY 31, 2005 The research and development segment's loss before income taxes was approximately $1.2 million for the six months ended January 31, 2006, compared to income of $13.1 million in the 2005 period. The 2006 loss was the result of a decline in direct sales of research products and the dispute with former distributors, whereby the Company did not record revenue in the 2006 period as compared to $1.5 million of revenue recorded from these distributors in the 2005 period. The 2005 period's income was the result of the $14 million gain from the Digene agreement. The clinical reference laboratory segment's loss before income taxes was $0.2 million in the 2006 period versus income of $1.5 million in 2005. The 2006 period was impacted by higher cost of services due to an increase in the number of tests performed, the higher cost of esoteric tests, and an increase in administrative personnel costs and other service support departments to support the expansion into the New Jersey market. 22 The Other segment's loss before income taxes was ($6.8) million in the 2006 period versus ($3.4) million in 2005, due to the recognition of stock option compensation charges required by the adoption of SFAS 123(R) during the 2006 period. In addition, there was an increase in expenditures for corporate governance, consulting and legal fees, partially offset by higher interest income earned on cash equivalents. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in investment grade corporate and U.S. government securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. ITEM 4. CONTROLS AND PROCEDURES (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 There was no change in the Company's internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company's most recently completed 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. See the annual report on Form 10-K for the fiscal year ended July 31, 2005 filed with the Securities and Exchange Commission for a discussion of the Company's ongoing legal proceedings. 23 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders was held on January 19, 2006. (b) The following matters were voted upon and the results were as follows: (1) Elazar Rabbani, Ph.D., John B. Sias, and Marcus A Conant, M.D. were nominated by management and elected by the shareholders to serve as Class III Directors until the 2009 Annual Meeting of Shareholders or until their respective successors are elected and shall qualify. The shareholders voted 29,493,295, 26,032,528 and 26,080,631 shares in the affirmative for Elazar Rabbani, Ph.D., John B. Sias, and Marcus A Conant, M.D, respectively, and withheld 1,220,631, 4,681,397 and 4,633,631 shares for Elazar Rabbani, Ph.D., John B. Sias, and Marcus A Conant, M.D, respectively. (2) The shareholders voted 15,632,081 shares in the affirmative with respect to the amendment and restatement of the Company's 2005 Equity Compensation Incentive Plan, to among other things, (a) permit restricted stock unit awards to be made under the plan, (b) add specific performance criteria that may be used to establish performance objectives for awards intended to qualify as "performance-based compensation" under Section 162(m) of the Internal Revenue Code of 1986, as amended, and (c) eliminate automatic annual option grants to the Company's non-employee directors. A total of 1,669,956 shares voted against this proposal, 188,688 shares abstained, and 11,223,668 shares were broker non-votes. (3) The shareholders voted 30,418,541 shares 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, 2006, 249,278 shares against and 46,107 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 and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ENZO BIOCHEM, INC. ------------------ (Registrant) Date: March 13, 2006 by: /s/Barry Weiner --------------- Chief Financial Officer 24
EX-31.(A) 2 c41432_ex31-a.txt EXHIBIT 31 (a) CERTIFICATIONS In connection with the Quarterly Report on Form 10-Q of Enzo Biochem, Inc. ("the Company") for the fiscal quarter January 31, 2006 as filed with the Securities and Exchange Commission on the date hereof, I, Elazar Rabbani, Ph.D., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 302 of the Sarbanes-Oxley Act of 2002, that: 1. I have reviewed this Quarterly Report on Form 10-Q of Enzo Biochem, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; (c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: March 13, 2006 By: /s/ Elazar Rabbani, Ph.D. ------------------------- Elazar Rabbani, Ph.D. Chief Executive Officer EX-31.(B) 3 c41432_ex31-b.txt EXHIBIT 31 (b) CERTIFICATIONS In connection with the Quarterly Report on Form 10-Q of Enzo Biochem, Inc. ("the Company") for the fiscal quarter ended January 31, 2006 as filed with the Securities and Exchange Commission on the date hereof, I, Barry Weiner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 302 of the Sarbanes-Oxley Act of 2002, that: 1. I have reviewed this Quarterly Report on Form 10-Q of Enzo Biochem, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; (c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: March 13, 2006 By: /s/ Barry Weiner ---------------- Barry Weiner Chief Financial Officer EX-32.(A) 4 c41432_ex32-a.txt EXHIBIT 32 (a) CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Enzo Biochem, Inc., and Subsidiaries ("the Company") on Form 10-Q for the fiscal quarter ended January 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Elazar Rabbani, Ph.D., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 13, 2006 By: /s/ Elazar Rabbani, Ph.D. ------------------------- Elazar Rabbani, Ph.D. Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Act Commission or its staff upon request. EX-32.(B) 5 c41432_ex32-b.txt EXHIBIT 32 (b) CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Enzo Biochem, Inc., and Subsidiaries ("the Company") on Form 10-Q for the fiscal quarter ended January 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barry Weiner., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 13, 2006 By: /s/ Barry Weiner ---------------- Barry Weiner Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Act Commission or its staff upon request.
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