Enzo Biochem, Inc.
2013 ANNUAL REPORT & PROXY
Enzo Biochem Today
Enzo Biochem, Inc. is a growth-oriented integrated life sciences and biotechnology
company focused on harnessing biological processes to develop research tools, diagnostics
and therapeutics and serves as a provider of test services, including esoteric tests, to the
medical community. Since our founding in 1976, our strategic focus has been on the
development of enabling technologies in research, manufacture, licensing and marketing of
innovative health care products, platforms and services based on molecular and cellular
technologies. Enzo’s pioneering work in genomic analysis coupled with its extensive patent
estate and enabling platforms have strategically positioned the Company to play an
important role in the rapidly growing life sciences and molecular medicine marketplaces.
Enzo has proprietary technologies and expertise in manipulating and modifying genetic
material and other biological molecules. Through three wholly-owned subsidiaries, the
Company targets its technology toward satisfying specific market needs.
Enzo Clinical Labs is a regional clinical laboratory serving the New York, New Jersey and Eastern
Pennsylvania medical communities. The Company believes having clinical diagnostic services allows us
to capitalize first hand on our extensive advanced molecular and cytogenetic capabilities and the
broader trends in predictive and personalized diagnostics. Enzo Clinical Labs offers a menu of routine
and esoteric clinical laboratory tests or procedures used in general patient care by physicians to
establish or support a diagnosis, monitor treatment or medication, and search for an otherwise
undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale, New York, a
network of approximately 35 patient service centers throughout New York and New Jersey, a
stand-alone “stat” or rapid response laboratory in New York City and a full-service phlebotomy, logistics
department and information technology department.
Enzo Life Sciences manufactures, develops and markets functional biology and cellular biochemistry
products and tools to life sciences, pharmaceutical and clinical research customers world-wide and has
amassed a large patent and technology portfolio. Enzo Life Sciences, Inc. is a recognized leader in
labeling and detection technologies across research and diagnostic markets. Our strong portfolio of
proteins, antibodies, peptides, small molecules, labeling probes, dyes and kits provides life science
researchers tools for target identification/validation, high content analysis, gene expression analysis,
nucleic acid detection, protein biochemistry and detection, and cellular analysis. We are internationally
recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over
7,500 of our own products and in addition distribute over 30,000 products made by over 40 other original
manufacturers. Our strategic focus is directed to innovative diagnostic platforms and high quality
research reagents and kits in the primary key research areas of genomics, cellular analysis, small
molecule chemistry, protein homeostasis, epigenetics, immunoassays and assay development.
Enzo Therapeutics is a biopharmaceutical venture that has developed multiple novel approaches in the
areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which are derived from
the pioneering work of Enzo Life Sciences. Enzo Therapeutics has focused its efforts on developing
treatment regimens for diseases and conditions for which current treatment options are ineffective,
costly, and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline,
as well as more than 45 patents and patent applications.
To Our Shareholders:
Fiscal 2013 was a challenging and exciting year for our Company. Challenging in that reduced
governmental budgets, the seemingly inexorable trend to reduce reimbursements and the general
uncertainty in and around healthcare have combined to make the economic environment for our
industry, as well as ourselves, a difficult one to navigate. But exciting because we have as a company
moved aggressively to meet these challenges with new products and innovative operating strategies,
while also focusing successfully on broadening our activities and on opportunities offered by today’s
dramatically new medical paradigms that are designed to be more responsive and less invasive for
patients.
This year we focused intensively on the developmental effort in the transformation of a key technology
into a platform that coincides with the rapidly changing diagnostic market dynamics. This proprietary
new system is designed to meet the market demand for increased performance coupled with worldwide
downward pricing pressure. We believe that our AmpiProbe™ diagnostic platform can serve as the
foundation of a new suite of molecular diagnostics solutions. It is the result of several years of focused
development at Enzo and represents a fundamental new aspect of our business plan which holds
significant opportunity. These initiatives have positioned Enzo to achieve greater recognition and value.
It should be remembered that Enzo is not new to the field of diagnostics or its challenges. To the
contrary, we have a long history of innovation, as underscored by our robust intellectual property estate
involving hundreds of relevant patents. Our platforms have served as key drivers in opening up modern
day molecular diagnostics that have benefited healthcare in numerous ways. To this day, our nucleic
acid labeling technologies are still fundamental and in use industry wide.
We have over the past year or so implemented programs to enhance our Company’s translational
abilities to contain costs, enhance our capabilities and to grow. Among our activities have been the
following:
Reducing costs by greater centralization of our business activities, resulting in greater gains and
tightened focus
Emphasizing higher margin services and products at Enzo Clinical Labs and Enzo Life Sciences
Achieving tighter integration between both of these operating units as diagnostic capabilities
become more instrumental to medical practitioners, pharmaceutical and clinical management
companies
Pursuing new developments and alliances to broaden our offerings aimed at products for
innovative healthcare platforms and services based on new, highly promising molecular and
cellular diagnostic technologies
Looking to strategies to monetize and advance our many transformational technologies through
joint ventures, spin‐offs or other forms of possible approaches and vehicles that would inure to
the benefit of our shareholders
Our determination to effect change and capitalize on our strong reputation is underscored by a number
of events and accomplishments. Most recently we continued to expand our menu of specialized tests in
an agreement to market in our northeast U.S. service area a proprietary early non‐invasive prenatal
laboratory test (“LDT”) service, MaterniT21 PLUS ™, developed by the Sequenom Laboratories, Inc.,
subsidiary of Sequenom, Inc. The marketing of tests such as this as well as others developed both
internally and externally, lends itself to our regional strength in servicing one of the highest value
medical markets in the United States. The other, a major scientific accomplishment ,was a published
study by a prestigious medical journal of a study conducted by Enzo scientists, along with those at
several prominent universities, that shows a strong association of idiopathic pulmonary fibrosis (IPF), a
pulmonary disease with 100% mortality within five years, with the presence of the herpes virus saimiri
virus, a virus native to squirrel monkeys. This breakthrough discovery of IPF’s origin is expected to result
in a clinical diagnostic that could lead to screening and diagnosis, and perhaps result in potential
treatment, for this fatal disease.
In other ways, too, we have moved to strengthen Enzo operationally and technologically. Enzo Clinical
Labs has invested heavily in improving its core laboratory infrastructure. It has rolled out a new lab
information system, updated critical instrumentation for high throughput units that run on most
common chemistry tests to new immunology coagulation, immunohistochemistry and genetics
platforms. A new robotics platform involving specimen handling is also enhancing productivity, while
reducing personnel costs.
In addition, several new tests have been introduced, especially in the growing realm of women’s health,
a key market for us. As an example, our new E‐tect assay measures the over‐expression of two key
oncogenes – E6 and E7 –that may be an indicator of the integration of the human papillomavirus into a
patient’s cells. It essentially allowed physicians to more effectively manage patient follow‐ups, since
human papillomavirus integration may indicate a higher risk of progression towards cervical cancer than
in individuals where the virus is not indicated. Enzo Clinical Labs also is offering a high‐risk HPV
genotyping service that improves identification of specific types of human papillomavirus without
requiring additional steps as was necessary previously.
Our Lab is one of the first in the New York metropolitan area to offer a fourth‐generation test for HIV
screening, now recommended by the New York State Department of Health in their latest HIV screening
algorithm. A new series of comprehensive prenatal genetics panels – including tests for Tay‐Sachs,
Walker‐Warburg, Fanconi’s anemia, Gaucher’s and spinal muscular dystrophy, among others – allows for
testing from a single tube of blood, rather than multiple tubes. Likewise our AmpiProbe® technology
platform, may offer a new more efficient delivery of gene‐based diagnostic testing from a single
specimen, and does so in a manner that could materially reduce the cost of performing these assays
while producing results at or superior to tests currently on the market.
For its part, Enzo Life Sciences, integration of activities with Enzo Clinical Labs is proceeding well.
European operations have been consolidated, following a similar program we have successfully
implemented domestically. And Life Sciences’ marketing campaigns are now designed around our
emphasis on high‐value products and kits serving a more clinically‐oriented marketplace, as government
cutbacks shrink university and other R&D outlays that are affecting the entire industry. On that score,
we have introduced programs targeting cancer research, congenital screening and epigenetics, and on
the immunohistochemistry market.
The jury award in federal court in New Haven, Connecticut, of over $48 million in direct infringement
penalties, represented an important confirmation of the validity of our patent potential. We are
currently awaiting the ruling on the pre‐market interest award. At the same time, the first of several
trials is due to commence in New York federal district court dealing with our claims regarding contract
violations as well as patent infringement issues. Enzo has spent heavily in prosecuting these cases. We
believe this is a cost‐effective investment, and although it is one that will continue to weigh on our
results through at least fiscal 2014, we expect it will nonetheless yield solid returns. Our shareholders
should be particularly interested in the calendar of court events in 2014.
Our financial results are focused on achieving profitability at both Enzo Clinical Labs, and Enzo Life
Sciences. Our cost reduction efforts continue to pay off in reduced expenses, as does our careful
financial management.
We started this letter indicating the excitement with which we embarked on the new year, and the
highly energized efforts we have underway. After reviewing our report, we hope you share this sense of
enthusiasm as well. We remain highly confident about the outlook and the opportunities as we
determinedly move forward.
We are especially appreciative to our employees for their committed assistance in helping us reach our
goals, and to the members of our Board of Directors and to you, our shareholders, for your support.
Elazar Rabbani, PhD
CEO and Chairman
Barry W. Weiner
President
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 001-09974
ENZO BIOCHEM, INC.
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction
of incorporation or organization)
527 Madison Ave.
New York, New York
(Address of principal executive offices)
13-2866202
(I.R.S. Employer
Identification No.)
10022
(Zip Code)
(212) 583-0100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class)
Common Stock, $.01 par value
(Name of Each Exchange on Which Registered)
The New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes No
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 was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act of 1934). Yes No
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant was approximately $102,630,000 as of
January 31, 2013
The number of shares of the Company’s common stock, $.01 par value, outstanding at October 1, 2013 was 41,180,742.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on
or about January 15, 2014 are incorporated by reference into Part III of this annual report.
Part I
TABLE OF CONTENTS
Description
Page
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
List of Consolidated Financial Statements and Financial Statements Schedule
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II - Valuation Accounts and Qualifying Accounts
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F-2
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PART I
Item 1. Business
Overview
Enzo Biochem, Inc. (the “Company” “we”, “our” or “Enzo”) is a growth-oriented integrated life sciences and biotechnology company
focused on harnessing biological processes to develop research tools, diagnostics and therapeutics and serves as a provider of test
services, including esoteric tests, to the medical community. Since our founding in 1976, our strategic focus has been on the
development of enabling technologies in research, development, manufacture, licensing and marketing of innovative health care
products, platforms and services based on molecular and cellular technologies. Our pioneering work in genomic analysis coupled with
its extensive patent estate and enabling platforms have strategically positioned the Company to play an important role in the rapidly
growing life sciences and molecular medicine marketplaces.
In the course of our research and development activities, we have built a substantial portfolio of intellectual property assets, comprising
145 key issued patents worldwide, and over 160 pending patent applications, along with extensive enabling technologies and platforms.
Operating Segments
We are comprised of three operating segments, of which the Therapeutics and Life Sciences segments have evolved out of our core
competencies: the use of nucleic acids as informational molecules and the use of compounds for immune modulation and augmented by
the previous acquisitions of a number of related companies. Information concerning sales by geographic area and business segments for
the years ended July 31, 2013, 2012 and 2011 is located in Note 15 in the Notes to Consolidated Financial Statements.
Below are brief descriptions of each of our operating segments:
Enzo Clinical Labs is a regional clinical laboratory serving the New York, New Jersey and Eastern Pennsylvania medical communities.
The Company believes having clinical diagnostic services allows us to capitalize first hand on our extensive advanced technological
capabilities and the broader trends in predictive and personalized diagnostics. Enzo Clinical Labs offers a menu of routine and esoteric
clinical laboratory tests or procedures used in general patient care by physicians to establish or support a diagnosis, monitor treatment or
medication, and search for an otherwise undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale, New York,
a network of over 35 patient service centers throughout New York and New Jersey, a stand-alone “stat” or rapid response laboratory in
New York City and a full-service phlebotomy, in-house logistics department, and information technology department.
Enzo Life Sciences manufactures, develops and markets products and tools to life sciences, drug development and clinical research
customers world-wide and has amassed a large patent and technology portfolio. Enzo Life Sciences, Inc. is a recognized leader in
labeling and detection technologies across research and diagnostic markets. Our strong portfolio of proteins, antibodies, peptides, small
molecules, labeling probes, dyes and kits provides life science researchers tools for target identification/validation, high content
analysis, gene expression analysis, nucleic acid detection, protein biochemistry and detection, and cellular analysis. We are
internationally recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over 7,500 of our
own products and in addition distribute over 30,000 products made by over 40 other original manufacturers. Our strategic focus is
directed to innovative diagnostic platforms and high quality research reagents and kits in the primary key research areas of genomics,
cellular analysis, small molecule chemistry, protein homeostasis epigenetics immunoassays and assay development.
2
The segment is an established source for a comprehensive panel of products to scientific experts in the fields of cancer, cardiovascular
disease, neurological disorders, diabetes and obesity, endocrine disorders, infectious and autoimmune disease, hepatotoxicity and renal
injury.
Enzo Therapeutics is a biopharmaceutical venture that has developed multiple novel approaches in the areas of gastrointestinal,
infectious, ophthalmic and metabolic diseases, many of which are derived from the pioneering work of Enzo Life Sciences. Enzo
Therapeutics has focused its efforts on developing treatment regimens for diseases and conditions for which current treatment options
are ineffective, costly, and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well as more
than 45 patents and patent applications.
The Company’s primary sources of revenue have historically been from the clinical laboratory services provided to the healthcare
community and product revenues and royalty and licensing of Life Sciences’ products utilized in life science research. The following
table summarizes the sources of revenues for the fiscal years ended July 31, 2013, 2012 and 2011 in $000’s and percentages:
Fiscal year ended July 31,
2013
2012
2011
Clinical laboratory services
Product revenues
Royalty and license fee income
Total
$ 55,889
32,526
5,292
$ 93,707
59% $ 59,403
37,722
35
5,958
6
100% $ 103,083
58% $ 52,762
37 41,830
7,437
100% $ 102,029
5
52%
41
7
100%
Markets
Background
Deoxyribonucleic Acid (“DNA”) is the source of biological information that governs the molecular mechanisms underlying life. This
information is stored in the linear sequences of nucleotides that comprise DNA. The sequence of the human genome, comprising well
over 30,000 genes, has been identified by genomic research in both the public and private sectors, including the Human Genome Project.
The ongoing challenge of the scientific research community is to determine the function and relevance of each gene, as well as gene to
gene and gene/environment interactions. In addition, scientists are looking in detail at the proteins that are expressed by genes, their
control and regulation in the cellular environment. This information will facilitate the understanding of biological mechanisms and how
variations and mutations in such mechanisms may result in disease, enabling more rapid and accurate detection of specific diseases and
the development of new therapeutics to treat them.
Tools for biomedical and pharmaceutical research
There is a large global demand by biomedical and pharmaceutical researchers for research and diagnostic tools that both facilitate and
accelerate the generation of biological information. This demand can be met by gene and protein target based diagnostics for which a
variety of formats, or tools, have been developed that enable researchers to study biological pathways. These tools can identify mutations
in gene sequences and variations in gene expression levels that can lead to disease, or quantify biomarkers that provide insight to disease
and potential therapeutic solutions. These techniques use instruments including DNA sequencing and genotyping instruments,
microarrays, fluorescent microscopes, high content screening systems, flow cytometers and plate readers. Common among these
instruments is the need for reagents that allow the identification, quantification and characterization, and interactions of specific genes or
nucleic acid sequences, proteins, cells and other cellular structures and organelles.
3
We believe this market will continue to grow as a result of:
•
•
•
long term commitment to research spending by academic, government and private organizations to determine the function and
clinical relevance of the gene sequences and proteins that have been identified by genome research,
development of commercial applications based on information derived from this research; and
ongoing advancements in tools that accelerate these research and development activities.
Clinical diagnostics
The clinical diagnostics market has been reported by industry sources to be greater than $22 billion annually domestically and over $44
billion worldwide. It is comprised of a broad range of tests based on clinical chemistry, microbiology, immunoassays, genomics,
proteomics, gene expression profiling blood banking, and cancer screening assays through histology as well as newer body fluid based
approaches. Many of these tests employ traditional technologies, such as immunoassays and cell culture technologies, for the detection
of diseases.
Immunoassays are based on the use of antibodies directed against a specific target, or antigen, to detect that antigen in a patient sample.
Cell culturing techniques involve the growth, isolation and visual detection of the presence of a microorganism and often it’s
susceptibility to FDA approved drugs.
There are several drawbacks to these more traditional technologies. Immunoassays do not allow for early detection of diseases because
they require minimum levels of antigens to be produced by the microorganism in order to be identified. These levels vary by
microorganism, and the delay involved could be several days or several months, as seen in HIV/AIDS. Cell cultures are slow, labor
intensive and not amenable to all microorganisms. For example, gonorrhea and chlamydia are difficult to culture.
Gene-based diagnostics have many advantages over the traditional technologies. Since gene-based diagnostics focus on the
identification of diseases at the cellular level, they can identify the presence of the disease at its earliest stage of manifestation in the
body. These tests provide results more rapidly, are applicable to a broad spectrum of microorganisms and can easily be automated in a
multiplex platform.
Several advances in technology are accelerating the adoption of gene-based diagnostics in clinical laboratories. These advances include
high throughput automated formats that minimize labor costs, non-radioactive probes and reagents that are safe to handle, and
amplification technologies that improve the sensitivity of such diagnostics.
According to industry sources, the market for molecular diagnostic tools, assays and other products is currently more than $6 billion per
year, and is acknowledged as one of the fastest growing segments in the in-vitro diagnostic industry, growing at more than twice the rate
of traditional diagnostics. Contributing to this growth is, among other factors:
•
•
•
•
the increasing number of diagnostic tests being developed from discoveries in genome research;
advances in formats and other technologies that automate and accelerate gene-based diagnostic testing;
growing emphasis by the health care industry on early diagnosis and treatment of disease and;
application of gene-based diagnostics as tools to match therapies to specific patient genetics commonly referred to as
pharmacogenomics or companion diagnostics.
4
Therapeutics
As science progresses, we are learning more about biochemical processes and how the cell’s machinery is directed towards normal
functioning of physiological, genetic and immune system pathways. Disease may result as the consequence of an inappropriate reaction
in any of these systems.
In the normal physiologic functioning of the body key modulators interact with membrane-bound proteins and initiate a cascade of
biochemical reactions that regulate the cell. How modulators interact with membrane-bound proteins set the stage for a variety of
possible activities that the cell then controls. The membrane-bound proteins are multiligand receptors; hence the modulator(s) and their
activity at a specific binding docking “station” determine the ultimate activity of the cell. This constitutes a cell signaling pathway. One
of the most notable cell signaling pathways is the Wnt pathway and an associated membrane protein, LDL (low density lipoprotein)
receptor-related protein LRP. Research by Enzo and others have unlocked the key to the activation/inhibition of the Wnt and/or LRP
system resulting in the discovery and subsequent regulation of natural processes, such as development, cell division, and metabolic
activity, among others. Manipulation of this system through small molecules, peptides, oligonucleotides or antibodies may possibly
correct dysfunctional systems.
Other diseases may be the consequence of an inappropriate reaction of the body’s immune system, either to a foreign antigen, such as a
bacterium or virus, or, in the case of an autoimmune condition, to the body’s own components. In recent years, several new strategies of
medication for the treatment of immune-based diseases such as Crohn’s disease, autoimmune uveitis and rheumatoid arthritis, have been
developed. These treatments are all based on a systemic suppression of certain aspects of the immune system and can lead to significant
side effects. Thus, there continues to be a need for a therapeutic strategy that is more specific and less global in its effect on the immune
system.
Still other diseases result from either the expression of foreign genes, such as those residing in viruses and pathogenic organisms, or from
the abnormal or unregulated expression of the body’s own genes. In other cases, it is the failure to express, or over expression of, a gene
that causes the disease. In addition, a number of diseases result from the body’s failure to adequately regulate its immune system.
Advances in gene analysis have provided the information and tools necessary to develop drugs that interfere with the disease process at
the genetic level. For a broad spectrum of diseases, this approach can be more precise and effective than interfering with downstream
events such as protein synthesis or enzyme activation. Therapies targeting genetic processes are called gene medicines. There are two
fundamental approaches to gene medicines, synthetic and genetic.
Synthetic gene medicine involves the administration of synthetic nucleic acid sequences called “oligos” that are designed to bind to, and
thus deactivate, ribonucleic acid (“RNA”) produced by a specific gene.
To date, this approach has demonstrated limited success. Since a single cell may contain thousands of strands of RNA, large amounts of
oligos are necessary to shut down the production of unwanted proteins. Also, they are quickly metabolized or eliminated by the body.
Consequently, large quantities of oligos must be delivered in multiple treatments, which can be both toxic to the body as well as costly.
Genetic medicine or gene therapy involves the insertion of a gene into a cell. The inserted gene biologically manufactures the therapeutic
product within the cell on an ongoing basis. This gene may be introduced to bring about a beneficial effect or to disable a pathological
mechanism within the cell. For example, the gene may be inserted to replace a missing or malfunctioning gene responsible for
synthesizing an essential protein or the inserted gene may code for a molecule that would deactivate either an overactive gene or a gene
producing an unwanted protein. As a permanent addition to the cellular DNA, the inserted gene produces RNA and/or proteins where
needed.
5
A major challenge in designing gene therapy medicines has been to enable the efficient and safe delivery of the gene to the appropriate
target cell. Gene delivery is often accomplished using a delivery vehicle known as a vector. A critical quality of the vector is its ability to
bind to the target cell and effectively deliver, or transduce, the gene into the cell. It is also critical that the nucleic acid of the vector not
produce proteins or antigens that can trigger an adverse immune response.
Strategy
Our objective is to be a leading developer and provider of the tools, services, and diagnostic technologies used to study and identify
disease at the molecular level and to be a provider of therapeutic platforms to manage specific diseases. There can be no assurance that
our objective will be met. Key elements of our strategy involving three separate platforms include our ability to:
Maximize our resources by collaborating with others in research and commercialization activities
We enter into research collaborations with leading academic and other research centers to augment our core expertise on specific
programs.
Our clinical trial of Optiquel® is a direct result of such research collaboration. We acquired the rights and intellectual property to this
candidate drug and technology intended for use in the treatment of autoimmune uveitis. Working with scientists and physicians in the
United States and abroad, Enzo continued drug development to the stage of a clinical trial now being conducted in collaboration with the
National Eye Institute of the National Institutes of Health in Washington DC.
We have research and clinical collaborations with other institutions including Hadassah University Medical Center in Jerusalem, Israel
relating to our immune regulation technology. Through collaborations such as these and other licensing agreements we continue to
develop novel therapeutics for the stimulation and enhancement of bone formation and glucose control, among others. Such products, if
any, emanating from this technology could provide potential therapy for bone disorders, including bone loss, bone fractures,
periodontitis, diabetes and other indications. There can be no assurance that any of these collaborative projects will be successful.
Enzo Life Sciences maintains relationships with academic and commercial groups worldwide in sourcing and commercializing high
value reagents developed by leading academics.
Similarly, we may seek to fully exploit the commercial value of our technology by partnering with for-profit enterprises in specific areas
in order to act on opportunities that can be accretive to our efforts in accelerating our development program.
Apply our biomedical research technology to the clinical diagnostics market
We have an extensive library of probes for the detection of various diseases. We have developed a standardized testing format that can
permit multiple diagnoses to be performed on the same specimen thereby potentially reducing the need for multiple physician visits to
obtain additional samples.
Exploit our marketing and distribution infrastructure
Enzo Life Sciences has developed its sales and marketing infrastructure to directly service its end users, while simultaneously
positioning the Company for targeted product line expansion. Our global sales, marketing, manufacturing, product development and
distribution infrastructure, have now been integrated and consolidated into a single global business. Enzo Life Sciences operates, under
its own name, worldwide through wholly owned subsidiaries (in USA, Switzerland, Benelux, Germany, and the UK), a branch office in
France and a network of third party distributors in most other significant markets worldwide.
6
Expand our collaborations with major life sciences companies
We intend to seek opportunities to secure strategic partnerships and assert our intellectual property estate with multiple market
participants. Further, we will look to advance proprietary business opportunities.
The Company has a license agreement with QIAGEN Gaithersburg Inc. (“Qiagen”) that began in 2005, whereby the Company earns
quarterly running royalties on the net sales of Qiagen products subject to the license until the expiration of the patent on April 24, 2018.
In the license agreement, Qiagen was granted a world-wide, non-exclusive license to the Company U.S. Patent number 6,222,581, which
is related to the use of a methodology called “hybrid-capture” in which certain nucleic acid probes are hybridized to target nucleic acids
and then captured indirectly on a solid surface. The resulting nucleic acid hybrids are then detected by antibodies conjugated to
signal-generating molecules which produce an amplified signal allowing for more sensitive detection of the resultant hybrids. This
platform is one of the most desirable formats for the detection of nucleic acids in a reliable and economic manner, and has formed the
basis for one of the most commonly ordered genomic-based assays. See Note 12 to the Notes to Consolidated Financial Statements.
Apply our innovative technology to a variety of diseases mediated by cell signaling pathways, by the immune system, or, in advanced
cases, gene therapy .
We believe our core technologies have broad diagnostic and therapeutic applications. We have focused our efforts on discovering how
best to correct pathologies associated with bone or metabolic control, and immune-mediated diseases. Although the cause of disorders
such as Crohn’s disease, autoimmune uveitis and non-alcoholic steatohepatitis (NASH) remains unknown, various features suggest
immune system involvement in their pathogenesis.
We continue to test technologies we believe can serve as enabling platforms for developing medicines that genetically target and inhibit
viral functions, as well as medicines that regulate the immune response. In addition to such therapeutic products, we continue to
capitalize on our nucleic acid labeling, target and signal amplification, and detection technologies and intellectual property to develop
diagnostic and monitoring tests for various diseases.
Expand and protect our intellectual property estate
Since our inception, we have followed a strategy of creating a broad encompassing patent position in the life sciences and therapeutics
areas. We have made obtaining patent protection a central strategic policy, both with respect to our proprietary platform technologies
and products, as well as broadly in the areas of our research activities. During Fiscal 2013 we were issued 32 patents and expanded our
patent estate in the area of nucleotides, amplification, labeling and detection, among others.
Core Technologies
We have developed a portfolio of proprietary technologies with a variety of research, diagnostic and therapeutic applications.
Diagnostic Technology Platform
Gene analysis technology
All gene-based testing is premised on the knowledge that DNA forms a double helix comprised of two complementary strands that
match and bind to each other. If a complementary piece of DNA (a probe) is introduced into a sample containing its matching DNA, it
will bind to, or hybridize, to form a double helix with that DNA. Gene-based testing is carried out by:
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amplification of the target DNA sequence (a process that is essential for the detection of very small amounts of nucleic acid);
labeling the probe with a marker that generates a detectable signal upon hybridization;
addition of the probe to the sample containing the DNA; and
binding or hybridization of the probe to the target DNA sequence, if present, to generate a detectable signal.
We have developed a broad technology base for the labeling, detection, amplification and formatting of nucleic acids for gene analysis
which is supported by our significant proprietary position in these fields.
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Amplification
In the early stages of infection, a pathogen may be present in very small amounts and consequently may be difficult to detect. Using
DNA amplification, samples can be treated to cause a pathogen’s DNA to be replicated, or amplified, to detectable levels. We have
developed a proprietary amplification process for multicopy production of nucleic acid, as well as proprietary techniques for amplifying
the signals of our probes to further improve sensitivity. Our amplification technologies are particularly useful for the early detection of
very small amounts of target DNA. We have also developed isothermal amplification procedures that can be performed at constant
temperatures, unlike polymerase chain reaction (PCR) the most commonly used method of target nucleic acid amplification. These
platform technologies could thus potentially lead to assays with advantages over PCR-based tests which require expensive heating and
cooling systems or specialized heat-resistant enzymes. Moreover, our AmpiProbe Nucleic Acid Amplification Platform, because of the
reduced amount of starting material needed for analysis, may lead to a next-generation of molecular-based diagnostics that can impart
higher sensitivity at lower cost than currently available assays.
Non-radioactive labeling and detection. Traditionally, nucleic acid probes were labeled with radioactive isotopes. However,
radioactively labeled probes have a number of shortcomings. They are unstable and consequently have a limited shelf life. They are
potentially hazardous, resulting in restrictive licensing requirements and safety precautions for preparation, use and disposal. Finally,
radioactive components are expensive. Our technologies permit gene analysis without the problems associated with radioactively
labeled probes and are adaptable to a wide variety of formats.
Formats. There are various processes, or formats, for performing probe-based tests. In certain formats, the probe is introduced to a target
sample affixed to a solid matrix; in others the probe is combined with the sample in solution (homogeneous assay). Solid matrix assays
include: in situ assays in which the probe reaction takes place directly on a microscope slide; dot blot assays in which the target DNA is
fixed to a membrane; and microplate and microarray assays in which the DNA is fixed on a solid surface, and the reaction can be
quantified by instrumentation.
Therapeutic Platform Development Cell Signaling Pathway
One area of Enzo’s therapeutic platform development is related to the development of pharmaceutical agents that affect protein-protein
interactions. Over the past several years, our scientists and collaborators have unlocked the secrets of a major cell signaling pathway thus
producing a means to modify biologic activity in a number of physiological systems.
Further investigation into the design and control of this system has allowed our scientists and their collaborators to determine the
structure of key regulatory proteins and to identify active sites that can then become targets for Enzo’s proprietary technology generating
system. Our technology is capable of generating active compounds that range from orally delivered small molecules to peptides,
oligonucleotides or antibodies. We have performed pioneering work on the structure and function of LRP and its ligands, developed a
screening technology to identify active compounds, and have synthesized proprietary molecules capable of producing biological effects
in cell-based systems and animal models of disease. Specifically, this system allows the Company to successfully:
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generate biological, genetic, and structural information concerning LRP;
determine the structure of LRP docking sites of its ligands;
identify the functionally important residues via site-directed mutagenesis;
build the fine structure map and employ it as the basis for virtual screening;
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show that compounds specifically bind to wild type LRP5, but not to mutated LRP5;
generate a cell-based assay capable of identifying active compounds; and
synthesize proprietary molecules that are active in animal models of disease.
Through this novel, proprietary, functional screening system, we have identified small molecules capable of reversing
sclerostin-mediated inhibition of Wnt signaling. Preclinical animal studies with several candidate lead compounds produced the
following results:
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significant increases in total and femoral bone density through new bone formation;
significant reduction in alveolar bone loss; and
significant reduction in bone resorption.
The anabolic induction of new bone formation and prevention of bone loss by our small molecule compounds may promise new paths
for the treatment of osteoporosis. In addition, our proprietary technology has enabled the generation of novel chemical entities that have
significant glucose lowering activity. These effects are separate from its effects on bone metabolism indicating a specificity of action
conferred by the interaction of a particular compound with the cell signaling pathway. Therefore, this approach may be broadly
applicable to the generation of therapeutic drug candidates for multiple indications.
Immune Regulation
Oral Immune Regulation. We continue to explore a novel therapeutic approach based on immune regulation. Our immune regulation
technology seeks to control an individual’s immune response to a specific antigen in the body. An antigen is a substance that the body
perceives as foreign and, consequently, against which the body mounts an immune response. This platform technology is being
developed as a means to manage immune-mediated diseases, such as autoimmune uveitis and Crohn’s disease.
We have developed an immunomodulator agent EGS21 as a potential therapeutic for treating immune mediated disorders. EGS 21 is a
glycolipid that has been shown by our scientists and collaborators to act as an anti-inflammatory agent in animal model systems and is
being evaluated as a drug candidate in the treatment of various immune mediated diseases.
Gene Regulation
We have developed an approach to gene regulation known as genetic antisense or antisense RNA. Our technology involves the
introduction into cellular DNA of a gene that codes for an RNA molecule that binds to, and thus deactivates, RNA produced by a specific
gene. To deliver our antisense gene to the target cell, in a process called transduction, we have developed proprietary vector technology.
We believe, though there can be no assurance, that our vector technology has broad applicability in the field of gene medicine. This can
be attributed to the following properties of our construct:
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the viral promoters are inactivated;
insertional gene activation is prevented - a major safety factor;
chromosomal integration; and
nuclear localization.
In summary, we have developed proprietary technologies in the areas of cell signaling, immune modulation and gene regulation (genetic
antisense RNA) that we are using as platforms for a portfolio of novel therapeutics.
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There can be no assurance that we will be able to secure patents or that these programs will be successful. The potential therapies we are
developing could be used, if successful for the treatment of a variety of diseases, including osteoporosis, osteonecrosis and other bone
pathologies, diabetes, autoimmune uveitis and inflammatory bowel disease, including Crohn’s disease and ulcerative colitis, among
others.
Products and Services
We are applying our core technologies to develop novel therapeutics as well as research tools for the life sciences and clinical
diagnostics markets. In addition, we provide clinical laboratory services to physicians and other health care providers in the New York,
New Jersey and Eastern Pennsylvania medical communities.
Research Products
We are organized to lead in the development, production, marketing and sales of innovative life science research reagents worldwide
based on over 30 years of experience in building strong international market recognition, implementing outstanding operational
capabilities, through two main channels to market:
Enzo Life Sciences - “Scientists enabling Scientists”
Enzo Life Sciences is a positioned as a leading manufacturer and supplier of high quality reagents, kits and products supplied to
customers in Life Sciences Research, Clinical Research and Drug Development. With direct sales operations in US, Switzerland,
Germany, UK, France and Benelux, Enzo Life Sciences also supports its 7,000 products through a global network of dedicated
distributors.
Axxora.com -“The Reagents Marketplace”, Thousands of Reagents, One Marketplace Axxora.com is a proven distribution platform
for original manufacturers of innovative research reagents. An increasing number of researchers use our unique marketplace to instantly
connect with over 40 specialty manufacturers and gain access to over 30,000 products. Purchasing groups from universities, research
institutes, biotech and pharmaceutical companies utilize this extensive catalog to source research reagents and conveniently consolidate
orders.
The products supplied by Enzo Life Sciences include small molecules, proteins, antibodies, peptides, probes, assay kits and custom
services. Our comprehensive portfolio of high quality reagents and kits in key research areas are sold to scientific experts in the
following fields:
Adipokines
Antibiotics
Apotosis/Cell Death
Biologically Active Peptides
Bone Metabolism
Cancer Research
Cell Death
Cell Cycle
Chemokines/Cytokines
Cytoskeletal Research
Dependence Receptors
DNA Fragmentation/Damage/Repair
DNA Regulation
Epigenetics
FISH
Growth Factors/Cytokines
Hypoxia
Immunology
Viral Signaling
Inflammation/Innate Immunity
Interferons
In Vitro Toxicology
Kinases/Inhibitors
Leukotrienes/Prostaglandins/Thromboxanes
Microarray Labeling
Multidrug Resistance
Natural Products/Antibiotics
Neuroscience
Nitric Oxide Pathway
Nuclear Receptors
Oxidative Stress
Protein Aggregation
Proteosome/Ubiquitin
Receptors
Signal Transduction
Stem Cell/Cell Differentiation
Stress Proteins/Heat Shock Proteins
Toxicology
TNF/TNF Receptor Superfamily
Transcription Factors
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Enzo Life Sciences is organized to promote and market its products and brands under its own name, building on a foundation of the
brands it has acquired or developed previously:
Enzo The original Enzo brand products and technologies are primarily focused in the areas of microarray analysis, gene regulation and
gene modification. Patented Enzo technologies and products are recognized as key tools in non-radioactive gene and protein labeling.
Alexis The Alexis brand provides recognition in producing and commercializing innovative high quality reagents and as an established
source for a comprehensive panel of products in many key research areas including the fields of cell death, nitric oxide, and
obesity/adipogenesis.
Biomol International The Biomol International brand provides global recognition in the cellular biochemistry segment with an
emphasis on areas related to protein post-translational modification, be it by ubiquitin or the ubiquitin-like proteins, acetylation,
methylation, phosphorylation, sulphation, or glycolsylation.
Assay Designs The Assay Designs brand emphasizes our immunoassay development capability in the fields of inflammation, steroids
and hormones, and cell signaling.
Stressgen The Stressgen brand is focused exclusively on the fields of the heat shock and cell stress.
Enzo Life Sciences through its selective new product development programs is now entering new markets in the fields of Cellular
Analysis and Protein Aggregation detection. As part of this introduction, we established new product lines to increase recognition of our
products, such as the Cellestial® range of fluorescent dyes and kits, and ProteoStat® protein aggregation detection line of products. We
are also launching certain products, particularly new drug development assays and immunoassay kits developed or acquired through our
business collaborators.
In Fiscal 2012 the Company created a five year branding plan that would provide more emphasis around the Enzo Life Sciences brand,
which currently encompasses the acquired brands, and over a five (5) year period reduce the emphasis of the acquired brands, Alexis,
Biomol International, Assay Designs and Stressgen. The Company intends to maintain the rights to the acquired brands which have long
product history. The Company believes the emphasis on the Enzo Life Sciences brand will result in stronger and clearer brand awareness
and allow the Company to execute the sale of higher value products and promote more products into the drug development, clinical
research and diagnostic markets.
Therapeutic Development Programs
We have a number of therapeutic products in various stages of development that are based on our proprietary platform technologies. Our
therapeutic programs are described below.
Autoimmune Uveitis
Autoimmune uveitis, which results from inflammation of a part of the eye known as the uvea, is believed to result from an immune
reaction to antigens in the eye, specifically the S-antigen and the interphotoreceptor retinoid-binding protein (IRBP).
There is no known cure for uveitis, which in the United States, according to the American Uveitis Society, is newly diagnosed in
approximately 38,000 people every year.
Enzo acquired the rights and intellectual property to a candidate drug and technology intended for use in the treatment of uveitis. The
drug is the result of a discovery by scientists at the eye clinic of the Ludwig Maximilians University in Munich, Germany, who found a
small peptide that when fed to rats with experimental allergic uveitis promoted their recovery. Based on favorable preclinical studies, the
developers conducted an open, pilot Phase I clinical trial in Germany with encouraging results.
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Based on the results from the German study, we entered into a Cooperative Research and Development Agreement (CRADA) with the
National Eye Institute (NEI), part of the National Institutes of Health (“NIH”), for further development of our candidate compound
Optiquel® for the treatment of autoimmune uveitis. In October 2010, we announced the initiation of a human clinical trial. Currently,
patients have been enrolled and are being treated. Under the terms of the CRADA, the NEI and Enzo will share the development costs of
the studies and Enzo will supply its proprietary compound, Optiquel. The agreement additionally includes non-clinical research focusing
on the use of various compounds that may serve to enhance the immune mediated oral tolerance response to specific antigens. Such
research may be applicable across the entire spectrum of the Company’s immune regulation platform. The clinical trial is currently
ongoing, and patients are being monitored, at the NEI to assess the safety and efficacy of Optiquel®. The study is designed as a
randomized, double-masked, placebo-controlled proof-of-concept study with a long-term follow-up.
We previously had filed with the regulatory authorities in Europe, and Optiquel has been granted orphan status under European
regulations. We may apply for the same in the U.S. since Orphan status designation can confer both financial and marketing benefits.
Inflammatory bowel diseases
We believe Alequel, Enzo’s proprietary candidate drug based on our immune regulation technology may be used to treat inflammatory
bowel disease (IBD), including ulcerative colitis and Crohn’s Disease. According to the Crohn’s and Colitis Foundation, approximately
one million people in the United States suffer from IBD. Although the cause of these disorders remains unknown, various features
suggest immune system involvement in their pathogenesis.
Patients are managed during short-term episodes through the use of anti-inflammatory medications, or immunosuppressants, which
provide symptomatic relief over short periods of time, but do not provide a cure. These drugs are all based on a generalized suppression
of the immune response and are non-specific. As such, they have considerable side effects and may make the body more prone to
infection, lymphoma, or other diseases.
Alequel is an individualized protein-product mixture produced from autologous tissue extracted during a routine colonoscopy. The Enzo
protein extract is administered to the patient orally. Clinical results indicated that the study met its primary and secondary endpoints.
Although not statistically significant, the results indicated that patients receiving Alequel achieved improved rates of clinical remission
compared with the placebo group (39% vs. 22%), clinical response (50% vs. 30%) and improved quality of life in the drug study group
compared to placebo. No treatment-related adverse events were noted. Thus, we conclude that Alequel may be a safe and effective
method for treatment of patients with moderate to severe Crohn’s disease.
Osteoporosis (and certain bone disorders) and Diabetes
We have a number of compounds in preclinical development that could provide therapy for treating bone disorders including
osteoporosis, bone loss, fractures, abnormalities, diseases, and other applications. These candidate compounds were identified through
an innovative approach, combining structural biology, computational screening, mutational analyses and biological in vitro assays,
followed by validation in animal model systems.
Enzo-D58 is one of several compounds found to induce new bone formation in mouse calvaria when injected subcutaneously. When
delivered orally the candidate compound was shown to prevent alveolar bone loss in a periodontitis-induced rat model.
One of the most challenging problems in clinical dentistry is the loss of alveolar bone. Alveolar bone loss is characterized by the
reduction in height and volume of the maxillary and mandibular bones that underlie and support the teeth. The primary causes of alveolar
bone loss are periodontitis and tooth loss, although osteoporosis may also contribute. The lack of an effective treatment for periodontal
bone loss has encouraged the continued search for a successful therapeutic approach.
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Our preliminary results which were presented at the annual meeting of the American Society for Bone and Mineral Research 2007
suggest that Enzo-D58 may be effective in preventing alveolar bone loss. We have continued this effort and have synthesized and
developed novel compounds that appear to be active in standard animal models which assess bone density. We continue to develop these
drug candidates and progress them along the drug development continuum.
In addition, we and our collaborators have investigated the biochemical pathways involved in glucose homeostasis. Using animal
genetic models, and structural and computational biology we have been able to decipher some of the complex cellular machinery that
controls glucose, synthesize novel entities that interact at key targets and test them in standard animal models of diabetes. We continue to
explore this very exciting line of research and continue activities geared toward the development of potential therapeutics for diabetes
with novel mechanisms of action.
Clinical Laboratory Services
We operate a regional clinical laboratory that offers extensive diagnostic services to the New York, New Jersey and Eastern
Pennsylvania medical communities. Our clinical laboratory testing is utilized by physicians as an essential element in the delivery of
healthcare services. Physicians use laboratory tests to assist in the detection, diagnoses, evaluation, monitoring and treatment of diseases
and other medical conditions. Clinical laboratory testing is generally categorized as clinical testing and anatomic pathology testing.
Clinical testing is performed on body fluids, such as blood and urine. Anatomic pathology testing is performed on tissues and other
samples, such as human cells. Most clinical laboratory tests are considered routine and can be performed by most commercial clinical
laboratories. Tests that are not routine and that require more sophisticated equipment and highly skilled personnel are considered
esoteric tests and may be performed less frequently than routine tests.
We offer a comprehensive and broad range of routine and esoteric clinical laboratory tests or procedures. These tests are frequently used
in general patient care by physicians to establish or support a diagnosis, to monitor treatment or medication levels, or search for an
otherwise undiagnosed condition.
Our full service clinical laboratory in Farmingdale, New York contains an infrastructure that includes comprehensive information
technology applications, logistics, client service and billing departments. Also, we have a network of over thirty strategically located
patient service centers and a full service phlebotomy department. Patient service centers collect from patients the specimens as requested
by physicians. We also operate a fully equipped STAT laboratory in New York City. A “STAT” lab is a laboratory that has the ability to
perform certain routine tests quickly and report results to the physician immediately.
Patient specimens are delivered to our laboratory facilities primarily by our logistics department accompanied by a test requisition form.
These forms, which are completed by the ordering physician, indicate the tests to be performed and demographic patient information in
most instances utilizing EnzoDirect, our proprietary computer-based ordering and results delivery system. Once the information is
entered into the laboratory computer system the tests are performed on the corresponding laboratory testing instrumentation and the
results are delivered primarily through an interface from the laboratory testing instrumentation or in some instances, manually into the
laboratory computer system. Most routine testing is completed by early the next morning, and test results are reported to the ordering
physician.
These test results are either reported electronically via our EnzoDirect system or delivered by our logistics department directly to the
ordering physicians’ offices. Physicians who request that they be called with a particular result are so notified by our customer service
personnel.
For fiscal years ended July 31, 2013, 2012 and 2011, respectively, approximately 59%, 58% and 52% of the Company’s revenues were
derived from the clinical laboratory. At July 31, 2013 and 2012, respectively, approximately 60% and 55% and of the Company’s net
accounts receivable were derived from its clinical laboratory business. The Company believes that the concentration of credit risk with
respect to the Clinical Labs accounts receivable is mitigated by the diversity of its third party payers that insure individuals.
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To reduce risk, the Company routinely assesses the financial strength of these payers and, consequently, believes that its accounts
receivable credit risk exposure, with respect to these payers, is limited. While the Company also has receivables due from the Federal
Medicare program, the Company does not believe that these receivables represent a credit risk since the Medicare program is funded by
the federal government and payment is primarily dependent on our submitting the appropriate documentation.
Revenues, net of contractual adjustment, from direct billings under the Federal Medicare program during the years ended July 31, 2013,
2012 and 2011 were approximately 22%, 21% and 22% respectively, of the clinical laboratory segment’s total revenue. We estimate
contractual adjustment based on significant assumptions and judgments, such as the interpretation of payer reimbursement policies
which bears the risk of change. The estimation process is based on the experience of amounts approved as reimbursable and ultimately
settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that
reduces gross revenue, based on gross billing rates, to amounts expected to be approved and reimbursed.
Gross billings are based on a standard fee schedule we set for self-payers, all third party payers, including Medicare, health maintenance
organizations (“HMO’s) and managed care providers. We adjust the contractual adjustment estimate quarterly, based on our evaluation
of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors. The other relevant
factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and receivables and
reimbursement by payer, 2) current changes in third party arrangements, and 3) the growth of in-network provider arrangements and
managed care plans specific to our Company. The clinical laboratory industry is characterized by a significant amount of uncollectible
accounts receivable related to the inability to receive accurate and timely billing information in order to forward it on to the third party
payers for reimbursement, and the inaccurate information received from the covered individual patients for unreimbursed unpaid
amounts. Our provision for uncollectible accounts receivable is within historical expectations.
Other than the Medicare program, revenues from United Healthcare of New York, Inc. represented approximately 13%, 21% and 22% of
the Clinical Labs segment’s net revenue for the fiscal year ended July 31, 2013, 2012 and 2011, respectively. Another third party
provider represents 9%, 13% and 11% of the Clinical Labs segment’s net revenue for the fiscal years ended July 31, 2013, 2012 and
2011, respectively. Billing for laboratory services is complicated. Depending on the billing arrangement and applicable law, we must bill
various payers, such as patients, insurance companies and the Federal Medicare Program, all of which have different requirements. In
both New York and New Jersey, the law prohibits the Company from billing the ordering physician. Compliance with applicable laws
and regulations as well as, internal compliance policies and procedures adds further complexity to the billing process. We depend on the
ordering physician to provide timely, accurate billing demographic and diagnostic coding information to us. Additional factors
complicating the billing process include:
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pricing differences between our standard gross fee schedules and the reimbursement rates of the payers;
disputes with payers as to which party is responsible for payment; and
disparity in coverage and information requirements among various payers.
We believe that most of our bad debt expense is primarily the result of inaccurate billing information on requisitions received from the
ordering physician. In addition, the bad debts 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. We perform the requested tests and report test results regardless of whether the billing or diagnostic coding information is
inaccurate or missing. We subsequently attempt to contact the ordering physician to obtain and rectify incorrect billing information.
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Missing or inaccurate information on the requisitions adds complexity to and may slow the billing process, creates backlogs of unbilled
requisitions, and generally decreases the collectability and increases the aging of accounts receivable. When all issues relating to the
missing or inaccurate information are not resolved in a timely manner, the related receivables are fully reserved to the allowance for
doubtful accounts or allowances for contractual adjustments or written off.
We incur significant additional costs as a result of our participation in Medicare, as billing and reimbursement for clinical laboratory
testing is subject to considerable and complex and stringent federal and state regulations including those relating to coverage, billing and
reimbursements. Future changes in regulations could further complicate our billing and increase our billing expenses.
These additional costs include those related to: (1) complexity added to our billing processes and change our reimbursements; (2)
training and education of our employees and customers; (3) compliance and legal costs; and (4) costs related to, among other factors,
medical necessity denials and advance beneficiary notices. The Centers for Medicare & Medicaid Services, or CMS (formerly the Health
Care Financing Administration), establishes procedures and continuously evaluates and implements changes in the reimbursement
process.
The established Medicare reimbursement rate for clinical laboratory services has been reduced by the Federal government in a number
of instances over the past several years. In March 2010, U.S. federal legislation was enacted to reform healthcare. The legislation
provides for reductions in the Medicare clinical laboratory fee schedule of 1.9% for five years beginning in 2010 and also includes a
productivity adjustment which reduces the Consumer Price Index (“CPI”) market basket update beginning in 2011. Based on these
calculations, the Medicare Fee Schedule was reduced in calendar year 2011 by 1.75%, increased in calendar year 2012 by 0.65%, and
decreased in calendar year 2013 by 2.95%. Future reductions/increases may occur depending on percentage changes in the CPI-U. In
connection with recent government sequestration Medicare reimbursement rate were further reduced by 2% in April 2013.The
legislation imposes an excise tax on the seller for the sale of certain medical devices in the United States, including those purchased and
used by laboratories, beginning in 2013. The legislation establishes the Independent Payment Advisory Board (“IPAB”), which will be
responsible, beginning in 2014, annually to submit proposals aimed at slowing Medicare cost growth while preserving quality.
If the projected growth in per capita Medicare costs exceeds a specified target level, the IPAB must submit proposals to reduce or
eliminate the difference. For calendar years 2015 through 2019, the target growth rate is the average of the increases in the consumer
price index and the medical consumer price index; for 2020 and thereafter, the target growth rate is the rate of increase in gross domestic
product per capita plus one percent point. If it is necessary for the IPAB to submit proposals, they will automatically be implemented
unless Congress enacts alternative proposals that achieve the same savings targets. We could experience a significant decrease in
revenue from Medicare as a result of this legislation, which could have a material adverse effect on us.
Research and Development
Our principal research and development efforts are directed toward developing innovative new clinical research and diagnostic
platforms, and selective expansion of our research product lines, given our increased manufacturing, distribution capability following
the acquisitions of Axxora, Biomol International, and Assay Designs. We have developed our core research expertise in the life science
field as a result of over 30 years of dedicated focus in this area. We conduct our research and other product development efforts through
internal research and collaborative relationships.
In the fiscal years ended July 31, 2013, 2012 and 2011, the Company incurred costs of approximately $3.9 million, $6.3 million and,
$7.8 million, respectively, for research and development activities. During fiscal 2013, the Company’s research and development
program was refocused to areas that had greater opportunity to maximize revenues.
Internal Research Programs
Our professional staff, including 57 with post graduate degrees, performs our internal research and development activities. Our product
development programs incorporate various scientific areas of expertise, including recombinant DNA, monoclonal antibody
development, enzymology, microbiology, biochemistry, molecular biology, organic chemistry, and fermentation. In addition, we
continuously review in-licensing opportunities in connection with new technology.
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External Research Collaborations
We have and continue to explore collaborative relationships with prominent companies and leading-edge research institutions in order to
maximize the application of our technology in areas where we believe such relationship will benefit the development of our technology.
Sales and Marketing
Our sales and marketing strategy for Enzo Life Sciences is to sell our life science products through: (i) direct sales to end-users under the
Enzo Life Sciences name, with direct recognition to our acquired brands (ii) direct sales to end users under the Axxora electronic market
place name (iii) supply agreements with manufacturers and (iv) distributors in major geographic markets. We operate with an
understanding of local markets and a well-functioning distribution network system across the globe. Scientists around the world who
recognize the brands (Alexis, Assay Designs, Biomol, Enzo and Stressgen) now receive products directly from Enzo Life Sciences
where we are recognized for innovative high quality products, supported directly by our qualified technical staff. We sell the same
products through our Axxora electronic market place which is also the source for life science research reagents from over 40 original
manufacturers. Our direct marketing and sales network includes fully-owned subsidiaries (USA, Switzerland, Germany, Benelux, and
UK), a branch office in France and a network of third party distributors in most other significant markets worldwide.
For Enzo Clinical Labs, we focus our sales efforts on obtaining and retaining profitable accounts. We market the clinical laboratory
services to a broad range of ordering physicians in the metro New York, New Jersey and Eastern Pennsylvania region through our direct
sales force who are supported by customer service and patient service representatives. We monitor and where appropriate, change the
service levels and terminate ordering physician accounts that are not profitable. We are focusing our efforts to attract and retain clients
who participate with the providers with whom we have regional contracts and are consistently looking to add higher value molecular and
esoteric testing, both internally developed and with partners, to our menu to assist sales in new account penetration as well as to improve
our level of service to existing clients
Distribution Arrangements
We also distribute our life science products internationally through a network of distributors. Through these arrangements, we are able to
leverage the established marketing and distribution infrastructure of these companies in certain market places.
Competition
We compete with other life science and biotechnology companies, as well as pharmaceutical, chemical and other companies.
Competition in our industry is intense. Many of these companies are performing research targeting the same technology, applications
and markets. Many of these competitors are significantly larger than we are and have more resources than we do. The primary
competitive factors in our industry are the ability to create scientifically advanced technology, offer innovative products at the forefront
of technological development to targeted market segments, successfully develop and commercialize products on a timely basis, establish
and maintain intellectual property rights and attract and retain a breadth and depth of human resources.
Our clinical laboratory services business competes with numerous national, regional, and local entities, some of which are larger than we
are and have greater financial resources than we do. Our laboratory competes primarily on the basis of the quality and specialized nature
of its testing, reporting and information services, its reputation in the medical community, its reliability and speed in performing
diagnostic tests, and its ability to employ qualified laboratory personnel.
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Intellectual Property
We consider our intellectual property program to be a key asset and a major strategic component to the execution of our business
strategy. A broad portfolio of issued patents and pending patent applications supports our core technology platforms. Our policy is to
seek patent protection for our core technology platforms, as well as for ancillary technologies that support these platforms and provide a
competitive advantage.
At the end of fiscal 2013 we owned or licensed over 140 patents relating to products, methods and procedures resulting from our internal
or sponsored research projects. There can be no assurance that patents will be issued on pending applications or that any issued patents
will not be challenged (see Item 3, Legal Proceedings), or that they will have commercial benefit. We do not intend to rely on patent
protection as the sole basis for protecting our proprietary technology. We also rely on our trade secrets and continuing technological
innovation. We require each of our employees to sign a confidentiality agreement that prohibits the employee from disclosing any
confidential information about us, including our technology or trade secrets.
Our intellectual property portfolio can be divided into patents that provide claims in three primary categories, as described below:
Nucleic Acid Chemistry
We currently have broad patent coverage in the area of nucleic acid chemistry. We have done extensive work on the labeling of nucleic
acids for the purpose of generating a signal that dates back over twenty years. Enzo has multiple issued patents covering the modification
of nucleic acids at their sugar and phosphate sites. The claims contained in these patents cover products that incorporate a signaling
moiety into a nucleic acid attached to a sugar or phosphate for the purpose of nucleic acid detection or quantification, including
sequencing and real time nucleic acid amplification. Enzo also has patents directed to proprietary dyes that may be used to label the
sugar, base or phosphate positions of nucleic acids.
Signal Delivery
We also have a long history of innovation in the area of analyte detection using non-radioactive signaling entities. At the signaling entity
itself, there are several Enzo patents that cover the formation of this structure. A patent which was allowed in 2006 covers the attachment
of signaling molecules through the phosphate moiety of a nucleic acid, which is how the signal-generating enzyme is bound.
Nucleic Acid Analysis Format
We also have patents with issued claims covering the use of arrays of single-stranded nucleic acids fixed or immobilized in hybridizable
form to a non-porous solid support. These patents cover any product that uses arrays of nucleic acids for molecular analysis.
In some instances, we may enter into royalty agreements with collaborating research parties in consideration for the commercial use by
us of the developments of their joint research. In other instances the collaborating party might obtain a patent, but we receive the license
to use the patented subject matter.
In such cases, we will seek to secure exclusive licenses. In other instances, we might have an obligation to pay royalties to, or reach a
royalty arrangement with, a third party in consideration of our use of developments of such third party.
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REGULATION AFFECTING OUR BUSINESSES
Clinical Laboratory
The clinical laboratory industry is subject to significant federal and state regulation, including inspections and audits by governmental
agencies. Governmental authorities may impose fines, criminal penalties or take other actions to enforce laws and regulations, including,
but not limited to, revocation of a clinical laboratory’s federal certification to operate a clinical laboratory. Changes in regulation may
also increase the cost of performing clinical laboratory tests, increase administrative requirements, or decrease the amount of
reimbursement. Our clinical laboratory and (where applicable) patient service centers are licensed and accredited by the appropriate
federal and state agencies.
CLIA (The Clinical Laboratory Improvement Act of 1967, and the Clinical Laboratory Improvement Amendments of 1988) regulates
virtually all clinical laboratories. Among other things, CLIA requires certification by the federal government and compliance with
various operational, personnel and quality requirements intended to ensure that their clinical laboratory testing services are accurate,
reliable and timely. CLIA does not preempt state laws that are more stringent than federal laws. Many clinical laboratories must meet
other governmental standards, undergo proficiency testing and inspections. Clinical laboratory certificates or licenses are also required
by various state and local laws.
CLIA places all tests into one of three categories of complexity (waived, moderate complexity and high complexity) and establishes
varying requirements depending upon the complexity category of the test performed. A laboratory that performs high complexity tests
must meet more stringent requirements than a laboratory that performs only moderate complexity tests, while those that perform only
waived tests may apply for a certificate of waiver from most CLIA requirements. Our facility is certified to perform high complexity
tests. In general, regulations promulgated by the United States Department of Health and Human Services (“HHS”) require laboratories
that perform high or moderate complexity tests to implement systems that ensure the accurate performance and reporting of test results,
establish quality control and quality assurance systems, ensure that personnel meet specified standards, conduct proficiency testing by
approved agencies, and undergo biennial inspections, among other requirements.
Clinical laboratories also are subject to state regulation. CLIA provides that a state may adopt different or more stringent regulations than
Federal law, and permits states to apply for exemption from CLIA if HHS determines that the state’s laboratory laws are equivalent to, or
more stringent than, CLIA. The State of New York’s clinical laboratory regulations contain provisions that are more stringent than
Federal law, and New York has received exemption from CLIA.
Therefore, as long as New York maintains its CLIA-exempt status, laboratories in New York, including our laboratory, are regulated
under New York law rather than CLIA. Our laboratory is licensed in New York and has continuing programs to ensure that its operations
are in compliance with all applicable regulatory requirements.
Sanctions for non-compliance with applicable regulations may include, but are not limited to, suspension, revocation, or limitation of a
laboratory’s CLIA certificate, as well as fines and criminal penalties. The loss of, or adverse action against, a certificate or license, the
imposition of fines, penalties or other sanctions, or future changes in Federal, state or local laboratory laws and regulations (or in the
interpretation of current laws and regulations) could have a material adverse effect on our business.
Billing and reimbursement for clinical laboratory testing is subject to complex federal and state laws, rules and regulations, the violation
of which may include, but is not necessarily limited to: (1) exclusion from participation in federal health care programs (including
Medicare and Medicaid); (2) asset forfeitures; (3) civil monetary penalties; (4) criminal fines and penalties; and (5) the loss of licenses,
certificates and/or authorizations necessary to operate some or all of a clinical laboratory’s business.
The health care industry has been undergoing significant change because third-party payers, such as Medicare, Medicaid, health
maintenance organizations and commercial insurers, have increased their efforts to control the cost, utilization and delivery of health
care services. To address the problem of increasing health care costs, legislation has been proposed or enacted at both the Federal and
state levels to regulate health care delivery in general, and clinical laboratories in particular.
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Additional health care reform efforts are likely to be proposed in the future. In particular, we believe that reductions in reimbursement
for Medicare services will continue to be implemented from time to time. Reductions in the reimbursement rates of other third-party
payers, commercial insurer and health maintenance organizations are likely to occur as well. We cannot predict the effect that current
and future health care reform measures, if enacted, would have on our business, and there can be no assurance that such reforms, if
enacted, would not have a material adverse effect on our business and operations.
Containment of health care costs, including reimbursement for clinical laboratory services, has been a focus of ongoing governmental
activity. Clinical laboratories must bill Medicare directly for the services provided to Medicare beneficiaries and may only collect the
amounts permitted under the Medicare Fee Schedule. Reimbursement to clinical laboratories under the Medicare Fee Schedule has been
steadily declining since its inception. Under federal health care reform legislation enacted in March 2010, the annual updates for clinical
laboratory services through 2015, which are based on the Consumer Price Index for All Urban Consumers (CPI-U), are reduced by a
multi-factor productivity adjustment and then by 1.75 percentage points. Based on these calculations, the Medicare Fee Schedule was
reduced in calendar year 2011 by 1.75%, increased in calendar year 2012 by 0.65%, and decreased in calendar year 2013 by 2.95%.
Future reductions/increases may occur depending on percentage changes in the CPI-U. (See Item 1A Risk Factors).
Future changes in federal, state and local regulations (or in the interpretation of current regulations) affecting governmental
reimbursement for clinical laboratory testing could have a material adverse effect on our business. We cannot predict, however, whether
and what type of legislation will be enacted into law. In addition, reimbursement disapprovals by the third party payers, commercial
insurers and health maintenance organizations, reductions or delays in the establishment of reimbursement rates, carrier limitations on
the insurance coverage of the Company’s services or the use of the Company as a service provider could have a negative effect on the
Company’s future revenues. During calendar year 2013 the Medicare reimbursement rates were reduced by an additional 2% in
connection with the government’s sequestration cuts.
Anti Fraud and Abuse Laws
Existing Federal and state laws also regulate certain aspects of the relationship among healthcare providers, including clinical
laboratories, and their referral sources (i.e., physicians, hospitals, other laboratories, etc.). One of these laws, known as the
“Anti-Kickback Statute,” contains extremely broad prohibitions against giving, accepting, soliciting ( i.e. , asking for) or arranging for
remuneration in any form (i.e., cash, gifts, certain discounts, cross-referrals between parties, etc.), either directly or indirectly, for the
purpose of inducing or rewarding another party for referrals of items or services paid for by a federal government health care program.
The Anti-Kickback statute is very broad and includes the purchasing, ordering, leasing or arranging for, or recommending the purchase,
leasing or ordering of, services paid for by a federal health care program in exchange for remuneration (i.e., anything of value).
Violation of the Anti-Kickback Statute may result in, among other things, a criminal conviction, significant monetary penalties and
exclusion from federal health care programs (including Medicare and Medicaid). Any person or entity involved in a prohibited
transaction is potentially subject to criminal and civil penalties. Compliance with the Anti-Kickback statute is also a condition of
participation under Medicare, and therefore a laboratory that claims payment for a transaction prohibited by the Anti-Kickback Statute
may also be subject to prosecution for violating a separate civil statute, the federal False Claims Act.
The False Claims Act is also a broad statute that the government often utilizes to combat fraud and abuse in the health care environment.
Among other things, the statute is violated by any person who knowingly presents, or causes to be presented, a false or fraudulent claim
for payment or approval; knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or
fraudulent claim; conspires to commit the above (or other specified) violations; or knowingly makes, uses, or causes to be made or used,
a false record or statement material to an obligation to pay or transmit money or property to the government, or knowingly conceals or
knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government. The False Claims
Act also provides that private parties may bring an action on behalf of (and in the name of) the United States to prosecute a False Claims
Act violation. These private parties (known as “qui tam relators”) may share in a percentage of the proceeds that result from a False
Claims Act action or settlement. A person or entity found to have violated the False Claims Act may be held liable for a per claim civil
penalty of not less than $5,500 and not more than $11,000, plus three times the amount of damages sustained by the government. A
person violating the False Claims Act is also liable to the government for the costs of the civil action brought to recover any such penalty
or damages. Other consequences may also result from a violation of the False Claims Act. New York has also adopted its own False
Claims Act statute, which closely mirrors its federal counterpart.
Another Federal law, commonly known as the “Stark” law, prohibits physicians who have a financial relationship with an entity that
furnishes “designated health services,” which includes clinical laboratory services (including anatomic pathology and clinical chemistry
services), from referring federal health care program beneficiaries to that entity for laboratory tests
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unless a specific exception applies. In addition, laboratories may not bill federal health care programs, or any other payor, for services
furnished pursuant to a prohibited referral. Violation of the Stark law may result not only in denial of payment for the underlying testing
services, but also the imposition of civil monetary penalties and, potentially, False Claims Act liability. New York State has adopted
laws that are similar to the Federal Stark law and Anti-Kickback Statute, which contain similar prohibitions and penalties.
The Stark law, and New York State regulations have also placed restrictions on the supplies and other items that laboratories may
provide to their clients. These laws specify that laboratories may only provide clients with items or devices that are used solely to collect,
transport or store specimens for the laboratory or to communicate results or tests. Items such as biopsy needles, snares and reusable
needles are specifically prohibited from being supplied by laboratories to their clients. The Company has implemented procedures to
ensure compliance with these laws and restrictions.
In February 1997, the OIG released model voluntary compliance program guidance for laboratories. One key aspect of the model
compliance guidance was an emphasis on the responsibility of laboratories to notify physicians that Medicare covers only medically
necessary services. This requirement, and the likely effect on physician test ordering habits, focuses on chemistry tests, especially
routine tests, rather than on anatomic pathology services or the non-automated tests, which make up the majority of the Company’s
business measured in terms of net revenues. Nevertheless, it could potentially affect physicians’ test ordering habits more broadly. The
Company is unable to predict whether, or to what extent, these developments have impacted, or may impact, utilization of the
Company’s services.
The federal health care reform legislation adopted in March, 2010, known as the Patient Protection and Affordable Care Act, contains
provisions requiring providers to establish compliance programs as a condition of enrollment in Medicare, Medicaid and the State
Children’s Health Insurance Program. Implementing regulations and guidance for clinical laboratories has not yet been issued yet by the
Centers for Medicare and Medicaid Services. In addition, New York State has adopted mandatory compliance program requirements for
certain specified providers, including those who directly or indirectly bill or collect more than $500,000 annually in Medicaid payments,
and entities licensed under certain articles of the Public Health Law and Mental Hygiene Law, respectively. Although at this time the
Company is not subject to the New York State requirement to implement a mandatory compliance program, the Company has
nevertheless adopted its own Corporate Compliance Program based upon the OIG model program guidance. The Company’s
compliance program focuses on, among other things, establishing clear compliance standards; auditing and monitoring of the
Company’s billing and coding practices; training personnel on compliance standards, policies and procedures; preventing and detecting
fraud, waste and abuse, enforcing a policy of non-retaliation and non-intimidation for good faith participation in the compliance
program; and establishing good faith reporting of actual or suspected compliance violations.
The Company seeks to structure its arrangements with physicians and other customers in compliance with federal and state
Anti-Kickback laws, Stark laws, False Claims Acts, and other applicable laws, rules and regulations, and to keep current on
developments concerning their application to the Company, including consultation with legal counsel. However, the Company is unable
to predict how such laws and regulations will be interpreted and applied in the future, and thus no assurances can be given that its
arrangements or processes will not become subject to scrutiny by a governmental agency.
Confidentiality of Health Information
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) was signed into law on August 21, 1996, and it included
“administrative simplification” provisions designed to standardize common electronic transactions in health care and to protect the
security and privacy of health information. Congress’ purpose in promulgating HIPAA was to increase the efficiency of health care
transactions while, at the same time, protecting the confidentiality of patient information. Regulations have been adopted for electronic
transaction, privacy and security standards and include the requirement to use a National Provider Identifier in electronic health care
transactions. These provisions have very broad applicability and they specifically apply to health care providers, which include
physicians and clinical laboratories. The National Provider Identifier is an identifier that replaced all other identifiers that are currently
used for healthcare transactions (e.g., UPIN, Medicaid provider numbers; identifiers assigned by commercial insurers).
The electronic transaction standards regulations created guidelines for certain common health care transactions. With certain exceptions,
these standards require that, when we conduct certain transactions electronically with another provider, clearinghouse or health plan, we
must comply with the standards set forth in the regulations. The regulations established standard data content and format for submitting
electronic claims and other administrative health transactions. Health care providers and health plans are required to use standard
formats when transmitting claims, referrals, authorizations, and certain other transactions electronically. The Company believes it is in
compliance with these standards.
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Privacy regulations and specific requirements for the use and disclosure of protected health information (“PHI”).
We are required to maintain numerous policies and procedures in order to comply with the HIPAA privacy and security requirements.
Furthermore, we need to continuously ensure that there are mechanisms to safeguard the PHI, which is used or maintained in any format
(e.g. oral, written, or electronic). Failure to comply with these requirements can result in criminal and civil penalties.
The security regulations also require us to ensure the confidentiality, integrity and availability of all electronic protected health
information (“EPHI”) that we create, receive, maintain, or transmit. We have some flexibility to fashion our own security measures to
accomplish these goals. The security regulations strongly emphasize that we must conduct an accurate and thorough assessment of the
potential risks and vulnerabilities of the confidentiality, integrity and availability of our EPHI and then document our response to the
various security regulations on the basis of that assessment.
The privacy and security regulations were modified in 2013 as a result of regulations published pursuant to the Health Information
Technology Act (“HITECH”). HITECH requires, among other things, that providers, such as laboratories, notify patients of breaches of
unsecured protected health information, enter new business associate agreements with existing business associates and revise many of
their existing privacy policies. In addition, HITECH makes business associates directly liable to the Federal government for compliance
with certain aspects of the privacy and security regulations.
Complying with the electronic transaction, privacy and security rules requires significant effort and expense for virtually all entities that
conduct health care transactions electronically and handle patient health information.
Medical Regulated Waste
We are subject to licensing and regulation under federal, state and local laws relating to the handling and disposal of medical specimens,
infectious and hazardous waste, as well as to the safety and health of laboratory employees. All our laboratories are required to operate in
accordance with applicable federal and state laws and regulations relating to biohazard disposal of all facilities specimens. We use
outside vendors to dispose of such specimens. Although we believe that we comply in all respects with such federal, state and local laws,
our failure to comply with those laws could subject us to denial of the right to conduct business, fines, criminal penalties and/or other
enforcement actions.
Occupational Safety
In addition to its comprehensive regulation of safety in the workplace, the U.S. Federal Occupational Safety and Health Administration
(“OSHA”) has established extensive requirements relating to workplace safety for health care employers, including clinical laboratories,
whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These regulations, among other things,
require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures
designed to minimize exposure to, and transmission of, blood-borne pathogens. The Federal Drug Enforcement Administration regulates
the use of controlled substances in testing for drugs of abuse. We are also subject to OSHA’s requirement that employers using
hazardous chemicals communicate the properties and hazards presented by those chemicals to their employees.
We believe that we are in compliance with these OSHA requirements. Our failure to comply with those regulations and requirements
could subject us to tort liability, civil fines, criminal penalties and/or other enforcement actions.
Other Regulation
Our business is and will continue to be subject to regulation under various state and federal environmental, safety and health laws,
including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, and the Atomic Energy Act or their
state law analogs. These and other laws govern our use, handling and disposal of various biological, chemical and radioactive substances
used in our operations and wastes generated by our operations. We are required to possess licenses under, or are otherwise subject to
federal and state regulations pertaining to, the handling and disposal of medical specimens, infectious and hazardous waste and
radioactive materials.
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We believe that we are in compliance with applicable environmental, safety and health laws in the United States and internationally and
that our continual compliance with these laws will not have a material adverse effect on our business. All of our laboratories are operated
in accordance with applicable federal and state laws and regulations relating to hazardous substances and wastes, and we use qualified
third-party vendors to dispose of biological specimens and other hazardous wastes. Although we believe that we comply in all respects
with such federal, state and local laws, our failure to comply with those laws could subject us to denial of the right to conduct business,
civil fines, criminal penalties and/or other enforcement actions. Environmental contamination resulting from spills or disposal of
hazardous substances generated by our operations, even if caused by a third-party contractor or occurring at a remote location could
result in material liability.
Regulation of Diagnostics
The diagnostic products that are developed by our collaborators, or by us, are likely to be regulated by the FDA as medical devices.
Unless an exemption applies, medical devices must receive either “510(k) clearance” or pre-market approval (“PMA”) from the FDA
before marketing them in the United States. The FDA’s 510(k) clearance process usually takes from four to twelve months, but it can last
longer. The process of obtaining PMA approval is much more costly, lengthy and uncertain. It generally takes from one to three years or
even longer. We cannot be sure that 510(k) clearance or PMA approval will ever be obtained for any product we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance or PMA approval process based upon statutory criteria.
These criteria include the level of risk that the agency perceives is associated with the device and a determination whether the product is
a type of device that is similar to devices that are already legally marketed. Devices deemed to pose relatively less risk are placed in
either class I or II, which requires the manufacturer to submit a premarket notification requesting 510(k) clearance, unless an exemption
applies. The pre-market notification must demonstrate that the proposed device is “substantially equivalent” in intended use and in
safety and effectiveness to a legally marketed “predicate device” that is either in class I, class II, or is a “pre-amendment” class III device
(i.e., one that was in commercial distribution before May 28, 1976) for which the FDA has not yet called for submission of a PMA
application.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA approval. The FDA requires each
manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a
manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k)
clearance or PMA approval. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until
510(k) clearance or PMA approval is obtained.
Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or deemed not
substantially equivalent to a legally marketed class I or class II predicate device, or to a preamendment class III device, for which PMAs
have not been called, are placed in class III. Such devices are required to undergo the PMA approval process in which the manufacturer
must prove the safety and effectiveness of the device to the FDA’s satisfaction. A PMA application must provide extensive preclinical
and clinical trial data and also information about the device and its components regarding, among other things, device design,
manufacturing and labeling. After approval of a PMA, a new PMA or PMA supplement is required in the event of a modification to the
device, it’s labeling or its manufacturing process.
Although clinical investigations of most devices are subject to the investigational device exemption (“IDE”) requirements, clinical
investigations of in vitro diagnostic (“IVDs”) tests are exempt from the IDE requirements, including the need to obtain the FDA’s prior
approval, provided the testing is noninvasive, does not require an invasive sampling procedure that presents a significant risk, does not
introduce energy into the subject, and is not used as a diagnostic procedure without confirmation by another medically established test or
procedure.
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In addition, the IVD must be labeled for Research Use Only (RUO) or Investigational Use Only (IUO), and distribution controls must be
established to assure that IVDs distributed for research or investigation are used only for those purposes. The FDA expressed its intent to
exercise heightened enforcement with respect to IUO and RUO devices improperly commercialized prior to receipt of FDA clearance or
approval.
We have developed products that we currently distribute in the United States on a RUO basis. There can be no assurance that the FDA
would agree that our distribution of these products meets the requirements for RUO distribution. Furthermore, failure by us or recipients
of our RUO products to comply with the regulatory limitations on the distribution and use of such devices could result in enforcement
action by the FDA, including the imposition of restrictions on our distribution of these products.
Any devices that we manufacture or distribute will be subject to a host of regulatory requirements, including the Quality System
Regulation (which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance
procedures), the Medical Device Reporting regulation (which requires that manufacturers report to the FDA certain types of adverse
events involving their products), labeling regulations, and the FDA’s general prohibition against promoting products for unapproved or
“off label” uses. Class II devices also can have special controls such as performance standards, post market surveillance, patient
registries, and FDA guidelines that do not apply to class I devices. Unanticipated changes in existing regulatory requirements or
adoption of new requirements could hurt our business, financial condition and results of operations.
We are subject to inspection and market surveillance by the FDA to determine compliance with regulatory requirements. If the FDA
finds that we have failed to comply, the agency can institute a wide variety of enforcement actions, ranging from a public warning letter
to more severe sanctions such as fines, injunction, civil penalties, recall or seizure of our products, the issuance of public notices or
warnings, operating restrictions, partial suspension or total shutdown of production, refusal of our requests for 510(k) clearance or PMA
approval of new products, withdrawal of 510(k) clearance or PMA approvals already granted, and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the cost of any medical device manufactured or distributed by
us. Our failure to comply with applicable requirements could lead to an enforcement action that may have an adverse effect on our
financial condition and results of operations.
Unanticipated changes in existing regulatory requirements, our failure to comply with such requirements or adoption of new
requirements could have a material adverse effect on us.
We have employees to expedite the preparation and filing of documentation necessary for FDA clearances and approvals, patent
issuances and licensing agreements.
We cannot assure you that future clinical diagnostic products developed by us or our collaborators will not be required to be reviewed by
FDA under the more expensive and time consuming pre-market approval process.
Regulation of Pharmaceutical Products
New drugs and biological drug products are subject to regulation under the Federal Food, Drug and Cosmetic Act, and biological
products are also regulated under the Public Health Service Act. We believe that products developed by us or our collaborators will be
regulated either as biological products or as new drugs. Both statutes and regulations promulgated thereunder govern, among other
things, the testing, licensing, manufacturing, marketing, distributing, safety, and efficacy requirements, labeling, storage, exporting,
record keeping, advertising and other promotional practices involving biologics or new drugs, as the case may be. FDA review or
approval or other clearances must be obtained before clinical testing, and before manufacturing and marketing, of biologics and drugs.
At the FDA, the Center for Biological Evaluation and Research (“CBER”) is responsible for the regulation of biological drugs and the
Center for Drug Evaluation and Research (“CDER”) is responsible for the regulation of non-biological drugs. Biological drugs are
licensed and other drugs are approved before commercialization.
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Any therapeutics products that we develop will require regulatory review before clinical trials, and additional regulatory clearances
before commercialization. New human gene medicine products as well as immune regulation products, as therapeutics, are subject to
regulation by the FDA and comparable agencies in other countries. The FDA on a case-by-case basis currently reviews each protocol. In
addition, the National Institutes of Health (“NIH”) is also involved in the oversight of gene therapies and the FDA has required
compliance with certain NIH requirements.
Federal requirements are detailed in Title 21 of the Code of Federal Regulations (21 CFR). In addition, the FDA publishes guidance
documents with respect to the development of therapeutics protocols.
Obtaining FDA approval has historically been a costly and time-consuming process. Generally, to gain FDA approval, a developer first
must conduct pre-clinical studies in the laboratory evaluating product chemistry, formulation and stability and, if appropriate, in animal
model systems, to gain preliminary information on safety and efficacy.
Pre-clinical safety tests must be conducted by laboratories that comply with FDA regulations governing Good Laboratory Practices
(GLP). The results of those studies are submitted with information characterizing the product and its manufacturing process and controls
as a part of an investigational new drug (“IND”) application, which the FDA must satisfactorily review before human clinical trials of an
investigational drug can start. The IND application includes a detailed description of the clinical investigations to be undertaken in
addition to other pertinent information about the product, including descriptions of any previous human experience and the company’s
future plans for studying the drug.
In order to commercialize any products, we (as the sponsor) file an IND and will be responsible for initiating and overseeing the clinical
studies to demonstrate the safety and efficacy necessary to obtain FDA marketing approval of any such products. For INDs that we
sponsor, we will be required to select qualified clinical sites (usually physicians affiliated with medical institutions) to supervise the
administration of the investigational product. It is the sponsor’s responsibility to ensure that the investigations are conducted and
monitored in accordance with FDA regulations, Good Clinical Practices (GCP) and the general investigational plan and protocols
contained in the IND. This may be done using in-house trained personnel or an outside contract research organization (CRO).
Each clinical study is reviewed and approved by an Institutional Review Board (IRB). The IRB will consider, among other things,
ethical factors and the safety of human subjects. Clinical trials are normally conducted in three phases, although the phases might
overlap. Phase I trials, concerned primarily with the safety and tolerance of the drug, and its pharmacokinetics (or how it behaves in the
body including its absorption and distribution) involve fewer than 100 subjects. Phase II trials normally involve a few hundred patients
and are designed primarily to demonstrate preliminary effectiveness and the most suitable dose or exposure level for treating or
diagnosing the disease or condition for which the drug is intended, although short-term side effects and risks in people whose health is
impaired may also be examined. Phase III trials are expanded, adequate and well-controlled clinical trials with larger numbers of patients
and are intended to gather the additional information for proper dosage and labeling of the drug. Clinical trials generally take two to five
years, but the period may vary. Certain regulations promulgated by the FDA may shorten the time periods and reduce the number of
patients required to be tested in the case of certain life-threatening diseases, which lack available alternative treatments.
The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension or
termination of clinical trials if an unwarranted risk is presented to patients. Human gene medicine products are a new category of
therapeutics.
There can be no assurance regarding the length of the clinical trial period, the number of patients that the FDA will require to be enrolled
in the clinical trials in order to establish the safety, purity and potency of human gene medicine products, or that the clinical and other
data generated will be acceptable to the FDA to support marketing approval.
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After completion of clinical trials of a new product, FDA marketing approval must be obtained before the product can be sold in the
United States. If the product is regulated as a new biologic, CBER requires the submission and approval of a Biologics License
Application (BLA) before commercial marketing of the biologic product. If the product is classified as a new drug, we must file a New
Drug Application (“NDA”) with CDER and receive approval before commercial marketing of the drug. The NDA or BLA must include
results of product development, pre-clinical studies and clinical trials. The testing and approval processes require substantial time and
effort and there can be no assurance that any approval will be granted on a timely basis, if at all. The median time to obtain new product
approvals after submission to the FDA is approximately 12 months. If questions arise during the FDA review process, approval can take
longer. Before completing its review, the FDA may seek guidance from an Advisory Panel of outside experts at a public or closed
meeting. While the advice of these committees is not binding on the FDA, it is often followed. Notwithstanding the submission of
relevant data, the FDA might ultimately decide that the NDA or BLA does not satisfy its regulatory criteria for approval and, thus, reject
the application, refuse to approve it, or require additional clinical, preclinical or chemistry studies. Even after FDA regulatory approval
or licensure, a marketed drug product is subject to continual review by the FDA.
In addition, if previously unknown problems are discovered or we fail to comply with the applicable regulatory requirements, we might
be restricted from marketing a product, we might be required to withdraw the product from the market, and we might possibly become
subject to seizures, injunctions, voluntary recalls, or civil, monetary or criminal sanctions. In addition, the FDA may condition marketing
approval on the conduct of specific post-marketing studies to further evaluate safety and effectiveness.
For commercialization of our biological or other drug products, the manufacturing processes described in our NDA or BLA must receive
FDA approval and the manufacturing facility must successfully pass an inspection prior to approval or licensure of the product for sale
within the United States. The pre-approval inspection assesses whether, for example, the facility complies with the FDA’s current good
manufacturing practices (cGMP) regulations. These regulations elaborate testing, control, documentation, personnel, record keeping and
other quality assurance procedure requirements that must be met.
Once the FDA approves our biological or other drug products for marketing, we must continue to comply with the cGMP regulations.
The FDA periodically inspects biological and other drug manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory
action, such as suspension of manufacturing, seizure of product or voluntary recall of a product.
If a developer obtains designation by the FDA of a biologic or other drug as an “orphan” for a particular use, the developer may request
grants from the federal government to defray the costs of qualified testing expenses in connection with the development of such drug.
Orphan drug designation is possible for drugs for rare diseases, including many genetic diseases, which means the drug is for a disease
that has a prevalence of less than 200,000 patients in the United States. The first applicant who receives an orphan drug designation and
who obtains approval of a marketing application for such drug acquires the exclusive marketing rights to that drug for that use for a
period of seven years unless the subsequent drug can be shown to be clinically superior. Accordingly, no other company would be
allowed to market an identical orphan drug with the same active ingredient for the use approved by the FDA for seven years after the
approval.
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Manufacturing and Research Facilities
Our internal integrated laboratory and scientific efforts for our three segments take place primarily at our two adjacent facilities in
Farmingdale, New York. A major part of one facility is utilized by Life Science as its global headquarters, and also for research and
manufacturing with special handling capabilities and clean rooms suitable for our operations The Life Sciences segment has centered its
US logistics, reagent and kit manufacturing at its facility in Ann Arbor, Michigan, and has European logistics operations in Lausen,
Switzerland. We also contract with qualified third-party contractors to manufacture our products in cases where we deem it appropriate,
for example, when it is not cost-effective to produce a product ourselves or where we seek to leverage the expertise of another
manufacturer in a certain area.
Employees
As of July 31, 2013, we employed 423 full-time and 61 part-time employees. Of the full-time employees, 100 were engaged in research,
development, manufacturing, and marketing of research products, 3 in therapeutics research, 267 in performing testing, marketing and
billing our clinical laboratories services and 53 in finance, legal, administrative and executive functions. Our scientific staff, including
57 individuals with post graduate degrees, possesses a wide range of experience and expertise in the areas of recombinant DNA, nucleic
acid chemistry, molecular biology and immunology. We believe that we have established good relationships with our employees.
Information Systems
Information systems are used extensively in virtually all aspects of our businesses. In our clinical laboratory business, our information
systems are critical with respect to laboratory testing, billing, accounts receivable, customer service, logistics, and management of
medical data. Our success depends, in part, on the continued and uninterrupted performance of our information technology systems.
Computer systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious
human acts and natural disasters.
Moreover, despite network security measures, some of our servers are potentially vulnerable to physical or electronic break-ins,
computer viruses and similar disruptive problems. We have invested heavily in the upgrade of our information and telecommunications
systems to improve the quality, efficiency and security of our businesses. In addition, to complement our proprietary physician
connectivity solution, EnzoDirect we have a web portal version which allows physicians to receive laboratory results from any personal
computer with a browser and an Internet connection.
Despite the precautionary measures that we have taken to prevent unanticipated problems that could affect our information technology
systems, sustained or repeated system failures that interrupt our ability to process test orders, deliver test results or perform tests in a
timely manner could adversely affect our reputation and result in a loss of customers and net revenues.
Quality Assurance
We consider the quality of our clinical laboratory tests to be of critical importance, and, therefore, we maintain a comprehensive quality
assurance program designed to help assure accurate and timely test results. In addition to the compulsory external inspections and
proficiency programs demanded by the Medicare program and other regulatory agencies, our clinical laboratory has in place systems to
emphasize and monitor quality assurance.
In addition to our own internal quality control programs, our laboratory participates in numerous externally administered, blind quality
surveillance programs, including on-site evaluation by the College of American Pathologies (“CAP”) proficiency testing program and
the New York State survey program. The blind programs supplement all other quality assurance procedures and give our management
the opportunity to review our technical and service performance from the client’s perspective.
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The CAP accreditation program involves both on-site inspections of our laboratory and participation in the CAP’s proficiency testing
program for all categories in which our laboratory is accredited by the CAP. The CAP is an independent nongovernmental organization
of board certified pathologists, which offers an accreditation program to which laboratories can voluntarily subscribe. A laboratory’s
receipt of accreditation by the CAP satisfies the Medicare requirement for participation in proficiency testing programs administered by
an external source. Our clinical laboratory facilities are accredited by the CAP.
FORWARD - LOOKING AND CAUTIONARY STATEMENTS
This Annual Report contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact, including, without limitation, the statements under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” Forward-looking statements may include
the words “believes,” “expects,” “plans,” “intends,” “anticipates,” “continues” or other similar expressions. These statements are based
on the Company’s current expectations of future events and are subject to a number of risks and uncertainties that may cause the
Company’s actual results to differ materially from those described in the forward-looking statements. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated,
estimated or projected. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except
as required by law.
The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange
Commission (the “SEC”). These filings are available to the public via the Internet at the SEC’s website located at http://www.sec.gov.
You may also read and copy any document the Company files with the SEC at the SEC’s public reference room located at 100 F Street,
N.E., Washington, D.C. 20549. For more information, please call the SEC at 1-800-SEC-0330.
The Company’s website is located at www.enzo.com. The Company makes available on its website a link to all filings that it makes with
the SEC. You may request a copy of the Company’s filings with the SEC (excluding exhibits) at no cost by writing or telephoning us at
the following address or telephone number:
Enzo Biochem, Inc.
527 Madison Ave.
New York, New York 10022
Tel: (212) 583-0100
Attn: Investor Relations
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Item 1A. Risk Factors
Risks relating to our Company and our industries
We have experienced significant losses in our last five fiscal years and quarter to quarter over such periods and our losses have
resulted in the use of cash in operations. If such losses and cash uses continue, the value of your investment could decline
significantly.
We incurred net losses of $18.2 million, $39.3 million, inclusive of a non-cash impairment charge of $22.4 million net of tax of $2.1
million (See Note 2) and $12.9 million for the fiscal years ended July 31, 2013, 2012 and 2011, respectively. If our revenues do not
increase, or if our operating expenses exceed expectations or cannot be reduced, we will continue to suffer substantial losses and use
cash in operations which could have an adverse effect on our business and adversely affect your investment in our Company.
We may need additional capital to fund growth, which may not be available on acceptable terms or at all, and could result in our
business plan being limited and our business being harmed.
Our ability to increase revenue and improve profitability and liquidity will depend in part on our ability to grow the Enzo Life Science
business with higher margin products and increase our market share and continue to grow the Enzo Clinical Lab business with new tests
with higher reimbursements and increase our service volume which may require significant additional capital that may not be available
to us. We may need additional financing due to future developments, changes in our business plan or failure of our current business plan
to succeed, which could result from increased marketing, distribution or research and development costs. Our actual funding
requirements could vary materially from our current estimates. If additional financing is needed, we may not be able to raise sufficient
funds on favorable terms or at all. If we issue common stock or securities convertible into common stock in the future, such issuance will
result in the then-existing stockholders sustaining dilution to their relative proportion of our outstanding equity. If we fail to obtain any
necessary financing on a timely basis, then our ability to execute our current business plan may be limited, and our business, liquidity
and financial condition could be harmed.
Our operating results may vary from period to period.
Our operating results may vary significantly from quarter to quarter and from year to year, depending on a variety of factors including:
•
competitive conditions, including changes in third-party reimbursements;
•
•
•
•
•
•
•
•
•
•
•
health care reform regulations affecting providers and plan sponsors;
changes in reimbursement policies from third party payers;
exchange rate fluctuations;
changes in tax laws, the results of tax audits or the measurement of tax uncertainties;
the timing of our research and development, sales and marketing expenses;
the introduction of new products by us or our competitors;
the success of identifying, acquiring and integrating businesses that complement our product offerings, add new technology or
add presence in a market;
expenses associated with defending our intellectual property portfolio;
customer demand for our products due to changes in purchasing requirements and research needs;
general worldwide economic conditions affecting funding of research and
seasonal fluctuations affected by weather and holiday periods.
Consequently, results for any interim period may not necessarily be indicative of results in subsequent periods.
A significant proportion of our sales are to academic centers, funded by government grants in our major markets globally.
Governments around the world have been reviewing long term public funding of life science research in response to the problems arising
from global financial pressures. As a result, the available funds for discretionary purchases from market to market have been capped or
reduced based on available National budgets. Reduced grants for researchers could impact our business, in the amount, price and type of
products bought and used by customers.
A significant proportion of our sales are to customers in Pharmaceutical and Biotech companies.
Globally, pharmaceutical companies are challenging internal budgets, and the return of investment from their R&D spend. This could
impact our business, in the amount, price and type of products bought and used by customers.
Our future success will depend in part upon our ability to enhance existing products and to develop and introduce new
products.
The market for our products is characterized by rapidly changing technology, evolving industry standards and new product
introductions, which may make our existing products obsolete.
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Our future success will depend in part upon our ability to enhance existing products and to develop and introduce new products.
The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological
and market trends as well as precise technological execution. In addition, the successful development of new products will depend on the
development of new technologies. We will be required to undertake time-consuming and costly development activities and to seek
regulatory approval for these new products. We may experience difficulties that could delay or prevent the successful development,
introduction and marketing of these new products. Regulatory clearance or approval of any new products may not be granted by the
FDA, state-wide agency or foreign regulatory authorities on a timely basis, or at all, and the new products may not be successfully
commercialized.
We may be unable to identify, acquire and integrate acquisition targets.
In the past six fiscal years we have made significant acquisitions in our Life Sciences segment. Our strategy envisions, if an opportunistic
target is identified, future growth from acquiring and integrating similar operations and/or product lines. There can be no assurance that
we will be able to identify suitable acquisition candidates and, once identified, to negotiate successfully their acquisition at a price or on
terms and conditions favorable to us, or to integrate the operations of such acquired businesses with the existing operations. In addition,
we compete for acquisition candidates with other entities, some of which have greater financial resources than ours. Our failure to
implement successfully its acquisition strategy would limit our potential growth.
Our inability to carry out certain of our marketing and sales plans may make it difficult for us to grow or maintain our business.
The Life Sciences segment continues a marketing program designed to more directly service its end users, while simultaneously
promoting the Enzo Life Science brand, with reference to our acquired brands. We will continue to reach out to our customers using our
direct field sales force, in house business team, the on-going enhancement of our interactive websites, continued attendance at top
industry trade meetings, and publications to customers and in leading scientific journals. In addition to our direct sales, we operate
worldwide through wholly-owned subsidiaries (in USA, Switzerland, Belgium, Germany, and the UK), a branch office in France and a
network of third-party distributors in most other significant markets. If we are unable to successfully continue these programs, we may
be unable to grow and our business could suffer.
We face intense competition, which could cause us to decrease the prices for our products or services or render our products
uneconomical or obsolete, any of which could reduce our revenues and limit our growth.
Our competitors in the biotechnology industry in the United States and abroad are numerous and include major pharmaceutical, energy,
food and chemical companies, as well as specialized genetic engineering firms. Many of our large competitors have substantially greater
resources than us and have the capability of developing products which compete directly with our products. Many of these companies
are performing research in the same areas as we are. The markets for our products are also subject to competitive risks because markets
are highly price competitive. Our competitors have competed in the past by lowering prices on certain products.
The clinical laboratory business is highly fragmented and intensely competitive, and we compete with numerous national and local
companies. Some of these entities are larger than we are and have greater resources than we do. We compete primarily on the basis of the
quality of our testing, reporting and information services, our reputation in the medical community, the pricing of our services and our
ability to employ qualified professionals.
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These competitive conditions could, among other things:
•
•
•
•
•
Require us to reduce our prices to retain market share;
Require us to increase our marketing efforts which could reduce our profit margins;
Increase our cost of labor to attract qualified personnel;
Render our biotechnology products uneconomical or obsolete or;
Reduce our revenue.
We depend on distributors and contract manufacturers and suppliers for materials that could impair our ability to
manufacture or distribute our products.
Outside distributors, suppliers and contract manufacturers provide key finished goods, components and raw materials used in the sale
and manufacture of our products. Our Life Sciences segment distributes product for over 40 unrelated third party manufacturers, and
own brand products from large numbers of suppliers. To the extent we are unable to maintain or replace a distributor in a reasonable time
period, or on commercially reasonable terms, if at all, our operations could be disrupted. Although we believe that alternative sources for
components and raw materials are available, any supply interruption in a limited or sole source component or raw material would harm
our ability to manufacture our products until a new source of supply is identified and qualified. In addition, an uncorrected defect or
supplier’s variation in a component or raw material, either unknown to us or incompatible with our manufacturing process, could harm
our ability to manufacture products. We might not be able to find a sufficient alternative supplier in a reasonable time period, or on
commercially reasonable terms, if at all. If we fail to obtain a supplier for the components of our products, our operations could be
disrupted.
We use hazardous materials in our business. Any claims relating to improper handling, storage or disposal of these materials
could be costly and time-consuming.
Our manufacturing, clinical laboratory and research and development processes involve the storage, use and disposal of hazardous
substances, including hazardous chemicals, biological hazardous materials and radioactive compounds. We are subject to governmental
regulations governing the use, manufacture, storage, handling and disposal of materials and waste products. Although we believe that
our safety and environmental management practices and procedures for handling and disposing of these hazardous materials are in
accordance with good industry practice and comply with applicable laws, permits, licenses and regulations, the risk of accidental
environmental or human contamination or injury from the release or exposure of hazardous materials cannot be completely eliminated.
In the event of an accident, we could be held liable for any damages that result, including environmental clean-up or decontamination
costs, and any such liability could exceed the limits of, or fall outside the coverage of, our insurance.
We may not be able to maintain insurance on acceptable terms, or at all. We could be required to incur significant costs to comply with
current or future environmental and public and workplace safety and health laws and regulations.
We are required to expend significant resources for research and development for our products in development and these
products may not be developed successfully. Failure to successfully develop these products may prevent us from earning a
return on our research and development expenditures.
The products we are developing are at various stages of development and clinical evaluations and may require further technical
development and investment to determine whether commercial application is practicable. There can be no assurance that our efforts will
result in products with valuable commercial applications. Our cash requirements may vary materially from current estimates because of
results of our research and development programs, competitive and technological advances and other factors. In any event, we will
require substantial funds to conduct development activities and pre-clinical and clinical trials, apply for regulatory approvals and
commercialize products, if any, that are developed.
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We do not have any commitments or arrangements to obtain any additional financing and there is no assurance that required financing
will be available to us on acceptable terms, if at all. Even if we spend substantial amounts on research and development, our potential
products may not be developed successfully.
If our product candidates on which we have expended significant amounts for research and development are not commercialized, we will
not earn a return on our research and development expenditures, which may harm our business.
Risks relating to our Intellectual Property and Regulatory Approval
Protecting our proprietary rights is difficult and costly. If we fail to adequately protect or enforce our proprietary rights, we
could lose potential revenue from licensing and royalties.
Our potential revenue and success depends in large part on our ability to obtain, maintain and enforce our patents. Our ability to
commercialize any product successfully will largely depend on our ability to obtain and maintain patents of sufficient scope to prevent
third parties from developing similar or competitive products.
In the absence of patent protection, competitors may impact our business by developing and marketing substantially equivalent products
and technology.
Patent disputes are frequent and can preclude the commercialization of products. We have in the past been, are currently, and may in the
future be, involved in material patent litigation, such as the matters discussed under “Part I - Item 3. Legal Proceedings” in this report.
Patent protection litigation is time-consuming and we have incurred and anticipate continuing to incur significant legal costs. In addition,
an adverse decision could force us to either obtain third-party licenses at a material cost or cease using the technology or product in
dispute.
We have filed applications for United States and foreign patents covering certain aspects of our technology, but there is no assurance that
pending patents will issue or as to the degree of protection which any issued patent might afford.
Lawsuits, including patent infringements, in the biotechnology industry are not uncommon. If we become involved in any
significant litigation, we would suffer as a result of the diversion of our management’s attention, the expense of litigation and
any judgments against us.
In addition to intellectual property litigation for infringement, other substantial, complex or extended litigation could result in large
expenditures by us and distraction of our management. Patent litigation is time-consuming and costly in its own right and could subject
us to significant liabilities to third parties. In addition, an adverse decision could force us to either obtain third-party licenses at a material
cost or cease using the technology or product in dispute. In addition, lawsuits by employees, stockholders, collaborators or distributors
could be very costly and substantially disrupt our business. Disputes from time to time with companies or individuals are not uncommon
in the biotechnology industry, and we cannot assure you that we will always be able to resolve them out of court.
We also utilize certain unpatented proprietary technology and no assurance can be given that others will not independently develop
substantially equivalent proprietary technology, that such proprietary technology will not be disclosed or that we can meaningfully
protect our rights to such proprietary technology.
We may incur impairment charges on our goodwill and intangibles which would reduce our earnings.
We are subject to Statement of Financial Accounting Standards ASC 350, “Intangibles, Goodwill and Other (“ASC 350”) which requires
that goodwill and other intangible assets that have an indefinite life be tested at least annually for impairment. Goodwill and other
intangible assets with indefinite lives must also be tested for impairment between the annual tests if a triggering event occurs that would
likely reduce the fair value of the asset below its carrying amount.
As of July 31, 2013 and 2012, goodwill represented approximately 13% and 11%, respectively, of our total assets. During the fiscal 2012
fourth quarter we recorded impairments on our indefinite-lived intangibles of $5.7 million and our goodwill of $18.8 million. The
aggregate non-cash charge of $24.5 million did not impact the Company’s consolidated cash flows, liquidity and capital resources (See
Note 2 to the Consolidated Financial Statements). If we determine that there has been impairment, our financial results for the relevant
period would be reduced by the amount of the impairment, net of tax effects, if any. After May 1, 2012, the Company had no intangible
assets with indefinite lives.
31
We may be unable to obtain or maintain regulatory approvals for our products, which could reduce our revenue or prevent us
from earning a return on our research and development expenditures.
Our research, preclinical development, clinical trials, product manufacturing and marketing are subject to regulation by the FDA and
similar health authorities in foreign countries. FDA approval is required for our products, as well as the manufacturing processes and
facilities, if any, used to produce our products that may be sold in the United States. The process of obtaining approvals from the FDA is
costly, time consuming and often subject to unanticipated delays. Even if regulatory approval is granted, such approval may include
significant limitations on indicated uses for which any products could be marketed. Further, even if such regulatory approvals are
obtained, a marketed product and its manufacturer are subject to continued review, and later discovery of previously unknown problems
may result in restrictions on such product or manufacturer, including withdrawal of the product from the market.
New government regulations in the United States or foreign countries also may be established that could delay or prevent regulatory
approval of our products under development. Further, because gene therapy is a relatively new technology and has not been extensively
tested in humans, the regulatory requirements governing gene therapy products are uncertain and may be subject to substantial further
review by various regulatory authorities in the United States and abroad. This uncertainty may result in extensive delays in initiating
clinical trials and in the regulatory approval process. Our failure to obtain regulatory approval of their proposed products, processes or
facilities could have a material adverse effect on our business, financial condition and results of operations. The proposed products under
development may also be subject to certain other federal, state and local government regulations, including, but not limited to, the
Federal Food, Drug and Cosmetic Act, the Environmental Protection Act, and Occupational Safety and Health Act, and state, local and
foreign counterparts to certain of such acts.
We cannot be sure that we can obtain necessary regulatory approvals on a timely basis, if at all, for any of the products we are developing
or manufacturing or that we can maintain necessary regulatory approvals for our existing products, and all of the following could have a
material adverse effect on our business:
•
•
•
•
significant delays in obtaining or failing to obtain required approvals;
loss of, or changes to, previously obtained approvals;
failure to comply with existing or future regulatory requirements and;
changes to manufacturing processes, manufacturing process standards or Good Manufacturing Practices following
approval or changing interpretations of these factors.
Adverse perception and increased regulatory scrutiny of gene medicine and genetic research might limit our ability to conduct
our business.
Ethical, social and legal concerns about gene medicine, genetic testing and genetic research could result in additional regulations
restricting or prohibiting the technologies we or our collaborators may use. Recently, gene medicine studies have come under increasing
scrutiny, which has delayed ongoing and could delay future clinical trials and regulatory approvals. Federal and state agencies,
congressional committees and foreign governments have expressed interest in further regulating biotechnology. More restrictive
regulations or claims that our products are unsafe or pose a hazard could prevent us from commercializing any products.
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Risks relating to our Clinical Labs services segment
Our clinical laboratory business is subject to extensive government regulation and our loss of any required certifications or
licenses could require us to cease operating this part of our business, which would reduce our revenue and injure our
reputation.
The clinical laboratory industry is subject to significant governmental regulation at the Federal, state and local levels. Under the Clinical
Laboratory Improvement Act of 1967 and the Clinical Laboratory Improvement Amendments of 1988 (collectively, as amended,
“CLIA”) virtually all clinical laboratories, including ours, must be certified by the Federal government. Many clinical laboratories also
must meet other governmental standards, undergo proficiency testing and are subject to inspection. Certifications or licenses are also
required by various state and local laws. The failure of our clinical laboratory to obtain or maintain such certifications or licenses under
these laws could interrupt our ability to operate our clinical laboratory business and injure our reputation.
Reimbursements from third-party payers, upon which our clinical laboratory business is dependent, are subject to inconsistent
rates and coverage and legislative reform that are beyond our control. This inconsistency and any reform that decreases
coverage and rates could reduce our earnings and harm our business.
Our clinical laboratory business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which
principally serves patients 65 and older) and commercial insurers. We are subject to variances in reimbursement rates among different
third-party payers, as well as constant renegotiation of those reimbursement rates. We also are subject to audit by Medicare and the
commercial insurers, which can result in the return of payments made to us under these programs. These variances in reimbursement
rates and audit results could reduce our margins and thus our earnings.
The health care industry continues to undergo significant change as third-party payers’ increase their efforts to control the cost,
utilization and delivery of health care services. In an effort to address the problem of increasing health care costs, legislation has been
proposed or enacted at both the Federal and state levels to regulate health care delivery in general and clinical laboratories in particular.
Some of the proposals include managed competition, global budgeting and price controls. Changes that decrease reimbursement rates or
coverage, or increase administrative burdens on billing third-party payers could reduce our revenues and increase our expenses.
U.S. healthcare reform legislation may result in significant change and our business could be adversely impacted if we fail to
adapt.
Government oversight of and attention to the healthcare industry in the United States is significant and increasing. In March 2010, U.S.
federal legislation was enacted to reform healthcare. The annual updates for clinical laboratory services through 2015, which are based
on the Consumer Price Index for All Urban Consumers (CPI-U), are reduced by a multi-factor productivity adjustment and then by 1.75
percentage points. Based on these calculations, the Medicare Fee Schedule was reduced in calendar year 2011 by 1.75% and increased in
calendar year 2012 by .65% and a decrease of 2.95% in calendar year 2013 Future reductions/increases may occur depending on
percentage changes in the CPI-U. In 2013, 2012 and 2011, approximately 22%, 21% and 22% of our Clinical Lab’s segment revenues
were reimbursed by Medicare under the clinical laboratory fee schedule. The legislation imposes an excise tax on the seller for the sale of
certain medical devices in the United States, including those purchased and used by laboratories, beginning in 2013. The legislation
establishes the Independent Payment Advisory Board, which will be responsible, beginning in 2014, annually to submit proposals aimed
at reducing Medicare cost growth while preserving quality. These proposals automatically will be implemented unless Congress enacts
alternative proposals that achieve the same savings targets.
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Further, the legislation calls for a Center for Medicare and Medicaid Innovation that will examine alternative payment methodologies
and conduct demonstration programs. The legislation provides for extensive health insurance reforms, including the elimination of
pre-existing condition exclusions and other limitations on coverage, fixed percentages on medical loss ratios, expansion in Medicaid and
other programs, employer mandates, individual mandates, creation of state and regional health insurance exchanges, and tax subsidies
for individuals to help cover the cost of individual insurance coverage. The legislation also permits the establishment of accountable care
organizations, a new healthcare delivery model. While the ultimate impact of the legislation on the healthcare industry is unknown, it is
likely to be extensive and may result in significant change. Our failure to adapt to these changes could have a material adverse effect on
our business.
Changes in provider mix, including continued growth in capitated managed-cost health care and changes in certain third party
provider agreements could have a material adverse impact on the Company’s net revenues and profitability.
Certain third party provider companies have adopted national and regional programs which include multiple managed-care
reimbursement models. If the Company is unable to participate in these programs or if the Company would lose a material contract, it
could have a material adverse impact on the Company’s net revenues and profitability.
The number of individuals covered under managed care contracts or other similar arrangements has grown over the past several years
and may continue to grow in the future. In addition, Medicare and other government healthcare programs may continue to shift to
managed care. Entities providing managed care coverage have reduced payments for medical services, including clinical laboratory
services, in numerous ways such as entering into arrangements under which payments to a service provider are capitated, limiting testing
to specified procedures, denying payment for services performed without prior authorization and refusing to increase fees for specified
services. These trends reduce our revenues and limit our ability to pass cost increases to our customers. Also, if these or other managed
care organizations do not select us as a participating provider, we may lose some or all of that business, which could have an adverse
effect on our business, financial condition and results of operations.
Because of competitive pressures, impacts of the economy on patient traffic at our customers and the complexity and expense of
the billing process in our clinical laboratory business, we must obtain new customers while maintaining existing customers to
grow our business.
Intense competition in the clinical laboratory business, increasing administrative burdens upon the reimbursement process, reduced
patient traffic, and reduced coverage and payments by insurers make it necessary for us to increase our volume of laboratory services. To
do so, we must obtain new customers while retaining existing customers.
Our failure to attract new customers or the loss of existing customers or a reduction in business from those customers could significantly
reduce our revenues and impede our ability to grow.
Compliance with Medicare administrative policies, including those pertaining to certain automated blood chemistry profiles,
may reduce the reimbursements we receive.
Containment of health care costs, including reimbursement for clinical laboratory services, has been a focus of ongoing governmental
activity. Clinical laboratories must bill Medicare directly for the services provided to Medicare beneficiaries and may only collect the
amounts permitted under this fee schedule. Reimbursement to clinical laboratories under the Medicare Fee Schedule has been steadily
declining since its inception. Because a significant portion of our costs is fixed, these Medicare reimbursement reductions and changes
have a direct adverse effect on our net earnings and cash flows.
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Regulations requiring the use of “standard transactions” for healthcare services may negatively impact our profitability and
cash flows.
The administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996 and its implementing
regulations, or HIPAA, were designed to improve the efficiency and effectiveness of the healthcare system by facilitating the electronic
exchange of information in certain financial and administrative transactions while protecting the privacy and security of the information
exchanged. The administrative simplification provisions address standards for electronic transactions, security regulations and privacy
regulations.
The HIPAA transaction standards are complex, and subject to differences in interpretation by payers. For instance, some payers may
interpret the standards to require us to provide certain types of information, including demographic information not usually provided to
us by physicians. While most of our transactions are submitted and/or received in ANSI standard format, inconsistent application of
transaction standards by some remaining payers or our inability to obtain certain billing information not usually provided to us by
physicians could increase our costs and the complexity of billing. In addition, new requirements for additional standard transactions,
such as claims attachments, could prove technically difficult, time-consuming or expensive to implement. We are working closely with
our payers to establish acceptable protocols for claims submissions and with our industry trade association and an industry coalition to
present issues and problems as they arise to the appropriate regulators and standards setting organizations.
Compliance with the HIPAA security regulations and privacy regulations may increase our costs.
The HIPAA privacy and security regulations establish comprehensive federal standards with respect to the uses and disclosures of
protected health information by health plans, healthcare providers and healthcare clearinghouses (collectively referred to as “Covered
Entities”). The HIPAA privacy and security regulations were recently amended by the Health Information Technology Act and its
implementing regulations, or HITECH, to, among other things, expand the obligations of HIPAA to business associates (i.e., individuals
or entities who perform services, other than treatment, on behalf of Covered Entities and receive protected health information in order to
perform such services). The regulations establish a complex regulatory framework on a variety of subjects, including:
the circumstances under which uses and disclosures of protected health information are permitted or required
without a specific authorization by the patient, including but not limited to treatment purposes, activities to obtain
payments for our services, and our healthcare operations activities;
a patient’s rights to access, amend and receive an accounting of certain disclosures of protected health
information;
requirements to notify individuals if there is a breach of their protected health information;
the requirements for business associates and the terms of business associate agreements;
the content of notices of privacy practices for protected health information and;
administrative, technical and physical safeguards required of entities that use or receive protected health
information.
We have implemented practices to meet the requirements of the HIPAA privacy and security regulations, and update these practices to
comply with HITECH. HIPAA establishes a “floor” and do not supersede state laws that are more stringent. Therefore, we are required
to comply with both federal privacy and security regulations and varying state privacy laws. In addition, for healthcare data transfers
from other countries relating to citizens of those countries, we must comply with the laws of those other countries. The federal privacy
regulations restrict our ability to use or disclose patient-identifiable laboratory data, without patient authorization, for purposes other
than payment, treatment, healthcare operations and certain other specified disclosures such as public health and governmental oversight
of the health care industry. The privacy and security regulations provide for significant fines and other penalties for wrongful use or
disclosure of protected health information, including potential civil and criminal fines and penalties. Although the HIPAA statute and
regulations do not expressly provide for a private right of damages, we also could incur damages under state laws to private parties for
the wrongful use or disclosure of confidential health information or other private personal information.
Compliance with all of the HIPAA and HITECH regulations, including standard transactions, requires ongoing resources from all
healthcare organizations, not just clinical laboratories. While we believe our total costs to comply with HIPAA will not be material to our
operations or cash flows, new standard transactions and additional customer requirements resulting from different interpretations of the
current regulations could impose additional costs on us.
35
FDA regulation of laboratory-developed tests, analyte specific reagents, or genetic testing could lead to increased costs and
delays in introducing new genetic tests.
The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by
clinical laboratories. In the past, the FDA has claimed regulatory authority over laboratory-developed tests, but has exercised
enforcement discretion in not regulating tests performed by high complexity CLIA-certified laboratories. In December 2000, the HHS
Secretary’s Advisory Committee on Genetic Testing recommended that the FDA be the lead federal agency to regulate genetic testing.
In late 2002, a new HHS Secretary’s Advisory Committee on Genetics, Health and Society, or SACGHS, was appointed to replace the
prior Advisory Committee. Ultimately, SACGHS decided that it would continue to monitor the progress of the federal agencies in the
oversight of genetic technologies, but it did not believe that further action was warranted. In the meantime, the FDA is considering
revising its regulations on analyte specific reagents, which are used in laboratory-developed tests, including laboratory-developed
genetic testing. FDA interest in or actual regulation of laboratory-developed tests or increased regulation of the various medical devices
used in laboratory-developed testing could lead to periodic inquiry letters from the FDA and increased costs and delays in introducing
new tests, including genetic tests.
In the past, the clinical laboratory industry has received negative publicity. This publicity has led to increased legislation, regulation, and
review of industry practices. These factors may adversely affect our ability to market our services, require us to change our services and
increase the regulatory burdens under which we operate, further increasing the costs of doing business and adversely affecting our
operating results. If we experience a significant disruption in our information technology systems, including our website, or if we fail to
implement new systems and software successfully, our business could be adversely affected.
Other risks relating to our business
If we fail to maintain or monitor our information systems our businesses could be adversely affected.
We depend on information systems throughout our Company to control our Life Science manufacturing, inventory, distribution and
website and the Clinical Lab processes for: processing orders, managing inventory, processing shipments to and collecting cash from our
customers, responding to customer inquiries, contributing to our overall internal control processes, maintaining records of our property,
plant and equipment, and recording and paying amounts due vendors and other creditors. If we were to experience a prolonged
disruption in our information systems that involve interactions with customers and suppliers, it could result in the loss of sales and
customers and/or increased costs, which could adversely affect our business.
If we fail to attract and retain key personnel, including our senior management, our business could be adversely affected.
Most of our products and services are highly technical in nature. In general, only highly qualified and trained scientists and technician
personnel have the necessary skills to develop proprietary technological products and market our products, support our research and
development programs and provide our Clinical Lab services.
In addition, some of our manufacturing, quality control, safety and compliance, information technology and e-commerce related
positions are highly technical as well. Further, our sales personnel highly trained and are important to retaining and growing our
businesses. Our success depends in large part upon our ability to identify, hire, retain and motivate highly skilled professionals.
36
We face intense competition for these professionals from our competitors, customers, marketing partners and other companies
throughout the industries in which we compete. Since our inception we have successfully recruited and hired qualified key employees.
Any failure on our part to hire, train, and retain a sufficient number of qualified professionals would seriously damage our business.
We depend heavily on the services of our senior management. We believe that our future success depends on the continued services of
such management. Our business may be harmed by the loss of a significant number of our senior management in a short period of time.
The insurance we purchase to cover our potential business risk may be inadequate.
Although we believe that our present insurance coverage is sufficient to cover our current estimated exposures, we cannot assure that we
will not incur liabilities in excess of our policy limits. In addition, although we believe that will be able to continue to obtain adequate
coverage, we cannot assure that we will be able to do so at acceptable costs.
Risks relating to our international operations
Foreign currency exchange rate fluctuations may adversely affect our business.
Since we operate as a multinational corporation that sells and sources products in many different countries, changes in exchange rates
could in the future, adversely affect our cash flows and results of operations.
Furthermore, reported sales and purchases made in non-U.S. currencies by our international businesses, when translated into U.S. dollars
for financial reporting purposes, fluctuate due to exchange rate movement. Due to the number of currencies involved, the variability of
currency exposures and the potential volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations on
future sales and operating results.
We are subject to economic, political and other risks associated with our significant international business, which could
adversely affect our financial results.
We operate internationally primarily through wholly-owned subsidiaries located in North America and Europe. Revenues outside the
United States were approximately 14% of total revenues in fiscal 2013. Our sales and earnings could be adversely affected by a variety
of factors resulting from our international operations, including
•
•
•
•
•
•
•
•
future fluctuations in exchange rates;
complex regulatory requirements and changes in those requirements;
trade protection measures and import or export licensing requirements;
multiple jurisdictions and differing tax laws, as well as changes in those laws;
restrictions on our ability to repatriate investments and earnings from foreign operations;
changes in the political or economic conditions in a country or region, particularly in developing or emerging
markets;
changes in shipping costs; and
difficulties in collecting on accounts receivable.
If any of these risks materialize, we could face substantial increases in costs, the reduction of profit and the inability to do business.
37
Risks Relating to our Common Stock
Our stock price has been volatile, which could result in substantial losses for investors.
Our common stock is quoted on the New York Stock Exchange, and there has been historical volatility in the market price of our
common stock. The trading price of our common stock has been, and is likely to continue to be, subject to significant fluctuations due to
a variety of factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
fluctuations in our quarterly operating and earnings per share results;
the gain or loss of significant contracts;
the carrying value of our goodwill and intangible assets;
loss of key personnel;
announcements of technological innovations or new products by us or our competitors;
delays in the development and introduction of new products;
legislative or regulatory changes;
general trends in the industries we operate;
recommendations and/or changes in estimates by equity and market research analysts;
biological or medical discoveries;
disputes and/or developments concerning intellectual property, including patents and litigation matters;
public concern as to the safety of new technologies;
sales of common stock of existing holders;
securities class action or other litigation;
developments in our relationships with current or future customers and suppliers and;
general economic conditions, both in the United States and worldwide.
In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of our
common stock, as well as the stock of many companies in our industries. Often, price fluctuations are unrelated to operating performance
of the specific companies whose stock is affected.
In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has occurred against
the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and a diversion of our
management’s attention and resources, each of which could have a material adverse effect on our revenue and earnings. Any adverse
determination in this type of litigation could also subject us to significant liabilities.
38
Because we do not intend to pay cash dividends on our common stock, an investor in our common stock will benefit only if it
appreciates in value.
We currently intend to retain our retained earnings and future earnings, if any, to finance the expansion of our business and do not expect
to pay any cash dividends on our common stock in the foreseeable future. As a result, the success of an investment in our common stock
will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain
the price at which investors purchased their shares.
It may be difficult for a third party to acquire us, which could inhibit stockholders from realizing a premium on their stock
price.
We are subject to the New York anti-takeover laws regulating corporate takeovers. These anti-takeover laws prohibit certain business
combinations between a New York corporation and any “interested shareholder” (generally, the beneficial owner of 20% or more of the
corporation’s voting shares) for five years following the time that the shareholder became an interested shareholder, unless the
corporation’s board of directors approved the transaction prior to the interested shareholder becoming interested.
Our certificate of incorporation, as amended, and by-laws contain provisions that could have the effect of delaying, deferring or
preventing a change in control of us that stockholders may consider favorable or beneficial. These provisions could discourage proxy
contests and make it more difficult for stockholders to elect directors and take other corporate actions. These provisions could also limit
the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:
•
•
a staggered board of directors, so that it would take three successive annual meetings to replace all directors; and
advance notice requirements for the submission by stockholders of nominations for election to the board of
directors and for proposing matters that can be acted upon by stockholders at a meeting.
Future sales of shares of our common stock or the issuance of securities senior to our common stock could adversely affect the
trading price of our common stock and our ability to raise funds in new equity offerings.
We are not restricted from issuing additional common stock, preferred stock or securities convertible into or exchangeable for common
stock. Future sales of a substantial number of our shares of common stock or equity-related securities in the public market or privately, or
the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock, and could impair our
ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any,
that future sales of shares of common stock or the availability of shares of common stock for future sale will have on the trading price of
our common stock.
Risk relating to our debt
Our use of leverage may expose us to substantial risks, including interest rate risk.
As of July 31, 2013, we had $3.3 million in borrowings under our Revolving Loan and Security Agreement (“credit agreement”). In
addition, we may incur additional indebtedness in the future. Accordingly, we are exposed to the typical risks associated with the use of
leverage. Increased leverage makes it more difficult for us to withstand adverse economic conditions or business plan variances, to take
advantage of new business opportunities, or to make necessary capital expenditures. The existing credit agreement contains restrictive
covenant restrictions that limit our ability to conduct our business, including restrictions on our ability to incur additional indebtedness.
Our ability to maintain our compliance with these covenants is dependent on our financial performance, which is influenced by a number
of factors. Violation of any of these covenants would result in an event of default under the credit agreement. Upon the occurrence of an
event of default that is not cured or waived, the lender would have the ability to accelerate the repayment of all amounts then outstanding
under the credit agreement. In the event of a default, and during the continuance of an event of default under the credit agreement, we
would no longer have the right to borrow additional funds under the credit agreement. Under these circumstances, we may not be able to
pay our debt or borrow sufficient funds to refinance it on terms that are acceptable to us or at all.
Our credit agreement requires the payment of interest based on 3 month LIBOR plus a fixed rate. Fluctuations in this variable interest
rate could negatively impact our financial results.
39
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The following are the principal facilities of the Company:
Location
Primary use
Segments
Leased /
owned
Square
footage
Farmingdale, NY
(Note1)
Clinical laboratory and research
Clinical Labs
Leased
43,000
Farmingdale, NY
Manufacturing, research, sales and
administrative office
Life Sciences,
Therapeutics
Owned
22,000
New York, NY
(Note 2)
Lausen,
Switzerland
(Note 3)
Ann Arbor,
Michigan
(Note 4)
Corporate headquarters
Other
Leased
11,300
Operational headquarters in Europe,
including sales and distribution
Life Sciences
Leased
18,829
Manufacturing, research, and
Life Sciences
Leased
26,820
distribution
Note 1 - In March 2005, the Company amended and extended the lease for its Farmingdale laboratory for a period of 12 years (See Note
13 to the Consolidated Financial Statements).
Note 2 - In February 2010, the lease, which includes 4,100 square feet under a sublease rental agreement through December 31, 2014,
was extended through May 2020.
Note 3 - The lease for this property was acquired in connection with the Axxora acquisition in May 2007 and was amended and extended
through January 2015.
Note 4 - The lease for this property was acquired in connection with the Assay Designs acquisition in March 2009 and was amended and
extended through April 2016.
We believe the current facilities are suitable and adequate for the Company’s current operating needs for its clinical laboratories, life
science and therapeutics segments and that the production capacity in various locations is sufficient to manage product requirements.
40
Item 3. Legal Proceedings
The Company, as plaintiff, is currently engaged in litigation in the United States District Court for the Southern District of New York
against six parties (and certain of their related companies): Amersham plc, Perkin Elmer, Inc., Molecular Probes, Inc., Orchid
Biosciences, Inc., Affymetrix, Inc., and Roche Diagnostic GmbH (“Roche”). These cases were commenced at various times from
October 2002 to June of 2004. In each of the six cases, the Company asserts similar (with some differences) causes of action against the
defendants which can be generally described as contract, tort, fraud, and patent claims, except that no patent claims are asserted against
Affymetrix. In the Roche case, Roche seeks a declaratory judgment of non-breach and patent invalidity against the Company. The cases
were consolidated for pre-trial purposes in 2004 and there has been extensive discovery among the parties. In 2011, the defendants
moved for summary judgment of non-infringement regarding the Company’s patent claims. In 2012, those motions were granted in part
and denied in part. In December 2012, all six defendants moved for summary judgment on the Company’s non-patent claims.
Additional discovery was taken and the Company responded to the motions in May 2013. Those motions are now fully briefed, but have
not yet been decided. The Company expects that the pending motions will be decided prior to October 31, 2013.
On June 7, 2004, the Company and Enzo Life Sciences, Inc., filed suit in the United States District Court for the District of Connecticut
against Applera Corporation and its wholly-owned subsidiary Tropix, Inc., now Life Technologies, Inc. (NASDAQ:LIFE). The
complaint alleged infringement of six patents relating to DNA sequencing systems, labeled nucleotide products, and other technology.
Yale University is the owner of four of the patents and the Company is the exclusive licensee. These four patents are commonly referred
to as the “Ward” patents. On November 12, 2012, a jury in New Haven found that one of these patents (United States Patent No.
5,449,667) was infringed and not proven invalid. The jury awarded $48.5 million for this infringement. Prejudgment interest should
provide for additional recovery in the tens of millions of dollars. Life Technologies will likely appeal and there can be no assurance that
the Company will be successful in this litigation. Even if the Company is not successful, management does not believe that there will be
a significant adverse monetary impact on the Company.
In 2012, the Company received a Subpoena Duces Tecum (the “Subpoena”) from the federal Department of Health and Human
Services, Office of Inspector General (“OIG”). The Subpoena was issued as part of an investigation being conducted by the US
Attorney’s Office for the Eastern District of New York in conjunction with the OIG. While a number of potential issues were raised
initially by the government, the investigation has come to focus primarily on certain practices relating to an alleged failure to collect
diagnosis codes from physicians who ordered tests from Enzo’s Clinical Labs. The time period covered by the investigation is from
2004 through 2011. In response to the Subpoena, the Company is cooperating with the government and has provided documents as
requested and no claim has yet been asserted by the OIG. The Company continues to review the methodologies around the matters
raised as well as the facts that impact them. Due to the on-going review, various questions of fact and the continuing discussions with the
government the Company is unable at this time to predict the outcome or estimate the potential impact that could result from the final
resolution of the investigation.
The Company is party to other claims, legal actions, complaints, and contractual disputes that arise in the ordinary course of business.
The Company believes that any liability that may ultimately result from the resolution of these matters will not, individually or in the
aggregate, have a material adverse effect on its financial position or results of operations.
Item 4. Mine Safety Disclosures
Not Applicable
41
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common stock of the Company is traded on the New York Stock Exchange (Symbol: ENZ). The following table sets forth the high
and low price of the Company’s common stock for the periods indicated as reported on the New York Stock Exchange.
2013 Fiscal Year (August 1, 2012 to July 31, 2013):
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2012 Fiscal Year (August 1, 2011 to July 31, 2012):
1st Quarter
2ndQuarter
3rd Quarter
4th Quarter
$
$
$
$
$
$
$
$
High
2.17 $
3.16 $
3.13 $
2.43 $
High
3.93 $
2.85 $
3.15 $
2.80 $
Low
1.33
1.86
1.83
1.96
Low
2.05
1.98
2.13
1.43
As of September 30, 2013, the Company had approximately 913 stockholders of record of its common stock.
The Company has not paid a cash dividend on its common stock and intends to continue a policy of retaining earnings to finance and
build its operations. Accordingly, the Company does not anticipate the payment of cash dividends to holders of common stock in the
foreseeable future.
42
Item 6. Selected Financial Data
The following table, which is derived from the audited consolidated financial statements of the Company for the fiscal years 2009
through 2013 should be read together with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and the Company’s consolidated financial statements and notes to those statements included elsewhere in this Annual
Report on Form 10-K.
For the fiscal year ended July 31,
(In thousands, except per share amounts)
2013
2012
2011
2010
(1)
2009
$
93,707 $
103,083 $
102,029 $
97,082 $
89,572
$
-
(24,540)
-
-
-
$
(18,980) $
(40,479) $
(12,928) $
(22,058) $
(23,407)
$
(18,237) $
(39,269) $
(12,960) $
(22,233) $
(23,564)
Operating Results
Revenues
Impairment charges (2)
Operating loss
Net loss
Basic and diluted net loss per
common share:
$
(0.46) $
(1.01) $
(0.34) $
(0.59) $
(0.63)
Financial Position
Working capital
$
2013
8,704 $
July 31,
(in thousands)
2011
33,670 $
2012
21,412 $
2010
42,181 $
2009
60,518
Total assets (2)
$
58,958 $
69,123 $
109,474 $
115,245 $
133,128
Stockholders’ equity (2)
$
34,132 $
49,101 $
88,715 $
97,016 $
116,781
Notes to Selected Financial Data:
(1) On March 12, 2009, Enzo Life Sciences Inc. acquired Assay Designs, Inc. (“ADI”). As such, the operating results of
ADI are included in the consolidated operating results beginning March 12, 2009.
(2)
In the fourth quarter of fiscal 2012, the Company recorded an impairment charge on goodwill and indefinite lived
intangible assets (See Item 7, Management Discussion and Analysis of Financial Conditions and Results of
Operations and Note 2 to the Consolidated Financial Statements),
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company’s Enzo Clinical Labs and Enzo Life Sciences reporting units, as described below, are affected by different US and global
economic conditions which are included in Item 1A, Risk Factors.
The Clinical Lab reporting unit is impacted by various risk factors, including among others, reduced reimbursements from third party
payers for testing performed and from recent health care legislation. Despite the growth we have experienced there can be no assurance
future growth can be achieved. The introduction of new molecular and esoteric tests is expected to increase our revenue per test and
could offset impacts from the above factors. The Company anticipates improved profitability with increased service volume. Clinical
Labs experienced year over year growth in fiscal 2012 of 13% but experienced contraction in fiscal 2013 of 6%.
43
Recent Actions
On June 7, 2013, the Company entered into a secured Revolving Loan and Security Agreement (the “Credit Agreement”) among the
Company and certain of its subsidiaries, with Enzo Therapeutics as a guarantor, and Healthcare Finance Group, LLC (the “Lender).The
Credit Agreement, which expires in December 2016, provides for borrowings against eligible US receivables, as defined, of the Clinical
Lab and Life Science segments up to $8.0 million at defined eligibility percentages and provides for additional borrowings of $4.0
million for increased eligible assets. At July 31, 2013, the borrowings under the Credit Agreement related to the Clinical Lab receivables
aggregated $3.3 million with an additional availability of $0.2 million. Commencement of borrowing against the eligible Life Science
receivables requires advance notification to the Lender. (See Note 7 to the Consolidated Financial Statements and the liquidity and
capital resources section).
We are comprised of three operating companies that have evolved out of our core competence: the use of nucleic acids as informational
molecules and the use of compounds for immune modulation. These wholly-owned operating companies and the foreign subsidiaries of
Enzo Life Sciences conduct their operations through three reportable segments. Below are brief descriptions of each of the three
operating segments (see Note 15 in the Notes to Consolidated Financial Statements):
Enzo Clinical Labs is a regional clinical laboratory serving the greater New York, New Jersey and Eastern Pennsylvania medical
communities. The Company believes having clinical diagnostic services allows us to capitalize firsthand on our extensive advanced
molecular and cytogenetic capabilities and the broader trends in predictive and personalized diagnostics. We offer a menu of routine and
esoteric clinical laboratory tests or procedures used in general patient care by physicians to establish or support a diagnosis, monitor
treatment or medication, or search for an otherwise undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale,
New York, a network of approximately 30 patient service centers throughout greater New York, New Jersey and Eastern Pennsylvania,
a standalone “stat” or rapid response laboratory in New York City, and a full-service phlebotomy and an in-house logistics department.
Payments for clinical laboratory testing services are made by the Medicare program, healthcare insurers and patients.
Enzo Life Sciences manufactures, develops and markets products and tools to life sciences, drug development and clinical research
customers world-wide and has amassed a large patent and technology portfolio. Enzo Life Sciences, Inc. is a recognized leader in
labeling and detection technologies across research and diagnostic markets. Our strong portfolio of proteins, antibodies, peptides, small
molecules, labeling probes, dyes and kits provides life science researchers tools for target identification/validation, high content
analysis, gene expression analysis, nucleic acid detection, protein biochemistry and detection, and cellular analysis. We are
internationally recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over 7,500 of our
own products and in addition distribute over 30,000 products made by over 40 other original manufacturers. Our strategic focus is
directed to innovative high quality research reagents and kits in the primary key research areas of genomics, cellular analysis, small
molecule chemistry, protein homeostasis and epigenetics and immunoassays and assay development. The segment is an established
source for a comprehensive panel of products to scientific experts in the fields of cancer, cardiovascular disease, neurological disorders,
diabetes and obesity, endocrine disorders, infectious and autoimmune disease, hepatotoxicity and renal injury.
Enzo Therapeutics is a biopharmaceutical company that has developed multiple novel approaches in the areas of gastrointestinal,
infectious, ophthalmic and metabolic diseases, many of which are derived from the pioneering work of Enzo Life Sciences. The
Company has focused its efforts on developing treatment regimens for diseases and conditions in which current treatment options are
ineffective, costly, and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well as more than
45 patents and patent applications.
The following table summarizes the sources of revenues for the fiscal years ended July 31, 2013, 2012 and 2011, (in $000’s and
percentages):
Fiscal year ended July 31,
Clinical laboratory services
Product revenues
Royalty and license fee
income
Total
2013
2012
2011
$
55,889
32,526
59% $
35
59,403
37,722
58% $
37
52,762
41,830
5,292
93,707
$
6
5,958
100% $ 103,083
5
7,437
100% $ 102,029
52%
41
7
100%
44
Results of Operations
Fiscal year ended July 31, 2013 compared to July 31, 2012
(in 000s)
Comparative Financial Data for the Fiscal Years Ended July 31,
2013
2012
Increase
(Decrease)
% Change
Revenues:
Clinical laboratory services
Product revenues
Royalty and license fee income
Total revenues
$
55,889 $
32,526
5,292
93,707
59,403 $
37,722
5,958
103,083
Operating expenses:
Cost of clinical laboratory services
Cost of product revenues
Research and development
Selling, general, and administrative
Provision for uncollectible accounts receivable
Legal
Impairment charges
Total operating expenses
38,251
16,584
3,889
43,654
4,496
5,813
-
112,687
36,305
19,668
6,293
47,928
5,104
3,724
24,540
143,562
(3,514)
(5,196)
(666)
(9,376)
1,946
(3,084)
(2,404)
(4,274)
(608)
2,089
(24,540)
(30,875)
Operating loss
(18,980)
(40,479)
(21,499)
Other income (expense):
Interest
Other
Foreign currency gain (loss)
Loss before income taxes
Consolidated Results:
(54)
5
80
(18,949) $
21
77
(540)
(40,921) $
(75)
(72)
620
(21,972)
$
(6)%
(14)
(11)
(9)
5
(16)
(38)
(9)
(12)
56
(100)
(22)
(53)
(357)
(94)
115
54
The “2013 period” and the “2012 period” refer to the Fiscal Year ended July 31, 2013 and 2012, respectively.
Clinical laboratory services revenues for the 2013 period were $55.9 million compared to $59.4 million in the 2012 period. The 2013
period’s decrease over the 2012 period was $3.5 million or 6%. During the 2013 period revenues were negatively impacted by lower
reimbursement rates from certain payers of $2.2 million, net of organic growth, and by approximately $1.3 million due to a severe storm
affecting our service area in the last three days of the first quarter and the first week of the second quarter.
Product revenues were $32.5 million as compared to $37.7 million in the 2012 period, a decrease of $5.2 million or 14%. During the
2013 period we continued to experience a decline attributed to certain distributed products for certain customer types and declines in
resale products due to market softness in research reagent products partially due to reduced government funding.
Royalty and license fee income during the 2013 period was $5.3 million compared to $6.0 million in the 2012 period a decrease of $0.7
million or 11%. Royalties are primarily earned from the reported sales of Qiagen products subject to a license agreement. There are no
direct expenses relating to royalty and licensing income.
The cost of clinical laboratory services during the 2013 period was $38.2 million as compared to $36.3 million in the 2012 period, an
increase of $1.9 million or 5%. The Company incurred increased costs due to increased payroll costs of $0.3 million, higher reagent costs
and supplies of $0.3 million, higher outside reference lab costs of $0.8 million and other lab support costs of $0.5 million. Certain
increases are affected by the changes in the mix of tests offered to the ordering physician.
The cost of product revenues during the 2013 period was $16.6 million compared to $19.7 million in the 2012 period, a decrease of $3.1
million or 16%.The decrease is primarily attributed to lower payroll and related costs of $1.1 million due to the business realignments
during fiscal 2012, $0.2 million in lower overhead costs and $0.2 depreciation costs, and the balance attributed to lower product
revenues.
45
Research and development expenses were approximately $3.9 million during the 2013 period, compared to $6.3 million in the 2012
period, a decrease of $2.4 million or 38%. The decrease was principally attributed to lower costs of $2.0 million at the Enzo Life
Sciences segment due to lower payroll and related costs of $1.0 million, lower patent filing costs of $0.3 million, lower material costs of
$0.3 million and lower overhead costs of $0.4 million due to a refocus of projects. The clinical trial and related activities at the
Therapeutics segment decreased by $0.4 million due to lower payroll and related costs and patent filing fees as compared to the 2012
period.
The Company’s selling, general and administrative expenses were approximately $43.7 million during the 2013 period and $47.9
million during the 2012 period, a decrease of $4.3 million or 9%.The Enzo Life Sciences segment selling, general and administrative
decreased by $2.8 million due to lower payroll and related costs of $1.8 million, rent and facility costs of $0.5 million, travel costs of
$0.3 million and $0.5 million in other operating costs primarily resulting from the positive effects from the business realignments in
fiscal 2012 which continued into fiscal 2013, offset by higher depreciation and amortization of $0.3 million. The Clinical Lab segment
selling general and administrative decreased by $0.9 million primarily due to a decrease in personnel related costs of $1.2 million, of
which $0.3 million is attributed to lower service volume, offset by increases in information processing costs of $0.3 million. The Other
selling general and administrative decreased by $0.6 million, primarily due to a decrease of $0.4 million in compensation and related
expenses and decreases of $0.1 in professional fees and $0.1 decreases in consulting costs. Such decreases in the Other were part of the
planned expense reductions in the 2013 period.
The provision for uncollectible accounts receivable primarily related to the Clinical Labs segment, was $4.5 million for the 2013 period
as compared to $5.1 million in the 2012 period. The decrease of $0.6 million was due to decreases of $0.8 million at Clinical Labs due to
the change in the mix of payers and improved collection procedures offset by increases of $0.2 million at Life Sciences. As a percentage
of revenues the provision for uncollectible accounts receivable for the Clinical Lab segment decreased to 7.6% from 8.4% in the 2012
period.
Legal expense was $5.8 million during the 2013 period compared to $3.7 million in the 2012 period, an increase of $2.1 million due to
overall increases in legal services in the 2013 period primarily related to a patent litigation trial and other patent litigation related matters.
During the 2012 period the Company recorded a pre-tax non-cash impairment charges of $24.5 million related to US and foreign
goodwill and trademarks carried in the Life Sciences segment. The charges resulted in a deferred tax benefit of approximately $2.1
million, bringing the impact of the charge, net of the tax benefit, to $22.4 million.
During the 2013 period, the gain on foreign currency transactions was $0.1 million as compared to a loss of $0.5 million in the 2012
period. During the 2013 period, the Company recognized remeasurement gains because of Swiss franc depreciation versus the euro and
Great British pound. During the 2012 period, the foreign currencies experienced depreciation against the Swiss franc and US dollar.
Segment Results
Clinical Labs
The Clinical Labs segment’s loss before taxes was $7.1 million for the 2013 period as compared to a loss of $3.3 million in the 2012
period, an increase of $3.8 million resulting from increased operating costs and decreased service volume. The revenue from laboratory
services decreased in the 2013 period by $3.5 million due to the impact of lower reimbursements rates from certain payers of $2.2
million, net of organic growth, and approximately $1.3 million due to a severe storm affecting our service area. As a result of these
revenue impacts, the 2013 period gross profit of $17.6 million decreased from the 2012 period by $5.5 million. Selling, general and
administrative expense decreased by approximately $0.9 million primarily due to decreases in personnel costs of $1.2 million offset by
increases in other costs of $0.3 million. The provision for uncollectible accounts receivable decreased by $0.8 million as compared to the
2012 period due to the improved implemented collection procedures and changes in the mix of payers and as a percentage of revenues
decreased to 7.6% from 8.4% in the 2012 period.
46
Life Sciences
The Life Sciences segment’s income before taxes was $3.1 million for the 2013 period as compared to $24.3 million loss for the 2012
period. During the 2012 period the Company recorded pre-tax non-cash impairment charges of $24.5 million related to US and foreign
goodwill and trademarks. Excluding the aforementioned impairment charges the segment would have had income before income taxes
of $0.3 million in the 2012 period.
Product revenues decreased by $5.2 million or 14% in the 2013 period to $32.5 million as compared to $37.7 million in the 2012 period
due to a continued decline attributed to certain distributed products for certain customer types and declines in resale products due to
market softness in research reagent products. Royalty and license fee income of $5.3 million represented a decrease of $0.7 million as
compared to the 2012 period and is primarily from the reported net sales of Qiagen products subject to a license agreement. The
segment’s gross profit was $21.2 million in the 2013 period, as compared to $24.0 million in the 2012 period. Gross profit was
negatively impacted by the decline in product revenues, offset by reduced payroll, facility and other costs resulting from realignments
during fiscal 2012 and continuing into fiscal 2013. The segment’s other operating expenses, including selling, general and
administrative, legal, provision for uncollectible accounts and research and development, decreased by approximately $5.1 million
during the 2013 period due to reduced research and development and selling, general and administrative of $4.8 million and lower legal
of $0.5 million offset by an increase in provision for uncollectible accounts of $0.2. Due to the strengthening of foreign currencies versus
the Swiss franc during the 2013 period as compared to the 2012 period, the foreign currency gain was $0.1 million as compared to a loss
of $0.5 million in the 2012 period.
Therapeutics
Therapeutics loss before income taxes was approximately $1.2 million for the 2013 period as compared to $1.7 million in 2012 period
primarily due to lower payroll costs of $0.3 million and lower materials and overhead costs of $0.1 million.
Other
The Other loss before taxes for the 2013 period was approximately $13.6 million as compared to $11.7 million for the 2012 period, an
increase of $1.9 million. In the 2013 period legal expenses increased by $2.5 million due to overall increases in legal services directly
related to a patent litigation trial and other legal activities. General and administrative costs decreased by $0.6 million due to lower
compensation and related costs and other costs.
47
Results of Operations
Fiscal year ended July 31, 2012 compared to July 31, 2011
(in 000’s)
Comparative Financial Data for the Fiscal Years Ended July 31,
2012
2011
Increase
(Decrease)
% Change
Revenues:
Clinical laboratory services
Product revenues
Royalty and license fee income
Total revenues
$
59,403 $
37,722
5,958
103,083
52,762 $
41,830
7,437
102,029
Operating expenses:
Cost of clinical laboratory services
Cost of product revenues
Research and development
Selling, general, and administrative
Provision for uncollectible accounts receivable
Legal
Impairment charges
Total operating expenses
36,305
19,668
6,293
47,928
5,104
3,724
24,540
143,562
31,682
22,137
7,806
45,191
4,431
3,710
-
114,957
6,641
(4,108)
(1,479)
1,054
4,623
(2,469)
(1,513)
2,737
673
14
24,540
28,605
13%
(10)
(20)
1
15
(11)
(19)
6
15
-
-
25
Operating loss
(40,479)
(12,928)
(27,551)
(213)
Other income (expense):
Interest
Other
Foreign exchange gain (loss)
Loss before income taxes
Consolidated Results:
21
77
(540)
(40,921) $
11
45
49
(12,823) $
10
32
(589)
(28,098)
$
91
71
-
219
The “2012 period” and the “2011 period” refer to the Fiscal year ended July 31, 2012 and 2011, respectively.
Clinical laboratory services revenue during the 2012 period were $59.4 million compared to $52.8 million in the 2011 period. The 2012
period’s increase over the 2011 period was $6.6 million or 13% due to organic growth.
Product revenues decreased by $4.1 million or 10% in the 2012 period to $37.7 million as compared to $41.8 million in the 2011 period
due to a decline in organic sales. During the 2012 period we experienced a decline attributed to certain distributed products for certain
customer types and declines in resale products due to market softness in research reagent products.
Royalty and license fee income during the 2012 period was $6.0 million compared to $7.5 million in the 2011 period, a decrease of $1.5
million or 20%. Royalties were primarily earned from the reported sales of Qiagen products subject to a license agreement. During the
2012 period the Qiagen royalties decreased by $0.8 million as compared to the 2011 period, to $5.9 million as a result of lower reported
sales from Qiagen. The 2012 period decrease is also due to Abbott’s notification in the 2011 period that they had made a final payment
under a license agreement, which aggregated $0.5 million, since they were not aware of any non-expired patents covered under the
license agreement. Other royalties declined $0.1 million. There are no direct expenses relating to royalty and licensing income.
48
The cost of clinical laboratory services during the 2012 period was $36.3 million as compared to $31.7 million in the 2011 period, an
increase of $4.6 million or 15%. The Company incurred increased costs in the 2012 period due to higher reagent costs and supplies of
$1.7 million, higher laboratory personnel costs and related costs of $1.1 million, higher outside reference lab costs of $1.1 million and
other lab costs of $0.7 million, all attributed to the increased service volume and higher employee benefit costs. In the 2012 period the
gross profit margin decreased to 39% from 40% in the 2011 period due to the increased costs.
The cost of product revenues during the 2012 period was $19.6 million compared to $22.1 million in the 2011 period, a decrease of $2.5
million or 11%. The decrease is primarily due to lower revenues and decreases to manufacturing costs.
Research and development expenses were approximately $6.3 million during the 2012 period, compared to $7.8 million in the 2011
period, a decrease of $1.5 million or 19%. The decrease was attributed to lower costs of $1.5 million at Enzo Life Sciences principally
due to lower payroll of $0.9 million, overhead costs of $0.4 million due to integration of facilities and lower patent related costs of $0.2
million. Research and development for the Clinical Labs segment, which commenced in the 2012 period, was $0.3 million. The
Therapeutics segment expense decreased by $0.3 million as compared to the 2011 period primarily due the recognition of deferred
revenue from a research grant.
Selling, general and administrative expenses were approximately $48.0 million during the 2012 period as compared to $45.2 million in
the 2011 period, an increase of $2.7 million or 6%. The Clinical Lab segment’s selling general and administrative increased by $2.4
million primarily due to an increase in sales commissions of $0.5 million, an increase in other expenses of $1.9 million, including among
others payroll and related benefits, severance costs, rent and repairs and maintenance for patient collection centers, phones, and billing
support, all related to the increased revenue volume. The Life Sciences segment selling general and administrative increased by $0.4
million due to a $0.5 million increase in compensation costs for existing personnel and for new hires of senior level marketing personnel
in the latter half of fiscal 2011, and an increase in overhead costs of approximating $0.3 million, partially offset by a decrease of $0.4
million in compensation costs for administrative personnel due to headcount reduction. The Other selling general and administrative
decreased by $0.1 million, primarily due to decreases in compensation and related costs and other employee benefit costs of $0.5 million
offset by increases in professional fees of $0.4 million.
The provision for uncollectible accounts receivable, primarily relating to the Clinical Labs segment, was $5.1 million for the 2012 period
as compared to $4.4 million in the 2011 period primarily due to the increase in service volume. As a percentage of revenues the provision
for uncollectible accounts receivable for the Clinical Labs segment approximated 8.4% in both periods.
Legal expense was $3.7 million during the 2012 and 2011 periods relating to general legal services, patent and litigation related matters.
During the 2012 period, the Company recorded pre-tax non-cash impairment charges of $24.5 million related to US and foreign
goodwill and trademarks carried in the Life Sciences segment. The charges resulted in a deferred tax benefit of approximately $2.1
million, bringing the impact of the charges, net of the tax benefit, to $22.4 million (See Note 2 to the Consolidated Financial Statements).
During the 2012 period, the loss on foreign currency transactions was $0.5 million compared to income of $0.1 million in the 2011
period. The loss in the 2012 period was due to the weakening of foreign currencies relative to the US dollar and the impact that had
principally on intercompany loans denominated in foreign currencies.
49
Segment Results
Clinical Labs
The Clinical Labs segment’s loss before taxes was $3.3 million for the 2012 period as compared to a loss of $2.1 million in the 2011
period, an increase of $1.2 million. The revenue from laboratory services increased in the 2012 period by $6.6 million or 13% due to
organic growth. The 2012 period gross profit of $23.1 million increased over the 2011 period by $2.0 million or 10% due to increases in
service revenues and cost of lab services. Selling, general and administrative expense increased by approximately $2.4 million primarily
due to increases in sales commissions directly the result of increased service revenues and other costs associated with the increased
volume. The provision for uncollectible accounts receivables increased by $0.6 million as compared to the 2011 period due to the
increase in service volume but as a percentage of revenues was approximately 8.4% in both the 2012 and 2011 periods. Research and
development, which commenced in the 2012 period, was $0.3 million.
Life Sciences
The Life Sciences segment’s (loss) income before taxes was ($24.3) million for the 2012 period, which includes a non-cash impairment
charge of $ 24.5 million related to goodwill and trademarks, as compared to income before taxes of $2.8 million for the 2011 period.
Company product revenues decreased by $4.1 million or 10% in the 2012 period primarily due to a decline in sales of certain distributed
products for certain customer types and declines in resale products due to market softness in research reagent products. Further, royalty
and license fee income decreased by $1.5 million in the 2012 period attributed to a decrease in royalties of $0.8 million from the reported
sales of Qiagen products subject to a license agreement, as previously discussed, and in addition, no royalty payments were received
under another license agreement after the first quarter of the 2011 period. The segment’s gross profit of $24.0 million in the 2012 period,
as compared $27.1 million in the 2011 period, was negatively impacted by the previously discussed changes in revenues. The segment’s
gross profit percentage was 55% in the 2012 and 2011 periods. The segment’s other operating expenses, including selling, general and
administrative, legal and research and development, decreased by approximately $1.2 million during the 2012 period primarily due to
reduced research and development costs of $1.4 million and decreased legal cost of $0.2 million, offset by higher compensation of $0.1
million and higher overhead of $0.3 million.
Therapeutics
The Therapeutics segment’s loss before income taxes was approximately $1.7 million in the 2012 and $2.0 in 2011 period. The decline
was due to the recognition of deferred revenue from a research grant of $0.4 million offset by other increases of $0.1 million.
Other
The Other loss before taxes for the 2012 period was approximately $11.7 million as compared to $11.5 million the 2011 period. In the
2012 period, legal expenses increased by $0.3 million, and general and administrative costs relating to compensation costs and other
employee benefit costs decreased by $0.5 million offset by an increase in professional fees of $0.4 million.
50
Liquidity and Capital Resources
At July 31, 2013, the Company had cash and cash equivalents of $9.0 million of which $1.5 million was in foreign accounts, as
compared to cash and cash equivalents of $15.1 million, of which $2.5 million was in foreign accounts at July 31, 2012. It is the
Company’s current intent to permanently reinvest these funds outside of the United States, and its current plans do not demonstrate a
need to repatriate them to fund its United States operations. The Company had working capital of $8.7 million at July 31, 2013 compared
to $21.4 million at July 31, 2012. The decrease in working capital of $12.7 million was primarily the result of the net loss and funding
capital expenditures offset by changes in net operating assets and liabilities.
Net cash used in operating activities for the year ended July 31, 2013 was approximately $10.0 million as compared to $6.0 million for
the year ended July 31, 2012. The increase in net cash used in operating activities in the 2013 period over the 2012 period of
approximately $4.0 million was primarily due to a decrease in the net loss of $21.0 million offset by a decrease in non-cash charges of
$24.4 million (primarily the fiscal 2012 impairment charges of $24.5 million) and by changes in operating assets and liabilities of $0.6
million, relating primarily to an increase in accounts receivable and increases in current liabilities.
Net cash used in investing activities was approximately $1.0 million as compared to cash provided of $7.5 million in the year ago period.
The decrease in the 2013 period of $8.5 million is primarily due to $10 million in maturities of short-term investments in 2012 offset by
an earn out payment of $1.1 million made in the 2012 period and $0.4 million of lower capital expenditures.
On June 7, 2013, the Company entered into a secured Revolving Loan and Security Agreement (the “Credit Agreement”) among the
Company and certain of its subsidiaries, with Enzo Therapeutics as a guarantor, and Healthcare Finance Group, LLC (the “Lender).The
Credit Agreement, which expires in December 2016, provides for borrowings against eligible US receivables, as defined, of the Clinical
Labs and Life Sciences segments up to $8.0 million at defined eligibility percentages and provides for additional borrowings of $4.0
million for increased eligible assets. At July 31, 2013, the borrowings under the Credit Agreement related to the Clinical Labs
receivables aggregated $3.3 million with an additional availability of $0.2 million. Commencement of borrowing against the eligible
Life Sciences receivables requires advance notification to the Lender. As of July 31, 2013, the Company received a waiver from the
Lender for non-compliance with a financial covenant and the lender modified various financial covenants relating to fiscal 2014. In
fiscal 2014, the Company expects to be in compliance with the modified financial covenants.
As previously disclosed in the Company’s Form 10-K for the year ended July 31, 2012, in the fourth quarter of fiscal 2012 the Company
completed a review of all operating units and expected to reduce annual cash expenditures by $6.0 million in fiscal 2013 based on actions
completed by September 1, 2012 which included, among other items, a realignment of our workforce, final integration of the acquired
businesses at Life Sciences, rationalization of low margin products, a refocus of our research and development program toward higher
value diagnostic platforms and the reduction in outside consulting costs. For the year ended July 31, 2013, the Company realized the
aforementioned cost reductions in annual expenditures however; such reductions were partially offset by higher than expected legal
costs of approximately $2.1 million relating to patent litigation matters. The Company will continue to review all operating units and
expects to further reduce annual operating expenditures in fiscal 2014. While revenues at the Life Sciences has continued to decline the
operating results have improved, although there can be no assurance that Life Sciences will be able to sustain these results and if not, it
may be required to record an impairment of intangibles and long lived assets. Despite the challenging global economic environment,
declining revenues in the Life Sciences reporting unit in fiscal 2013 attributed to macroeconomic concerns and customer research
budgets, impacts of healthcare reform regulations and changes in payer policies affecting reimbursements to providers and the funding
of research projects, the Company believes that its current cash and cash equivalents level, utilization of the Controlled Equity Offering
program disclosed in Note 10, which has resulted in net proceeds of $1.5 million subsequent to July 31, 2013, and available borrowings
under the aforementioned Revolving Loan and Security Agreement disclosed in Note 7 are sufficient for its foreseeable liquidity and
capital resource needs over the next twelve (12) months, although there can be no assurance that future events will not alter such view.
Although there can be no assurances, in the event additional capital is required, the Company believes it has the ability to raise additional
funds through equity offerings or other sources of funds. Our liquidity plans are subject to a number of risks and uncertainties, including
those described in the Item 1A. “Risk Factors” section of this Form 10-K for the year ended July 31, 2013, some of which are outside our
control. Macroeconomic conditions could limit our ability to successfully execute our business plans and therefore adversely affect our
liquidity plans.
See in this Form 10-K for the fiscal year ended July 31, 2013 Part 1. Item 1. Business, for Forward Looking Cautionary Statements.
51
Effect of New Accounting Pronouncements
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income” (Topic 220) - Presentation of
Comprehensive Income” (ASU No. 2011-05), which requires an entity to present the total of comprehensive income, the components of
net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in
two separate but consecutive statements. ASU 2011-05 eliminated the option to present the components of other comprehensive income
as part of the statement of stockholders’ equity. The Company adopted ASU 2011-05 in its first quarter of fiscal year 2013 by including
the required disclosures in two separate but consecutive statements.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08 “Testing Goodwill for Impairment” (ASU No.
2011-08) which is intended to reduce the complexity and costs to test goodwill for impairment. The amendment allows an entity the
option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it is necessary to perform the
two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless
the entity determines, based on its qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than
its carrying amount. The ASU also expands upon the examples of events and circumstances that an entity should consider between
annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. The amendment became effective for annual and interim goodwill impairment tests performed for the Company’s fiscal year
beginning August 1, 2012. The Company adopted ASU 2011-08 in the first quarter of fiscal 2013 and adoption did not have a material
impact on its consolidated financial statements.
In July 2011, the FASB issued ASU No. 2011-07 “Health Care Entities (Topic 954) - Presentation and Disclosure of Patient Service
Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities”. This update was issued
to provide greater transparency relating to accounting practices used for net patient service revenue and related bad debt allowances by
health care entities. Some health care entities recognize patient service revenue at the time the services are rendered regardless of
whether the entity expects to collect that amount or has assessed the patient’s ability to pay. These prior accounting practices used by
some health care entities resulted in a gross-up of patient service revenue and the provision for bad debts, causing difficulty for users of
financial statements to make accurate comparisons and analyses of financial statements among entities. ASU No. 2011-07 requires
certain healthcare entities to change the presentation of the statement of operations, reclassifying the provision for bad debts associated
with patient service revenue from an operating expense to a deduction from patient service revenue and also requires enhanced
quantitative and qualitative disclosures relevant to the entity’s policies for recognizing revenue and assessing bad debts. This update is
not designed to change and will not change the net income reported by healthcare entities. The Company adopted this update in its first
quarter of fiscal year 2013 with no impact on its consolidated financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets
for Impairment” (ASU 2012-02), which permits an entity to make a qualitative assessment of whether it is more likely than not that the
fair value of a reporting unit’s indefinite-lived intangible asset is less than the asset’s carrying value before applying the two-step
goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that the fair value of a
reporting unit’s indefinite-lived intangible asset is more likely than not greater than the asset’s carrying value, the remaining impairment
steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment.
ASU 2012-02 is effective for the Company for annual and interim indefinite-lived intangible asset impairment tests performed
beginning August 1, 2013, however early adoption is permitted. The Company is currently evaluating the impact ASU 2012-02 will have
on its consolidated financial statements.
Contractual Obligations
The Company has entered into various real estate and equipment operating leases and has employment agreements with certain
executive officers. The real estate lease for the Company’s Farmingdale Clinical Lab and Research facility is with a related party. See
Item 2, Properties, and Note 13 to the Consolidated Financial Statements for a further description of these various leases.
The following is a summary of future payments under the Company’s contractual obligations as of July 31, 2013:
52
Payments Due by Period
In 000’s
Current and Long term Debt
Obligations
Capital Lease Obligations
Operating Lease Obligations
Employment agreements
Total
Total
3,714 $
732
19,180
2,271
25,897 $
$
$
Less than
1 year
1-3 years
4-5 years
More than 5
years
1,446 $
176
4,346
1,048
7,016 $
212 $
352
7,973
1,223
9,760 $
2,056 $
204
4,345
-
6,605 $
-
-
2,516
-
2,516
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.
Off-Balance Sheet Arrangements
The Company does not have any “off-balance sheet arrangements” as such term is defined in Item 303(a) (4) of Regulation S-K.
Critical Accounting Policies
General
The Company’s discussion and analysis of its financial condition and results of operations are based upon Enzo Biochem, Inc.
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. These estimates and judgments also affect related disclosure of contingent assets
and liabilities.
On an on-going basis, we evaluate our estimates, including those related to contractual expense, allowance for uncollectible accounts,
inventory, intangible assets and income taxes. The Company bases its estimates on experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Product revenues
Revenues from product sales are recognized when the products are shipped and title transfers, the sales price is fixed or determinable and
collectability is reasonably assured.
Royalties
Royalty revenues are recorded in the period earned. Royalties received in advance of being earned are recorded as deferred revenues.
53
Revenues - Clinical laboratory services
Revenues from the Clinical Labs segment are recognized upon completion of the testing process for a specific patient and reported to the
ordering physician. These revenues and the associated accounts receivable are based on gross amounts billed or billable for services
rendered, net of a contractual adjustment, which is the difference between amounts billed to payers and the expected approved
reimbursable settlements from such payers.
The following table represents the Clinical Labs segment’s net revenues and percentages by revenue category:
Year ended July 31
2013
Year ended July 31
2012
Year ended July 31
2011
Revenue category
Medicare
Third-party payers
Patient self-pay
HMO’s
Total
(In 000’s)
(in %)
(In 000’s)
(in %)
(In 000’s)
$
$
12,497
26,014
12,172
5,206
55,889
22 $
47
22
9
100% $
12,658
29,616
11,895
5,234
59,403
21 $
50
20
9
100% $
11,856
24,335
11,554
5,017
52,762
(in %)
22
46
22
10
100%
The Company provides services to certain patients covered by various third-party payers, including the Federal Medicare program. Laws
and regulations governing Medicare are complex and subject to interpretation for which action for noncompliance includes fines,
penalties and exclusion from the Medicare programs. See Item 3. Legal Proceedings.
Other than the Medicare program, one provider whose programs are included in the “Third-party payers” and “Health Maintenance
Organizations” (“HMO’s”) categories represent approximately 22%, 21% and 22% of the Clinical Labs segment net revenue for the
years ended July 31, 2013, 2012 and 2011 respectively. Another third party provider represents 9%, 13% and 11% of the Clinical Labs
segment’s net revenue for the years ended July 31, 2013, 2012 and 2011, respectively.
Contractual Adjustment
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer
reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as
reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual
adjustment is an estimate that reduces gross revenue based on gross billing rates, to amounts expected to be approved and reimbursed.
Gross billings are based on a standard fee schedule we set for all third party payers, including Medicare, health maintenance
organizations (“HMO’s”) and managed care. The Company adjusts the contractual adjustment estimate quarterly, based on its
evaluation of current and historical settlement experience with payers, industry reimbursement trends, and other relevant factors. The
other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and
receivables and reimbursement by payer, 2) current changes in third party arrangements and 3) the growth of in-network provider
arrangements and managed care plans specific to our Company.
Our clinical laboratory business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which
principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement rates among different third-party
payers, as well as constant changes of reimbursement rates. Changes that decrease reimbursement rates or coverage would negatively
impact our revenues. The number of individuals covered under managed care contracts or other similar arrangements has grown over the
past several years and may continue to grow in the future. In addition, Medicare and other government healthcare programs continue to
shift to managed care. These trends will continue to reduce our revenues.
54
During the years ended July 31, 2013, 2012 and 2011, the contractual adjustment percentages, determined using current and historical
reimbursement statistics, were approximately 85%, 85% and 84%, respectively, of gross billings. The Company believes a decline in
reimbursement rates or a shift to managed care, or similar arrangements may be offset by the positive impact of an increase in the
number of tests we perform. However, there can be no assurance that we can increase the number of tests we perform or that if we do
increase the number of tests we perform, that we can maintain that higher number of tests performed, or that an increase in the number of
tests we perform would result in increased revenue.
The Company estimates (by using a sensitivity analysis) that each 1% point change in the contractual adjustment percentage could result
in a change in clinical laboratory services revenues of approximately $3.8 million, $3.8 million, and $3.2 million, for the years ended
July 31, 2013, 2012, and 2011, respectively, and a change in the net accounts receivable of approximately $0.5 million and $0.5 million
as of July 31, 2013 and 2012, respectively.
Our clinical laboratory financial billing system records gross billings using a standard fee schedule for all payers and does not record
contractual adjustment by payer at the time of billing. Therefore, we are unable to quantify the effect of contractual adjustment recorded
during the current period that relate to revenue recorded in a previous period. However, we can reasonably estimate our monthly
contractual adjustment to revenue on a timely basis based on our quarterly review process, which includes:
•
•
•
•
an analysis of industry reimbursement trends;
an evaluation of third-party reimbursement rates changes and changes in reimbursement arrangements with third-party payers;
a rolling monthly analysis of current and historical claim settlement and reimbursement experience statistics with payers;
an analysis of current gross billings and receivables by payer.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the
period of the related revenue.
The following is a table of the Company’s net accounts receivable by segment. The Clinical Labs segment’s net receivables are detailed
by billing category and as a percent to its total net receivables. As of July 31, 2013 and 2012, approximately 60% and 55%, respectively,
of the Company’s net accounts receivable relates to its Clinical Labs business, which operates in the New York, New Jersey and Eastern
Pennsylvania medical communities. The Life Sciences segment’s accounts receivable, of which $1.7 million or 35% and $2.3 million or
36% represents foreign receivables as of July 31, 2013 and 2012 respectively, includes royalty receivables of $1.2 million and $1.7
million, respectively, from Qiagen Corporation.
55
Net accounts receivable
Clinical Labs (by billing category)
Medicare
Third party payers
Patient self-pay
HMO’s
Total Clinical Labs
Total Life Sciences
Total accounts receivable – net
July 31, 2013
July 31, 2012
(In 000’s)
(in %)
(In 000’s)
(in %)
$
$
930
3,395
2,696
300
7,321
4,967
12,288
13 $
46
37
4
100%
$
1,270
3,478
2,655
330
7,733
6,402
14,135
16
45
35
4
100%
Changes in the Company’s allowance for doubtful accounts are as follows:
In 000’s
Beginning balance
Provision for doubtful accounts
Write-offs, net
Ending balance
July 31, 2013
$
$
3,273 $
4,496
(5,062)
2,707 $
July 31, 2012
3,488
5,104
(5,319)
3,273
For the Clinical Labs 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.
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 years ended July 31, 2013 and 2012, the Company determined an allowance for doubtful accounts for customers whose
accounts receivable have been oustanding less than 210 days and wrote off 100% of accounts receivable over 210 days, as it assumed
those accounts are uncollectible, except for certain fully reserved balances, principally related to Medicare. These accounts have not
been written off because the payer’s filing date deadline has not occurred or the collection process has not been exhausted. The
Company’s collection experience on Medicare receivables beyond 210 days has been insignificant. The Company adjusts the historical
collection analysis for recoveries, if any, on an ongoing basis.
The Company’s ability to collect outstanding receivables from third party payers is critical to its operating performance and cash flows.
The primary collection risk lies with 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 collectability of its receivables is directly linked to the quality of its billing processes, most notably, those related to obtaining the
accurate patient 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.
56
Billing for laboratory services is complicated because of many factors, especially: the differences between our standard gross fee
schedule for all payers and the reimbursement rates of the various payers we deal with, disparity of coverage and information
requirements among the various payers, and disputes with payers as to which party is responsible for reimbursement.
The following table indicates the Clinical Labs aged gross receivables by payer group (in thousands), which is prior to adjustment to
gross receivables for: 1) contractual adjustment, 2) fully reserved balances not yet written off, and 3) other revenue adjustments.
$
As of July 31,
2013
1-30 days
31-60 days
61-90 days
91-120 days
121-150 days
Greater than
150 days*
Totals
$
As of July 31,
2012
$
1-30 days
31-60 days
61-90 days
91-120 days
121-150 days
Greater than
150 days**
$
Totals
Total
Amount %
Medicare
Amount %
Third
Party
Payers
Amount %
Self-pay
Amount %
25,565 50% $
6,238 12%
5,923 12%
8%
4,287
5%
2,319
3,741 62% $
7%
6%
4%
3%
452
357
216
166
14,915 44% $
4,254 12%
3,845 11%
3,484 10%
6%
2,140
3,341 48% $
1,492 21%
1,686 24%
8%
0%
546
-
HMO’s
Amount %
3,568 96%
1%
1%
1%
0%
40
35
41
13
6,847 13%
51,179 100% $
1,058 18%
5,990 100% $
5,824 17%
34,462 100% $
(73)
-1%
6,992 100% $
38
1%
3,735 100%
Total
Amount %
Medicare
Amount %
Third
Party
Payers
Amount %
Self-pay
Amount %
HMO’s
Amount %
27,092 54% $
8,282 17%
9%
4,922
8%
3,758
5%
2,301
5,246 56% $
475
5%
964 10%
6%
512
6%
515
14,529 52% $
4,566 17%
9%
2,561
8%
2,124
6%
1,733
3,337 39% $
3,092 36%
1,257 15%
977 10%
0%
-
3,980 89%
3%
3%
3%
1%
149
140
145
53
3,701
7%
50,056 100% $
1,589 17%
9,301 100% $
2,072
8%
27,585 100% $
-
0%
8,663 100% $
40
1%
4,507 100%
* Total includes $3,775 fully reserved over 210 days as of July 31, 2013.
** Total includes $1,178 fully reserved over 210 days as of July 31, 2012.
Income Taxes
The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits
recognized for net operating loss carry forwards and other items be reduced by a valuation allowance where it is not more likely than not
the benefits will be realized in the foreseeable future.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under the liability method, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date.
It is the Company’s policy to provide for uncertain tax positions, if any, and the related interest and penalties based upon management’s
assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the
Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of
the liability, the Company’s effective tax rate in a given financial statement period may be affected.
Inventory
The Company values inventory at the lower of cost (first-in, first-out) or market. Work-in-process and finished goods inventories consist
of material, labor, and manufacturing overhead. Write downs of inventories to market value are based on a review of inventory quantities
on hand and estimated sales forecasts based on sales history and anticipated future demand. Unanticipated changes in demand could
have a significant impact on the value of our inventory and require additional write downs of inventory which would impact our results
of operations.
57
Goodwill and Indefinite-Lived Intangibles
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company tests goodwill
and had tested other indefinite lived intangibles for impairment annually as of the first day of the fourth quarter, or more frequently if
indicators of potential impairment exist. Goodwill is reviewed for impairment utilizing a two-step process. The first step of the
impairment test requires the identification of the reporting units and comparison of the fair value of each of these reporting units to their
respective carrying value. If the carrying value of the reporting unit is less than its fair value, no impairment exists and the second step is
not performed. If the carrying value of the reporting unit is higher than its fair value, the second step must be performed to compute the
amount of the goodwill impairment, if any. In the second step, the impairment is computed by comparing the implied fair value of the
reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized for the excess. In the fiscal 2012 fourth quarter the Company
recorded a non-cash goodwill impairment charge relating to the Life Sciences reporting unit of $18.8 million after completing an interim
impairment assessment as of July 31, 2012. The interim impairment test as of July 31, 2012 was required due to a decline in market
capitalization of 44% from May 1 to July 31, 2012 and declining revenues experienced in the fourth quarter of fiscal 2012.
In connection with the annual assessment of indefinite-lived intangibles as of May 1, 2012, the Company determined the estimated fair
value of trademarks, relating to the Enzo Life Sciences reporting unit, were less than their carrying values by $5.7 million primarily due
to declines in projected revenues and in connection with future plans resulting from a strategic review. As a result of this impairment,
which included a change in the future branding strategy, the useful life of the trademarks were reassessed and determined to have an
estimated economic life of 5 years. A non-cash impairment charge of $5.7 million, ($4.4 million net of related taxes) was recorded for
the trademark impairment in the fourth quarter. As a result of the reclassification of trademarks from indefinite lived to a 5 year life,
annual amortization of trademarks is estimated to be $0.6 million per year.
Intangible Assets
Intangible assets (exclusive of patents), arose primarily from acquisitions and primarily consist of customer relationships, trademarks,
licenses, employment and non-compete agreements, and website and database content. These finite-lived intangible assets are amortized
according to their estimated useful lives, which range from 4 to 15 years. The Company had previously capitalized certain legal costs
directly incurred in pursuing patent applications as patent costs. When such applications result in an issued patent, the related costs are
amortized over a ten year period or the life of the patent, whichever is shorter, using the straight-line method. The Company reviews its
issued patents and pending patent applications, and if it determines to abandon a patent application or that an issued patent no longer has
economic value, the unamortized balance in deferred patent costs relating to that patent is immediately expensed.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates resulting from acquisitions with foreign locations (See
Item 1A. Risk Factors and Note 2 in the Notes to Consolidated Financial Statements) that could impact our results of operations and
financial position. We do not currently engage in any hedging or market risk management tools.
Foreign Currency Exchange Rate Risk
The financial reporting of our non-U.S. subsidiaries is denominated in currencies other than the U.S. dollar. Since the functional
currency of our non-U.S. subsidiaries is the local currency, foreign currency translation adjustments are accumulated as a component of
accumulated other comprehensive income in stockholders’ equity. Assuming a hypothetical decline of 10% in the exchange rates of
foreign currencies against the U.S. dollar at July 31, 2013, our assets and liabilities would decrease by $1.0 million and $0.6 million,
respectively, and our net sales and net earnings (loss) would decrease by $1.3 million and $0.2 million, respectively, on an annual basis.
We also maintain intercompany balances and loans receivable with subsidiaries with different local currencies. These amounts are at risk
of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical increase of 10% in the exchange rates of foreign
currencies against the U.S. dollar at July 31, 2013, our pre-tax earnings (loss) would be unfavorably impacted by approximately $0.4
million on an annual basis.
Interest Rate Risk
We are exposed to interest rate risk with our variable rate Credit Agreement which bears interest at the three month LIBOR with a floor
of 1.25% plus 4% per annum. A 3% change in the LIBOR rate would impact our interest expense by $0.1 million.
As of July 31, 2013, we have fixed interest rate financing on transportation and equipment leases.
58
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this report. See Item 15(a) (1) and (2)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2013. This evaluation was carried
out under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer. There are inherent
limitations to the effectiveness of any system of disclosure controls and procedures. Therefore, effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control objectives.
Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective at that reasonable assurance level as of July 31, 2013, and that information required to be disclosed in the reports
that we file under the Exchange Act is recorded, processed, summarized and reported in a timely manner and is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
59
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fourth quarter ended July 31, 2013 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) under the Exchange Act.
Our internal control over financial reporting is a process designed 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 principles
and includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of management and our directors; and
provide reasonable assurance regarding prevention and timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial statements.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems that are determined to be
effective provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting based on criteria for effective internal control
over financial reporting described in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on its assessment, management concluded that we maintained effective internal control over financial reporting as of July 31,
2013.
EisnerAmper LLP, our independent registered public accounting firm, has audited the effectiveness of the Company’s internal control
over financial reporting as of July 31, 2013, as stated in their report, which is included herein.
60
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Enzo Biochem, Inc.
We have audited Enzo Biochem, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of July 31, 2013,
based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Enzo Biochem, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of July 31, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Enzo Biochem, Inc. and subsidiaries as of July 31, 2013, and the related consolidated statements of
operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and our report dated October 15,
2013 expressed an unqualified opinion thereon.
/s/ EisnerAmper LLP
New York, New York
October 15, 2013
61
Item 9B. Other Information
None
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required under this item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange
Commission on or before November 27, 2013 and is incorporated herein by reference.
Item 11. Executive Compensation
The information required under this item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange
Commission on or before November 27, 2013 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under this item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange
Commission on or before November 27, 2013 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required under this item will be set forth in the Company’s proxy statement to be filed with the Securities and Exchange
Commission on or before November 27, 2013 and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required under this item will be set forth in the Company’s proxy statement expected to be filed with the Securities and
Exchange Commission on or before November 27, 2013 and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
(1) Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 2013 and 2012
Consolidated Statements of Operations - Years ended July 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income (Loss) - Years ended July 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity - Years ended July 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows - Years ended July 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is included in the consolidated financial statements or the notes
thereto or because they are not required.
62
(3) Exhibits
The following documents are filed as Exhibits to this Annual Report on Form 10-K:
Exhibit
No.
Description
3(a)
3(b)
3(c)
3(d)
3(e)
Certificate of Incorporation (1)
Certificate of Incorporation, as amended on March 17, 1980. (1)
Certificate of Amendment of the Certificate of Incorporation as amended on June 16, 1981. (2)
Certificate of Amendment to the Certificate of Incorporation as of July 22, 1988. (3)
Amended and restated Bylaws. (4)
10(a)
1994 Stock Option Plan. (5)
10 (b)
1999 Stock Option Plan. (6)
10 (c)
2005 Equity Compensation Incentive Plan (7)
10 (d)
2011 Incentive Plan (8)
10 (e)
Lease agreement with Pari Management (9)
10 (f)
Settlement and Release Agreement between the Company and Sigma Aldrich (10)
10 (g)
Stock Purchase Agreement By and Among Enzo Life Sciences, Inc., Axxora Life Sciences Inc., and the Stock
holders, Option holders and Warrant holders (12)
10 (h)
Stock Asset Purchase Agreement By and Among Buyer Parties and Seller Parties with respect to the Biomol
International and affiliate acquisition (13)
10 (i)
Asset Purchase Agreement By and Among Enzo Life Sciences, Acquisition, Inc. and Assay Designs, Inc.(14)
10 (j)
Amended and Restated Employment Agreement with Elazar Rabbani (15)
10 (k)
Amended and Restated Employment Agreement with Barry Weiner (15)
10 (l)
Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co,, as sales agent (16)
10 (m)*
Revolving Loan and Security Agreement among the Enzo Biochem, Inc., Enzo Clinical Labs, Inc., Enzo Life
Sciences, Inc., Axxora, LLC and Enzo Realty, LLC as borrowers, and Enzo Therapeutics, Inc. as a guarantor,
and Healthcare Finance Group, LLC as Lender(17)
14 (a)
Code of Ethics (11)
21*
23.1*
23.2*
List of subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
31 (a)*
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31 (b)*
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 (a)*
Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32 (b)*
Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101. INS** XBRL Instance Document
101. SCH** XBRL Taxonomy Extension Schema Document
101. CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF** XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
63
Notes to
exhibits
Filed herewith
XBRL (Extensible Business Reporting Language) information is being furnished and not filed for purposes of
Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
*
**
(1)
The exhibits were filed as exhibits to the Company’s Registration Statement on Form S-18 (File No. 2-67359) and
are incorporated herein by reference.
(2)
This exhibit was filed as an exhibit to the Company’s Form 10-K for the year ended July 31, 1981 and is
incorporated herein by reference.
(3)
This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 1989 and is
incorporated herein by reference.
(4)
This exhibit was filed with the Company’s Current Report on Form 8-K May 8, 2008 and is incorporated herein by
reference.
(5)
This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 1995 and is
incorporated herein by reference.
(6)
This exhibit was filed with the Company’s Registration Statement on Form S-8 (333-87153) and is incorporated
herein by reference.
(7)
This exhibit was filed as an exhibit to the Company’s Proxy Statement of Schedule 14A filed on January 19, 2006
and is incorporated herein by reference.
(8)
This exhibit was filed as appendix B to the Company’s Definitive Proxy Statement on Schedule 14A, which was
filed with the Securities and Exchange Commission on November 16, 2010 and is incorporated herein by
reference.
(9)
This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 2006 and is
incorporated herein by reference.
(10)
This exhibit was filed with the Company’s Current Report on Form 8-K on September 21, 2006 and is incorporated
herein by reference.
(11)
This exhibit was filed with the Company’s Annual Report on Form 10-K for the year ended July 31, 2003 and is
incorporated here by reference.
(12)
This exhibit was filed with the Company’s Current Report on Form 8-K May 30, 2007 and is incorporated herein by
reference.
(13)
This exhibit was filed with the Company’s Current Report on Form 8-K May 8, 2008 and is incorporated herein by
reference.
(14)
This exhibit was filed with the Company’s Current Report on Form 8-K March 13, 2009 and is incorporated herein
by reference.
(15)
This exhibit was filed with the Company’s Current Annual Report on Form 10-K for the year ended July 31, 2010
and is incorporated herein by reference.
64
(16)
This exhibit was filed with the Company’s Current Report on Form 8-K on March 28, 2013 and incorporated herein
by reference.
(17)
This exhibit is being filed with the Company’s Current Report on Form 10-K for the year ended July 31, 2013.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: October 15, 2013
ENZO BIOCHEM, INC.
By:
/s/ Elazar Rabbani Ph.D.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Elazar Rabbani Ph.D.
Elazar Rabbani,
Chairman of Board of Directors and Secretary
(Principal Executive Officer)
By: /s/ Barry W. Weiner
Barry W. Weiner,
President, Chief Financial Officer, Principal Accounting Officer, Treasurer and Director
By: /s/ Bernard L. Kasten MD
Bernard Kasten, Director
By: /s/ Gregory M. Bortz
Gregory M. Bortz, Director
By: /s/ Dov Perlysky
Dov Perlysky, Director
October 15, 2013
October 15, 2013
October 15, 2013
October 15, 2013
October 15, 2013
65
FORM 10-K, ITEM 15(a) (1) and (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and financial statement schedule of Enzo Biochem, Inc. are included in Item 15(a):
List of Consolidated Financial Statements and Financial Statements Schedule
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - July 31, 2013 and 2012
Consolidated Statements of Operations - Years ended July 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income (Loss) - Years ended July 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity - Years ended July 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows - Years ended July 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts - Years ended July 31, 2013, 2012 and 2011
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
S-1
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore have been omitted.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Enzo Biochem, Inc.
We have audited the accompanying consolidated balance sheet of Enzo Biochem, Inc. and subsidiaries (the “Company”) as of July 31,
2013, and the related consolidated statement of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the
year then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Enzo Biochem, Inc. and subsidiaries as of July 31, 2013, and the consolidated results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Enzo
Biochem, Inc. and subsidiaries’ internal control over financial reporting as of July 31, 2013, based on criteria established in the 1992
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”),
and our report dated October 15, 2013 expressed an unqualified opinion thereon.
In connection with our audit of the consolidated financial statements referred to above, we also audited Schedule II - Valuation and
Qualifying Accounts for the year ended July 31, 2013. In our opinion, this financial schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.
/s/ EisnerAmper LLP
New York, New York
October 15, 2013
F-2
The Board of Directors and Stockholders of Enzo Biochem, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Enzo Biochem, Inc. (the “Company”) as of July 31, 2012, and the
related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the years ended
July 31, 2012 and 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Enzo Biochem, Inc. at July 31, 2012, and the consolidated results of their operations and their cash flows for each of the years ended July
31, 2012 and 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Jericho, New York
October 15, 2012
/s/ Ernst & Young LLP
F-3
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $2,707 in 2013 and
$
9,007 $
15,076
July 31,
2013
July 31,
2012
$3,273 in 2012
Inventories
Prepaid expenses
Total current assets
Property, plant, and equipment, net
Goodwill
Intangible assets, net
Other
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loan payable
Accounts payable - trade
Accrued liabilities
Other current liabilities
Total current liabilities
Deferred taxes
Other liabilities
Total liabilities
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:
40,569,393 at July 31, 2013 and 39,495,475 at July 31, 2012
Additional paid-in capital
Less treasury stock at cost: none at July 31, 2013 and 216,556 shares at July 31,
2012
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
12,288
8,805
2,456
14,135
8,800
2,357
32,556
40,368
8,617
7,452
9,943
390
9,116
7,452
11,780
407
$
58,958 $
69,123
$
3,264 $
8,481
11,776
331
-
9,020
9,818
118
23,852
18,956
200
774
938
128
$
24,826 $
20,022
-
-
406
304,288
-
(272,420)
1,858
395
304,358
(3,074)
(254,183)
1,605
34,132
49,101
$
58,958 $
69,123
The accompanying notes are an integral part of these consolidated financial statements
F-4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenues:
Clinical laboratory services
Product revenues
Royalty and license fee income
Total revenues
Operating expenses:
Cost of clinical laboratory services
Cost of product revenues
Research and development
Selling, general, and administrative
Provision for uncollectible accounts receivable
Legal
Impairment charges
Total operating expenses
Operating loss
Other income (expense):
Interest
Other
Foreign exchange gain (loss)
Years ended July 31,
2013
2012
2011
$
55,889 $
32,526
5,292
93,707
59,403 $
37,722
5,958
103,083
52,762
41,830
7,437
102,029
38,251
16,584
3,889
43,654
4,496
5,813
-
112,687
36,305
19,668
6,293
47,928
5,104
3,724
24,540
143,562
31,682
22,137
7,806
45,191
4,431
3,710
-
114,957
(18,980)
(40,479)
(12,928)
(54)
5
80
21
77
(540)
11
45
49
Loss before income taxes
Benefit (provision) for income taxes
(18,949)
712
(40,921)
1,652
(12,823)
(137)
Net loss
$
(18,237) $
(39,269) $
(12,960)
Net loss per common share:
Basic and diluted
$
(0.46) $
(1.01) $
(0.34)
Weighted average common shares outstanding:
Basic and diluted
39,607
38,798
38,357
The accompanying notes are an integral part of these consolidated financial statements
F-5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustments
Comprehensive loss
Years Ended
July 31,
$
$
2013
(18,237) $
2012
(39,269 ) $
2011
(12,960)
253
(17,984) $
(2,188 )
(41,457 ) $
2,918
(10,042)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended July 31, 2013, 2012, and 2011
(In thousands, except share data)
Common
Stock
Shares
Treasury
Stock
Shares
Common
Stock
Amount
Additional
Paid-in
Capital
Treasury
Stock
Amount
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
Balance at July 31,
2010
38,782,725
623,848
388
306,561
(8,854)
(201,954)
875
97,016
2011
39,045,837
450,014
390
305,833
(6,387)
(214,914)
3,793
88,715
Net (loss) for the year
ended July 31, 2011
Vesting of restricted
-
-
-
stock
263,112
-
2
-
-
-
(12,960)
-
Share based
compensation
charges
Issuance of treasury
stock for employee
401(k) plan match
Foreign currency
translation
adjustments
Balance at July 31,
-
-
-
1,049
-
-
(173,834)
-
(1,777)
2,467
-
-
-
-
-
Net (loss) for the year
ended July 31, 2012
Vesting of restricted
-
-
-
stock
174,638
-
2
-
-
-
(39,269)
-
Share based
compensation
charges
Issuance of treasury
stock for employee
401(k) plan match
Issuance of common
stock for services
Foreign currency
translation
adjustments
Balance at July 31,
-
-
-
719
-
-
(233,458)
-
(2,664)
3,313
275,000
-
3
470
-
-
-
-
-
-
Net (loss) for the year
ended July 31, 2013
Vesting of restricted
-
-
-
stock
157,784
-
2
-
-
-
(18,237)
-
Share based
compensation
charges
Net proceeds from
Issuance of common
stock (net of
expenses of $224)
Issuance of treasury
stock for employee
401(k) plan match
Issuance of common
stock for employee
401(k) plan match
Foreign currency
translation
adjustments
Balance at July 31,
-
-
-
545
-
906,715
-
9
1,816
-
-
(216,556)
-
(2,458)
3,074
9,419
-
-
27
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(12,960)
2
1,049
690
2,918
2,918
-
-
-
-
-
(39,269)
2
719
649
473
(2,188)
(2,188)
-
-
-
-
-
-
253
(18,237)
2
545
1,825
616
27
253
2012
39,495,475
216,556 $
395 $
304,358 $
(3,074) $
(254,183)
$
1,605
$
49,101
2013
40,569,393
- $
406 $
304,288 $
- $
(272,420)
$
1,858
$
34,132
The accompanying notes are an integral part of these consolidated financial statements
F-7
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss
Years ended July 31,
2013
2012
2011
$
(18,237) $
(39,269) $
(12,960)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of property, plant and equipment
Amortization of intangible assets
Provision for uncollectible accounts receivable
Deferred income tax (benefit) provision
Share based compensation charges
Share based 401(k) employer match expense
Deferred revenue recognized
Foreign exchange (gain) loss
Impairment charges
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable - trade
Accrued liabilities, other current liabilities and other liabilities
Total adjustments
2,615
1,990
4,496
(759)
545
643
-
(127)
-
(2,606)
60
(97)
(514)
1,975
8,221
2,817
1,660
5,104
(1,762)
719
649
(400)
538
24,540
(4,210)
199
356
1,031
2,056
33,297
2,962
1,507
4,431
17
1,049
690
(38)
(131)
-
(6,537)
(178)
(432)
1,462
(168)
4,634
Net cash used in operating activities
(10,016)
(5,972)
(8,326)
Cash flows from investing activities:
Capital expenditures
Maturities of short term investments
Purchases of short term investments
Decrease (Increase) in security deposits and other
Earn-out payment
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net proceeds from issuance of common stock
Proceeds from borrowings under Credit Agreement
Repayments under Credit Agreement
Installment loan payments
Net cash provided (used in) financing activities
(988)
-
-
17
-
(971)
1,825
13,360
(10,096)
(274)
4,815
(1,364)
58,497
(48,497)
(25)
(1,150)
7,461
-
-
-
(154)
(154)
(1,223)
182,453
(167,646)
(45)
-
13,539
-
-
-
(68)
(68)
Effect of exchange rate changes on cash and cash equivalents
103
(420)
257
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
(6,069)
15,076
9,007 $
915
14,161
15,076 $
5,402
8,759
14,161
$
The accompanying notes are an integral part of these consolidated financial statements
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Note 1 - Summary of significant accounting policies
Nature of business
Enzo Biochem, Inc. (the “Company”) is an integrated life science and biotechnology company engaged in research, development,
manufacturing and marketing of diagnostic and research products based on genetic engineering, biotechnology and molecular biology.
These products are designed for the diagnosis of and/or screening for infectious diseases, cancers, genetic defects and other medically
pertinent diagnostic information and are distributed in the United States and internationally. The Company is conducting research and
development activities in the development of therapeutic products based on the Company’s technology platform of genetic modulation
and immune modulation. The Company also operates a clinical laboratory that offers and provides diagnostic medical testing services in
the New York, New Jersey and Eastern Pennsylvania medical communities. The Company operates in three segments (see Note 15).
Principles of consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries, Enzo Clinical Labs, Inc.,
Enzo Life Sciences, Inc. (and its wholly-owned foreign subsidiaries), Enzo Therapeutics, Inc. and Enzo Realty LLC (“Realty”). All
intercompany transactions and balances have been eliminated. The results of operations for companies acquired are included in the
consolidated financial statements from the effective date of the acquisition.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from those estimates.
Foreign Currency Translation/Transactions
The Company has determined that the functional currency for its foreign subsidiaries is the local currency. For financial reporting
purposes, assets and liabilities denominated in foreign currencies are translated at current exchange rates and profit and loss accounts are
translated at weighted average exchange rates. Resulting translation gains and losses are included as a separate component of
stockholders’ equity as accumulated other comprehensive income or loss. Gains or losses resulting from transactions entered into in
other than the functional currency are recorded as foreign exchange gains and losses in the consolidated statements of operations.
Cash and cash equivalents
Cash and cash equivalents consist of demand deposits with banks, highly liquid money market funds, and highly liquid U.S. Government
instruments acquired with maturities of less than ninety days. At July 31, 2013 and 2012, the Company had cash and cash equivalents in
foreign bank accounts of $1.5 million and $2.5 million, respectively.
Fair Values of Financial Instruments
The recorded amounts of the Company’s cash and equivalents, receivables, loan payable, accounts payable and accrued liabilities
approximate their fair values principally because of the short-term nature of these items.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents
and accounts receivable.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
The Company believes the fair value of the aforementioned financial instruments approximates the cost due to the immediate or
short-term nature of these items.
Concentration of credit risk with respect to the Company’s Life Sciences segment is mitigated by the diversity of the Company’s clients
and their dispersion across many different geographic regions. To reduce risk, the Company routinely assesses the financial strength of
these customers and, consequently, believes that its accounts receivable credit exposure with respect to these customers is limited.
The Company believes that the concentration of credit risk with respect to the Clinical Labs accounts receivable is mitigated by the
diversity of its third party payers that insure individuals. To reduce risk, the Company routinely assesses the financial strength of these
payers and, consequently, believes that its accounts receivable credit risk exposure, with respect to these payers, is limited. While the
Company also has receivables due from the Federal Medicare program, the Company does not believe that these receivables represent a
credit risk since the Medicare program is funded by the federal government and payment is primarily dependent on our submitting the
appropriate documentation.
Accrual for Self-Funded Medical
Accruals for self-funded medical insurance are determined based on a number of assumptions and factors, including historical payment
trends, claims history and current estimates. These estimated liabilities are not discounted. If actual trends differ from these estimates,
the financial results could be impacted.
Revenue Recognition - Product revenues
Revenues from product sales are recognized when the products are shipped and title transfers, the sales price is fixed or determinable and
collectability is reasonably assured.
Royalties
Royalty revenues are recorded in the period earned. Royalties received in advance of being earned are recorded as deferred revenues in
the accompanying balance sheet.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Clinical laboratory services
Revenues from the Clinical Labs segment 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 reimbursable
settlements from such payers.
The following table summarizes the Clinical Lab segment’s net revenues and revenue percentages by revenue category:
Revenue category
Medicare
Third-party payers
Patient self-pay
HMO’s
Total
2013
(in %)
Years ended July 31,
2012
(in %)
2011
(in %)
$ 12,497
26,014
12,172
5,206
$ 55,889
22 $
47
22
9
100% $
12,658
29,616
11,895
5,234
59,403
21 $ 11,856
24,335
50
11,554
20
5,017
9
100% $ 52,762
22
46
22
10
100%
The Company provides services to certain patients covered by various third-party payers, including the Federal Medicare program. Laws
and regulations governing Medicare are complex and subject to interpretation for which action for noncompliance includes fines,
penalties and exclusion from the Medicare programs (See Note 14).
Other than the Medicare program, one provider whose programs are included in the “Third-party payers” and “Health Maintenance
Organizations” (“HMO’s”) categories represent approximately 22%, 21% and 22% of the Clinical Labs segment net revenue for the
years ended July 31, 2013, 2012 and 2011 respectively. Another third party provider represents 9%,13% and 11% of the Clinical Labs
segment’s net revenue for the years ended July 31, 2013, 2012 and 2011, respectively.
Contractual Adjustment
The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer
reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as
reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual
adjustment is an estimate that reduces gross revenue based on gross billing rates, to amounts expected to be approved and reimbursed.
Gross billings are based on a standard fee schedule the Company sets for all third-party payers, including Medicare, HMO’s and
managed care providers. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and
historical settlement experience with payers, industry reimbursement trends, and other relevant factors which include the monthly and
quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements
and 3) the growth of in-network provider arrangements and managed care plans specific to our Company.
During the years ended July 31, 2013, 2012 and 2011, the contractual adjustment percentages, determined using current and historical
reimbursement statistics, were approximately 85%, 85% and 84%, respectively, of gross billings.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
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 Labs 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, payer mix and other relevant factors.
During the years ended July 31, 2013 and 2012, the Company determined an allowance for doubtful accounts for customers whose
accounts receivable have been outstanding less than 210 days and either fully reserved or wrote off 100% of accounts receivable over
210 days, as it determined based on historical trends that those accounts were uncollectible, except for certain fully reserved balances,
principally related to Medicare. These accounts have not been written off because the payer’s filing date deadline has not occurred or the
collection process has not been exhausted. The Company 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 issues and to
assess the impact, if any, on the allowance estimates which involves judgment. The Company believes that the collectability of its
receivables is directly linked to the quality of its billing processes, most notably, those related to obtaining the correct information in
order to bill effectively for the services provided. Should circumstances change (e.g. shift in payer mix, decline in economic conditions
or deterioration in aging of receivables), our estimates of net realizable value of receivables could be reduced by a material amount.
The Clinical Labs segment’s net receivables are detailed by billing category and as a percent to its total net receivables. At July 31, 2013
and 2012, approximately 60% and 55%, respectively, of the Company’s net accounts receivable relates to its Clinical Labs business,
which operates in the New York, New Jersey, and Eastern Pennsylvania medical communities.
The Life Sciences segment’s accounts receivable includes royalties receivable of $1.2 million and $1.7 million, as of July 31, 2013 and
2012, respectively, due from QIAGEN Gaithersburg Inc. (“Qiagen”) (see Note 12).
The following is a table of the Company’s net accounts receivable by segment.
Net accounts receivable by segment
Clinical Labs (by billing category)
Medicare
Third party payers
Patient self-pay
HMO’s
Total Clinical Labs
July 31, 2013
July 31, 2012
(in %)
(in %)
$
930
3,395
2,696
300
7,321
13 $
46
37
4
100%
1,270
3,478
2,655
330
7,733
16
45
35
4
100%
Total Life Sciences
Total accounts receivable - net
$
4,967
12,288
$
6,402
14,135
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Changes in the Company’s allowance for doubtful accounts are as follows:
July 31, 2013
Beginning balance
Provision for doubtful accounts
Write-offs
Ending balance
Inventories
$
$
3,273 $
4,496
(5,062)
2,707 $
July 31, 2012
3,488
5,104
(5,319)
3,273
The Company values inventory at the lower of cost (first-in, first-out) or market. Work-in-process and finished goods inventories consist
of material, labor, and manufacturing overhead. Write downs of inventories to market value are based on a review of inventory quantities
on hand and estimated sales forecasts based on sales history and anticipated future demand. Unanticipated changes in demand could
have a significant impact on the value of our inventory and require additional write downs of inventory which would impact our results
of operations.
Property, plant and equipment
Property, plant and equipment is stated at cost, and depreciated on the straight-line basis over the estimated useful lives of the various
asset classes as follows: building and building improvements: 15-30 years, and laboratory machinery and equipment and office furniture
and computer equipment which range from 3-10 years. Leasehold improvements are amortized over the term of the related leases or
estimated useful lives of the assets, whichever is shorter.
Impairment of Long-Lived Assets
The Company reviews the recoverability of the carrying value of long-lived assets (including intangible assets with finite lives) for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
Should indicators of impairment exist, the carrying values of the assets are evaluated in relation to the operating performance and future
undiscounted cash flows of the underlying business. The net book value of an asset is adjusted to fair value if its expected future
undiscounted cash flow is less than its book value. The Company reviewed long-lived assets for impairment at July 31, 2013. This test
did not result in any impairment of long-lived assets. There were no impairments in 2012 or 2011, exclusive of Goodwill and
Indefinite-lived intangibles in 2012.
Goodwill and Indefinite-Lived Intangibles
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company tests goodwill
and had tested other indefinite lived intangibles for impairment annually as of the first day of the fourth quarter, or more frequently if
indicators of potential impairment exist. Goodwill is reviewed for impairment utilizing a two-step process. The first step of the
impairment test requires the identification of the reporting units and comparison of the fair value of each of these reporting units to their
respective carrying value. If the carrying value of the reporting unit is less than its fair value, no impairment exists and the second step is
not performed. If the carrying value of the reporting unit is higher than its fair value, the second step must be performed to compute the
amount of the goodwill impairment, if any. In the second step, the impairment is computed by comparing the implied fair value of the
reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized for the excess.
Intangible Assets
Intangible assets (exclusive of patents), arose primarily from acquisitions, and primarily consist of customer relationships, trademarks,
licenses, and website and database content. Finite-lived intangible assets are amortized according to their estimated useful lives, which
range from 4 to 15 years.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
The Company has capitalized certain legal costs directly incurred in pursuing patent applications as patent costs. When such applications
result in an issued patent, the related costs are amortized over a ten year period or the life of the patent, whichever is shorter, using the
straight-line method. The Company reviews its issued patents and pending patent applications, and if it determines to abandon a patent
application or that an issued patent no longer has economic value, the unamortized balance in deferred patent costs relating to that patent
is immediately expensed.
Comprehensive loss
Comprehensive loss consists of net loss and foreign currency translation adjustments. Foreign currency translation adjustments included
in comprehensive loss were not tax effected as investments in international affiliates are deemed to be permanent. Accumulated other
comprehensive income is a separate component of stockholders’ equity and consists of foreign currency translation adjustments.
Shipping and Handling Costs
Shipping and handling costs associated with the distribution of finished goods to customers are recorded in cost of goods sold.
Research and Development
Research and development costs are charged to expense as incurred.
Advertising
All costs associated with advertising are expensed as incurred. Advertising expense, included in Selling, general and administrative
expense, approximated $302, $237 and $235 for the years ended July 31, 2013, 2012 and 2011, respectively.
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 when it is more likely than not that
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.
It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s
assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At July 31, 2013, the
Company believes it has appropriately accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for
which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company’s
effective tax rate in a given financial statement period may be affected.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Segment Reporting
The Company follows accounting pronouncements which establish standards for reporting information on operating segments in interim and
annual financial statements. An enterprise is required to separately report information about each operating segment that engages in business
activities from which the segment may earn revenues and incur expenses, whose separate operating results are regularly reviewed by the chief
operating decision maker regarding allocation of resources and performance assessment and which exceed specific quantitative thresholds related
to revenue and profit or loss. The Company’s operating activities are reported in three segments (see Note 15).
Net income (loss) per share
Basic net income (loss) per share represents net income (loss) divided by the weighted average number of common shares outstanding
during the period. The dilutive effect of potential common shares, consisting of outstanding stock options and unvested restricted stock,
is determined using the treasury stock method. Diluted weighted average shares outstanding for fiscal 2013, 2012 and 2011 do not
include the potential common shares from stock options and unvested restricted stock because to do so would have been antidilutive and
as such is the same as basic weighted average shares outstanding. The number of potential common shares (“in the money options”) and
unvested restricted stock excluded from the calculation of diluted earnings per share for the years ended July 31, 2013, 2012, and 2011
was 32,000, 0, and 27,000, respectively.
For the years ended July 31, 2013, 2012 and 2011, the effect of approximately 727,000, 736,000 and 785,000 respectively, of
outstanding “out of the money” options to purchase common shares were excluded from the calculation of diluted net loss per share
because their effect would be anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share for the
years ended July 31:
Numerator:
Net loss
2013
2012
2011
$
(18,237) $
(39,269) $
(12,960)
Denominator:
Weighted-average common shares outstanding - Basic
Add: effect of dilutive stock options and restricted stock
Weighted-average common shares outstanding - Diluted
39,607
-
39,607
38,798
-
38,798
38,357
-
38,357
Net loss per share
Basic and diluted
Share-Based Compensation
$
(0.46) $
(1.01) $
(0.34)
The Company records compensation expense associated with stock options and restricted stock based upon the fair value of stock based
awards as measured at the grant date. The expense is recorded by amortizing the fair values on a straight line basis over the vesting
period, adjusted for estimated forfeitures.
For the years ended July 31, 2013, 2012 and 2011, share-based compensation expense relating to the fair value of stock options,
restricted shares and restricted stock units was approximately $545, $719, and $1,049, respectively (see Note 10). No excess tax benefits
were recognized for the year ended July 31, 2013, 2012 and 2011.
The following table sets forth the amount of expense related to share-based payment arrangements included in specific line items in the
accompanying statement of operations for the years ended July 31:
Cost of clinical laboratory services
Research and development
Selling, general and administrative
$
$
2013
2012
10 $
2
533
545 $
10 $
4
705
719 $
2011
10
14
1,025
1,049
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
As of July 31, 2013, there was $531 of total unrecognized compensation cost related to nonvested share-based payment arrangements
granted under the Company’s incentive stock plans, which will be recognized over a weighted average remaining life of approximately
fifteen months.
Effect of new accounting pronouncements
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income” (Topic 220) - Presentation of
Comprehensive Income” (ASU No. 2011-05), which requires an entity to present the total of comprehensive income, the components of
net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in
two separate but consecutive statements. ASU 2011-05 eliminated the option to present the components of other comprehensive income
as part of the statement of stockholders’ equity. The Company adopted ASU 2011-05 in its first quarter of fiscal year 2013 by including
the required disclosures in two separate but consecutive statements.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08 “Testing Goodwill for Impairment” (ASU No.
2011-08) which is intended to reduce the complexity and costs to test goodwill for impairment. The amendment allows an entity the
option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it is necessary to perform the
two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless
the entity determines, based on its qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than
its carrying amount. The ASU also expands upon the examples of events and circumstances that an entity should consider between
annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. The amendment became effective for annual and interim goodwill impairment tests performed for the Company’s fiscal year
beginning August 1, 2012. The Company adopted ASU 2011-08 in the first quarter of fiscal year 2013 and the adoption did not have a
material impact on its consolidated financial statements.
In July 2011, the FASB issued ASU No. 2011-07 “Health Care Entities (Topic 954) - Presentation and Disclosure of Patient Service
Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities”. This update was issued
to provide greater transparency relating to accounting practices used for net patient service revenue and related bad debt allowances by
health care entities. Some health care entities recognize patient service revenue at the time the services are rendered regardless of
whether the entity expects to collect that amount or has assessed the patient’s ability to pay. These prior accounting practices used by
some health care entities resulted in a gross-up of patient service revenue and the provision for bad debts, causing difficulty for users of
financial statements to make accurate comparisons and analyses of financial statements among entities. ASU No. 2011-07 requires
certain healthcare entities to change the presentation of the statement of operations, reclassifying the provision for bad debts associated
with patient service revenue from an operating expense to a deduction from patient service revenue and also requires enhanced
quantitative and qualitative disclosures relevant to the entity’s policies for recognizing revenue and assessing bad debts. This update is
not designed to change and will not change the net income reported by healthcare entities. The Company adopted this update in its first
quarter of fiscal year 2013 with no impact on its consolidated financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets
for Impairment” (ASU 2012-02), which permits an entity to make a qualitative assessment of whether it is more likely than not that the
fair value of a reporting unit’s indefinite-lived intangible asset is less than the asset’s carrying value before applying the two-step
goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that the fair value of a
reporting unit’s indefinite-lived intangible asset is more likely than not greater than the asset’s carrying value, the remaining impairment
steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment.
ASU 2012-02 is effective for the Company for annual and interim indefinite-lived intangible asset impairment tests performed
beginning August 1, 2013, however early adoption is permitted. As the Company has no indefinite-lived intangibles, ASU 2012-02 is
expected to have no impact on its consolidated financial statements.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Note 2 - Goodwill and intangible assets
The Company’s change in the net carrying amount of goodwill by business segment is as follows:
August 1, 2011
Foreign currency translation
Impairment charge
July 31, 2012 and 2013
Enzo Life
Sciences
19,921 $
(1,083)
(18,838)
- $
$
$
Enzo
Clinical
Labs
7,452 $
-
-
7,452 $
Total
27,373
(1,083)
(18,838)
7,452
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company tests goodwill
and had tested other indefinite-lived intangibles for impairment annually as of the first day of the fourth quarter, or more frequently if
indicators of potential impairment exist. Goodwill is reviewed for impairment utilizing a two-step process. The first step of the
impairment test requires the identification of the reporting units and comparison of the fair value of each of these reporting units to their
respective carrying value. If the carrying value of the reporting unit is less than its fair value, no impairment exists and the second step is
not performed. If the carrying value of the reporting unit is higher than its fair value, the second step must be performed to compute the
amount of the goodwill impairment, if any. In the second step, the impairment is computed by comparing the implied fair value of the
reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized for the excess.
The Company estimates the fair value of a reporting unit using a forward-looking discounted cash flow methodology. The assumptions
included in the discounted cash flow methodology included among others; forecasted revenues based on historical and recent revenue
trends, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates,
all of which require significant judgments by management. As of the first day of the fourth quarter of 2013, the annual assessment date,
the Company’s test did not indicate impairment at the Clinical Lab’s reporting unit.
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
As a result of decline in the Company’s market capitalization, relating to the decline in the Company’s stock price of 44% from May 1 to
July 31, 2012, declining results in the fiscal 2012 fourth quarter and results from the completion of the refocusing of the Enzo Life
Sciences reporting unit, the Company determined that these impairment factors required the completion of an interim impairment test as
of July 31, 2012. Based upon the results of the interim impairment test as of July 31, 2012, the carrying value of the Enzo Life Sciences
reporting unit was determined to be higher than its fair value and, accordingly, the Company performed a step two impairment analysis.
The results of the step-two impairment analysis for the Enzo life Sciences reporting unit indicated that goodwill was fully impaired. As
a result of the analysis the Company recognized a total non-cash impairment charge of $18.8 million ($18.0 net of related taxes) as of
July 31, 2012. The impairment charge did not impact the Company’s consolidated cash flows, liquidity, and capital resources. The fair
value of the Enzo Clinical Lab reporting unit was higher than its carrying value and therefore a step-two analysis was not required.
Intangible assets
The Company’s change in the net carrying amount of intangible assets, all in the Life Sciences segment is as follows:
August 1, 2011
Amortization expense
Foreign currency translation
Trademark impairment charge
July 31, 2012
Amortization expense
Foreign currency translation
July 31, 2013
Intangible assets consist of the following:
$
$
Gross
34,838
-
(1,232)
(5,702)
27,904
-
310
28,214
Accumulated
Amortization
(14,853)
(1,660)
389
-
(16,124)
(1,990)
(157)
(18,271)
Finite-lived intangible assets:
Patents
Customer relationships
Website and acquired content
Licensed technology and other
Trademarks, gives effect for
impairment charge and
reclassification to finite-lived as
of May 1, 2012
Total
July 31, 2013
Accumulated
Amortization
Gross
Net
Gross
July 31, 2012
Accumulated
Amortization
$
11,027 $
12,446
1,026
513
(10,587) $
(5,448)
(980)
(382)
440 $
6,998
46
131
11,027 $
12,304
1,019
485
(10,439) $
(4,356)
(874)
(300)
3,202
28,214 $
$
(874)
(18,271) $
2,328
9,943 $
3,069
27,904 $
(155)
(16,124) $
2,914
11,780
F-18
Net
19,985
(1,660)
(843)
(5,702)
11,780
(1,990)
153
9,943
Net
588
7,948
145
185
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
At July 31, 2013 information with respect to the intangibles acquired is as follows:
Customer relationships
Trademarks
Other intangibles
Useful life
assigned
8-15 years
5 years
4-5 years
Weighted average
remaining useful life
7 years
4 years
2 years
At July 31, 2013, the weighted average useful lives of amortizable intangible assets were approximately six years.
Estimated amortization expense related to these finite-lived intangible assets for the five succeeding fiscal years ending July 31 is as
follows:
2014
2015
2016
2017
2018
$
1,671
1,630
1,620
1,508
1,141
Amortization expense for the years ended July 31, 2013, 2012, and 2011 was $1,990, $1,660, and $1,507, respectively.
In connection with the annual assessment of indefinite-lived intangibles as of May 1, 2012, the Company determined the estimated fair
value of trademarks, relating to the Enzo Life Science reporting unit, were less than their carrying values by $5.7 million primarily due to
declines in projected revenues and in connection with future plans resulting from a strategic review. As a result of this impairment,
which included a change in the future branding strategy, the useful life of the trademarks were reassessed and determined to have an
estimated economic life of 5 years. A non-cash impairment charge of $5.7 million, ($4.4 million net of related taxes) was recorded for
the trademark impairment in the fourth quarter of fiscal 2012. As a result of the reclassification of trademarks from indefinite lived to a
5 year life, annual amortization of trademarks is estimated to be $0.6 million per year. No impairment was determined to exist at May 1,
2013.
The aggregate goodwill and indefinite lived-intangible impairment charge recorded in the fiscal 2012 fourth quarter was $24.5 million,
($22.4 million net of related taxes). These charges did not affect consolidated cash flows, current liquidity or capital resources.
Note 3 - Supplemental disclosure for statement of cash flows
In the years ended July 31, 2013, 2012, and 2011 income taxes paid by the Company approximated $46, $70, and $107 respectively .
In the years ended July 31, 2013, 2012, and 2011, interest paid by the Company approximated $69, $5, and $5 respectively.
During fiscal 2013 and 2012, the Company financed $365 and $182, respectively, in machinery and transportation equipment under
installment loans.
During fiscal 2013, the Company entered into a capital lease for machinery and equipment with a cost basis of $765.
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Note 4 - Inventories
Inventories consisted of the following at July 31:
Raw materials
Work in process
Finished products
Note 5 - Property, plant, and equipment
At July 31, 2013 and 2012 property, plant, and equipment consist of:
Building and building improvements
Machinery and equipment (includes asset under capital lease - see Note 9)
Office furniture and computer equipment
Leasehold improvements
Accumulated depreciation and amortization
Land and land improvements
2013
922
2,628
5,255
8,805
2013
4,751
6,922
16,390
4,759
32,822
(24,917)
7,905
712
8,617
$
$
$
$
2012
1,283
2,821
4,696
8,800
2012
4,751
6,760
14,879
4,498
30,888
(22,484)
8,404
712
9,116
$
$
$
$
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Note 6 - Income taxes
The benefit (provision) for income taxes for fiscal years ended July 31 is as follows:
Current (provision) benefit:
Federal
State and local
Foreign
Deferred benefit (provision)
Benefit (provision) for income taxes
2013
-
(46)
(1)
759
712
$
$
2012
-
(49)
(61)
1,762
1,652
$
$
2011
8
(161)
33
(17)
(137)
$
$
Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements. The components of deferred tax assets (liabilities) as of July 31 are as follows:
2013
2012
$
Deferred tax assets:
Federal tax carryforward losses
Provision for uncollectible accounts receivable
State and local tax carry forward losses
Accrued royalties
Stock compensation
Depreciation
Research and development and other tax credit carryforwards
Foreign tax carryforward losses
Intangibles
Inventory
Accrued expenses
Other, net
Deferred tax assets
Deferred tax liabilities:
Deferred patent costs
Prepaid expenses
Other, net
Deferred tax liabilities
Net deferred tax assets (liabilities) before valuation allowance
Less: valuation allowance
Net deferred tax liabilities
34,836 $
920
3,791
143
317
625
1,013
772
2,980
1,249
1,622
19
48,287
(132)
(695)
(37)
(864)
47,423
(47,623)
29,531
1,263
2,914
143
450
445
795
108
2,903
1,630
909
15
41,106
(139)
(613)
(31)
(783)
40,323
(41,261)
(938)
$
(200) $
F-21
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
At July 31, 2013, the Company had net deferred tax liabilities of approximately $0.2 million which consists primarily of identifiable
intangible assets and cumulative tax deductions in excess of book expenses recognized by foreign subsidiaries.
Net deferred tax liabilities are included in the consolidated balance sheets as of July 31 as follows:
Deferred taxes:
Current
Non-current
2013
-
200
200
$
$
2012
-
938
938
$
$
The Company recorded a valuation allowance during the year ended July 31, 2013 and 2012 equal to domestic and certain foreign net
deferred tax assets. The Company believes that the valuation allowance is necessary as it is not more likely than not that the deferred tax
assets will 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.
As of July 31, 2013, the Company had U.S. federal net operating loss carryforwards of approximately $102.5 million. The U.S. federal
tax loss carryforwards, if not fully utilized, expire between 2018 and 2033. Utilization is dependent on generating sufficient taxable
income prior to expiration of the tax loss carryforwards. In addition, the Company has research and development tax credit
carryforwards of approximately $0.9 million which expire between 2025 and 2033. As of July 31, 2013, the Company had foreign loss
carryforwards of approximately $3.7 million.
As a result of certain acquisitions approximately $0.7 million of the Company’s U.S. federal net operating loss carryforwards are subject
to an annual limitation under Internal Revenue Code Section 382 due to the ownership change. However, management does not believe
that such a change would have a significant impact on the Company’s ability to utilize its tax loss carryforwards. The components of loss
before income taxes consisted of the following for the years ended July 31:
United States operations
International operations
Loss before taxes
2013
(15,419)
(3,530)
(18,949)
$
$
2012
(31,817)
(9,104)
(40,921)
$
$
2011
(12,284)
(539)
(12,823)
$
$
The benefit (provision) for income taxes were at rates different from U.S. federal statutory rates for the following reasons for the years
ended July 31:
Federal statutory rate
Expenses not deductible for income tax return purposes
State income taxes, net of benefit of federal tax deduction
Change in valuation allowance
Impairment of goodwill
Reversal of tax reserve
Other
2013
34.0%
(0.9)
2.5
(32.7)
-
-
0.9
3.8%
2012
34.0%
(0.5)
0.9
(23.2)
(7.1)
-
(0.1)
4.0%
2011
34.0%
(2.3)
1.0
(34.6)
-
0.1
0.7
(1.1)%
U.S. federal income taxes have not been provided on approximately $252 of undistributed earnings at the Company’s foreign
subsidiaries at July 31, 2013, because it is the Company’s intent to keep the earnings reinvested. As of July 31, 2013, the Company has
no liabilities for uncertain tax positions. It is the Company’s policy to record interest and penalties as a component of tax expense. The
Company files income tax returns in the U.S. Federal jurisdiction, various U.S. state jurisdictions and several foreign jurisdictions. With
few exceptions, the years that remain subject to examination are years July 31, 2010 through 2012.
F-22
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Note 7 - Loan Payable
On June 7, 2013, the Company entered into a secured Revolving Loan and Security Agreement (the “Credit Agreement”) among the
Company and certain of its subsidiaries, with Enzo Therapeutics as a guarantor, and Healthcare Finance Group, LLC (the “Lender).The
Credit Agreement, which expires in December 2016, provides for borrowings against eligible US receivables, as defined, of the Clinical
Lab and Life Science segments up to $8.0 million at defined eligibility percentages and provides for additional borrowings of $4.0
million for increased eligible assets. Debt issuance costs of $281 are being amortized over the life of the Credit Agreement. If the amount
of borrowings outstanding under the revolving credit facility exceeds the borrowing base then in effect, or the Lender requires a reserve,
the Company will be required to repay such borrowings in an amount sufficient to eliminate such excess. Interest on advances, payable
monthly, is based on the three month LIBOR rate, with a floor of 1.25% plus an applicable margin of 4.0%, In the event of any default,
the interest rate may be increased 3.0% over the current rate. The facility also carries a non-utilization fee of 0.50% per annum, payable
monthly, on the unused portion of the credit line. The Credit Agreement requires a minimum borrowing of $2.0 million. At July 31,
2013, the borrowings under the Credit Agreement related to the Clinical Lab receivables aggregated $3.3 million with an additional
availability of $0.2 million. Commencement of borrowing against the eligible Life Science receivables requires advance notification to
the Lender.
The Company’s obligations under the Credit Agreement are secured by primarily all the unencumbered U.S. assets of the Company,
excluding buildings and intellectual property which the Lender has a negative pledge, and the capital stock of subsidiaries. The Credit
Agreement includes customary affirmative and negative covenants and events of default and requires maximum levels of cash usage and
minimum levels of liquidity, as defined, and provides for increased liquidity levels if operating results are not achieved. Negative
covenants include among others, limitations on additional debt, liens, loans or investments, distributions, asset sales and affiliate
transactions. Events of default include, non-payment of principal and interest on debt outstanding, non-performance of covenants,
material change in business, breach of representations, bankruptcy and insolvency, material judgments and changes in control. As of
July 31, 2013, the Company received a waiver from the Lender for non-compliance with a financial covenant and the lender modified
various financial covenants relating to fiscal 2014. In fiscal 2014, the Company expects to be in compliance with the modified financial
covenants.
Note 8 - Accrued Liabilities, Other Current Liabilities and Other Liabilities
At July 31 accrued liabilities consist of:
Legal
Payroll, benefits, severance and commissions
Research and development
Professional fees
Other
At July 31 other current liabilities consist of:
Capital Lease Obligations - see Note 9
Installment Loans - see Note 9
Self-Insured Medical Plan
2013
3,104
4,794
721
863
2,294
11,776
2013
149
182
331
$
$
$
$
$
$
$
$
2012
1,475
5,125
696
901
1,621
9,818
2012
-
118
118
The Company self-funds medical insurance coverage for certain of its U.S. based employees. The risk to the Company is being limited
through the use of individual and aggregate stop loss insurance. As of July 31, 2013 and 2012, the Company has established a reserve of
$0.2 million and $0.4 million, respectively, which is included in accrued liabilities, for claims that have been reported but not paid and
incurred but not reported. The reserve is based upon the Company’s historical payment trends, claim history and current estimates.
F-23
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Note 9 - Other liabilities
At July 31 Other liabilities consist of:
Capital lease obligation
Installment loans
$
$
2013
505
269
774
$
$
2012
-
128
128
The capital lease obligation and installment loans are for machinery and equipment used in the Clinical Labs segment. Amortization of
the asset recorded under the capital lease is included in depreciation expense. At July 31, 2013, the accumulated amortization on the
capital lease was $141.
Future minimum lease and loan payments are as follows:
2014
2015
2016
2017
2018
Total payments
Less: imputed interest
Payments net of interest
Less: current portion
Other liabilities - net
Capital lease
176
176
176
176
28
732
(79)
653
(148)
505
$
$
$
$
Installment
loans
183
123
89
47
10
452
-
452
(183)
269
The weighted average interest rate on our short term borrowings during fiscal 2013 was 4.5%. The weighted average interest rate on our
short term borrowings during fiscal 2012 was 1.9%.
Note 10 - Stockholders’ equity
Controlled Equity Offering
On March 28, 2013, the Company entered into a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with Cantor
Fitzgerald & Co., as sales agent (“Cantor”). Under the Sales Agreement, the Company may offer and sell, from time to time, through
Cantor, shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), having an aggregate offering price of
up to $20.0 million (the “Shares”). The Company will pay Cantor a commission of 3.0% of the aggregate gross proceeds received under
the Sale Agreement. The Company is not obligated to make any sales of the Shares under the Sales Agreement. The offering of Shares
pursuant to the Sales Agreement will terminate upon the earlier of (a) the sale of all of the Shares subject to the Sales Agreement or (b)
the termination of the Sales Agreement by Cantor or the Company, as permitted therein. The Shares were initially issued pursuant to the
Company’s Registration Statement which was declared effective on August 5, 2010 and the prospectus supplement, dated March 28,
2013, and more recently under a current registration statement declared effective August 13, 2013 and the prospectus supplement dated
August 1, 2013, filed by the Company with the Securities and Exchange Commission. During fiscal 2013, the Company sold an
aggregate of 906,715 shares of common stock under the Sales Agreement at an average price of $2.26 per share and received proceeds
aggregating $1,825, net of expenses of the offering and commissions of $224.
Common stock
In June 2012, the Company issued 275,000 shares of common stock at a fair value of $0.5 million for services performed.
F-24
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Treasury stock
In fiscal 2013, the Company issued 216,556 shares from treasury stock to match a portion of its employees’ 401(k) contributions. The
Company recorded an expense of $643 for the match, reducing treasury stock by $3,074 for the average acquisition cost of such shares
and adjusting additional paid in capital by $2,458.
In fiscal 2012, the Company issued 233,458 shares from treasury stock for its employees’ 401(k) matched contributions obligation. The
Company recorded an expense of $649 for the match, reducing treasury stock by $3,313 for the average acquisition cost of such shares
and adjusting additional paid in capital by $2,664.
In fiscal 2011, the Company issued 173,834 shares from treasury stock for its employees’ 401(k) matched contributions obligation. The
Company recorded an expense of $690 for the match, reducing treasury stock by $2,467 for the average acquisition cost of such shares
and adjusting additional paid in capital by $1,777.
Incentive stock plans
The Company has an incentive stock option plan (the “1999 Plan”) and an incentive stock option and restricted stock award plan (the
“2005 Plan”), under which the Company may grant options for up to 2,312,356 common shares under the 1999 Plan and options and
restricted stock awards for up to 1,000,000 common shares under the 2005 Plan. No additional awards may be granted under the 1999 or
2005 Plans. On January 14, 2011, the Company’s stockholders approved the adoption of the 2011 Incentive Plan (the “2011 Plan”)
which provides for the issuance of equity awards, including among others, options, restricted stock and restricted stock units for up to
3,000,000 Common Shares. The exercise price of options granted under the 2011 Plan, and consistent with other Plans, is equal to or
greater than fair market value of the Common Stock on the date of grant. Unless terminated earlier by the Board of Directors, the 2011
Plan will terminate at the earliest of; (a) such time as no shares of Common Stock remain available for issuance under the 2011 Plan or
(b) tenth anniversary of the effective date of the 2011 Plan. Awards outstanding upon expiration of the 2011 Plan shall remain in effect
until they have been exercised, terminated, or have expired. As of July 31, 2013, there were approximately 2,322,000 shares available for
grant under the 2011 Plan.
The Company estimates the fair value of each stock option award on the measurement date using a binomial option pricing model. The
fair value of the award is amortized to expense on a straight line basis over the requisite service period. The Company expenses restricted
stock awards based on vesting requirements, primarily time elapsed.
Options granted pursuant to the plans may be either incentive stock options or non-statutory options The 2011 Plan provides for the
issuance of stock options, restricted stock and restricted stock unit awards which generally vest over a two to four year period. A
summary of the information pursuant to the Company’s stock option plans for the years ended July 31, 2013, 2012, and 2011 is as
follows:
2013
2012
2011
Weighted -
Average
Exercise
Weighted -
Average
Exercise
Options
Price
Options
Price
Options
Weighted -
Average
Exercise
Price
Outstanding at beginning of year
New Grants
Expired
Outstanding at end of year
736,490 $
336,817 $
(346,662) $
726,645 $
14.50
2.88
11.82
10.39
785,124 $
- $
(48,634) $
736,490 $
14.53
-
15.05
14.50
1,132,450 $
- $
(347,326) $
785,124 $
Exercisable at end of year
389,828 $
16.88
736,490 $
14.50
785,124 $
Weighted average fair value of
options granted during year
$
1.22
$
-
14.30
-
13.78
14.53
14.53
-
There is no aggregate intrinsic value of options either outstanding or exercisable at July 31, 2013.
F-25
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
On January 17, 2013, the Company awarded 336,817 options to directors and certain officers with an exercise price of $2.88 and a five
year term, of which 247,672 options vest over two years and 89,145 vest over three years. The weighted average assumptions used to fair
value this option award were as follows: expected life of 3.3 years, expected volatility 60.8%, risk free interest rate of 0.45% and no
dividend yield. As of July 31, 2013, none of these options were vested.
The following table summarizes information for stock options outstanding at July 31, 2013:
Range of Exercise prices
$ 2.88
$12.99-17.66
Restricted Stock Awards
Options outstanding and exercisable
Weighted- Average
Remaining
Contractual Life in
years
4.47 $
0.94 $
Weighted-
Average Exercise
Price
2.88
17.04
Shares
336,817
389,828
726,645
During fiscal 2013, 2012 and 2011, the compensation committee of the Company’s board of directors approved grants of restricted stock
and restricted stock unit awards (the “Awards”), respectively, to the Company’s directors, certain officers and certain employees under
the 2005 and 2011 Plans. The Awards vest upon the recipient’s continued employment or director service ratably over either two, three
or four years. Share-based compensation expense is based on the fair value of the award as measured on the grant date and is recorded
over the vesting period on a straight-line basis. The Awards will be forfeited if the recipient ceases to be employed by or serve as a
director of the Company, as defined in the Plans’ terms. The Awards settle in shares of the Company’s common stock on a one-for-one
basis.
A summary of the information pursuant to the Company’s Restricted Stock Awards for the years ended July 31, 2013, 2012 and 2011 is
as follows:
2013
2012
2011
Weighted -
Average
Award Price
Weighted -
Average
Award Price
Awards
Weighted -
Average
Award Price
Awards
Awards
257,583 $
39,000 $
(157,783) $
(13,667) $
3.58
1.77
(3.23)
(3.59)
311,952 $
144,143 $
(174,638) $
(23,874) $
4.84
2.51
(4.85)
(4.30)
417,578 $
181,643 $
(263,112) $
(24,157) $
125,133 $
3.45
257,583 $
3.58
311,952 $
5.50
3.78
(5.11)
(5.27)
4.84
$
1.77
$
2.51
$
3.78
Outstanding at beginning
of year
Awarded
Vested
Forfeited
Outstanding at end of
year
Weighted average market
value of
awards granted during
year
F-26
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Note 11 - Employee benefit plan
The Company has a qualified Salary Reduction Profit Sharing Plan (the “Plan”) for eligible U.S. employees under Section 401(k) of the
Internal Revenue Code. The Plan provides for voluntary employee contributions through salary reduction and voluntary employer
contributions at the discretion of the Company. For the years ended July 31, 2013, 2012, and 2011, the Company authorized employer
matched contributions of 50% of the employees’ contribution up to 10% of the employees’ compensation, payable in Enzo Biochem,
Inc. common stock. The share-based 401(k) employer matched contribution was approximately $643, $649, and $690 in fiscal years
2013, 2012, and 2011, respectively.
The Company’s Swiss operations provide a pension plan named the Enzo Life Sciences (ELS) AG Vertrag - Nr. 601013, (the “Swiss
Plan”) under the Swiss government’s social security system for Swiss employees. The current required minimum contribution is 8% and
minimum annual investment return is 2%. Employees are required to contribute based on a formula and the Company’s Swiss operations
make contributions of at least 50% of the employee contribution. The status of the Swiss Plan, which is substantially funded as of
December 31, 2012, the latest plan year end, is as follows:
As of December 31,
Total Assets
Accumulated Benefit Obligation
Funded status
Fiscal Year ended July 31,
$
$
2012
2,964,952
3,064,058
97%
$
$
2011
3,247,099
3,224,370
99%
$
$
2010
3,080,281
3,083,361
100%
2012
2011
2010
Contributions
$
521,000
$
483,000
$
480,000
The Swiss Plan’s contract expires December 31, 2014 and currently the Company has no plans to change the current funding or plan
design. No events have occurred that would impact the Swiss Plan status.
Note 12 - Royalty and other income
The Company has a license agreement with Qiagen that began in 2005, whereby the Company earns quarterly running royalties on the
net sales of Qiagen products subject to the license until the expiration of the patent on April 24, 2018. During the years ended July 31,
2013, 2012 and 2011, the Company recorded royalty income under the agreement of approximately $5,144, $5,900 and $6,800,
respectively, which is included in the Life Sciences segment.
F-27
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Note 13 - Commitments
Leases
The Company leases equipment, office and laboratory space under several non-cancelable operating leases that expire between
September 2013 and May 2023. Certain leases include renewal options and rent escalation clauses. An entity owned by certain executive
officers/directors of the Company owns the building that the Company leases as its main facility for laboratory operations and certain
research operations. In March 2005, the Company amended and extended the lease for another 12 years. In addition to the minimum
annual rentals of space, the lease is subject to annual increases, based on the consumer price index. Annual increases are limited to 3%
per year. Rent expense, inclusive of real estate taxes, approximated $1,605, $1,556 and $1,509 during fiscal years 2013, 2012 and 2011,
respectively.
Total rent expense incurred by the Company during fiscal 2013, 2012 and 2011 was approximately $4,354, $4,378 and $4,023,
respectively. Minimum future annual rentals under non-cancelable operating leases, net of sublease rental income of $451, as of July 31,
2013, are as follows:
Years ended July 31,
2014
2015
2016
2017
2018
Thereafter
$
$
4,346
4,163
3,810
2,868
1,477
2,516
19,180
Employment Agreements
The Company has employment agreements with certain officers that are cancelable at any time but provide for severance pay in the
event an officer is terminated by the Company without cause, as defined in the agreements. Unless cancelled earlier or with notice as
defined, the agreement automatically renews for two years. Aggregate minimum compensation commitments, exclusive of any
severance provisions, as of July 31, 2013 is $2,271.
Note 14 - Contingencies
The Company, as plaintiff, is currently engaged in litigation in the United States District Court for the Southern District of New York
against six parties (and certain of their related companies): Amersham plc, Perkin Elmer, Inc., Molecular Probes, Inc., Orchid
Biosciences, Inc., Affymetrix, Inc., and Roche Diagnostic GmbH (“Roche”). These cases were commenced at various times from
October 2002 to June 2004. In each of the six cases, the Company asserts similar (with some differences) causes of action against the
defendants which can be generally described as contract, tort, fraud, and patent claims, except that no patent claims are asserted against
Affymetrix. In the Roche case, Roche seeks a declaratory judgment of non-breach and patent invalidity against the Company. The cases
were consolidated for pre-trial purposes in 2004 and there has been extensive discovery among the parties. In 2011, the defendants
moved for summary judgment of non-infringement regarding the Company’s patent claims. In 2012, those motions were granted in part
and denied in part. In December 2012, all six defendants moved for summary judgment on the Company’s non-patent claims. Additional
discovery was taken and the Company responded to the motions in May 2013. Those motions are now fully briefed, but have not yet
been decided. The Company expects that the pending motions will be decided by October 31, 2013.
On June 7, 2004, the Company and Enzo Life Sciences, Inc., filed suit in the United States District Court for the District of Connecticut
against Applera Corporation and its wholly-owned subsidiary Tropix, Inc., now Life Technologies, Inc. (NASDAQ:LIFE). The
complaint alleged infringement of six patents relating to DNA sequencing systems, labeled nucleotide products, and other technology.
Yale University is the owner of four of the patents and the Company is the exclusive licensee. These four patents are commonly referred
to as the “Ward” patents. On November 12, 2012, a jury in New Haven found that one of these patents (United States Patent No.
5,449,667) was infringed and not proven invalid. The jury awarded $48.5 million for this infringement. Prejudgment interest should
provide for additional recovery in the tens of millions of dollars.
F-28
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Life Technologies will likely appeal and there can be no assurance that the Company will be successful in this litigation. Even if the
Company is not successful, management does not believe that there will be a significant adverse monetary impact on the Company.
In 2012, the Company received a Subpoena Duces Tecum (the “Subpoena”) from the federal Department of Health and Human
Services, Office of Inspector General (“OIG”). The Subpoena was issued as part of an investigation being conducted by the US
Attorney’s Office for the Eastern District of New York in conjunction with the OIG. While a number of potential issues were raised
initially by the government, the investigation has come to focus primarily on certain practices relating to an alleged failure to collect
diagnosis codes from physicians who ordered tests through Enzo Clinical Labs. The time period covered by the investigation is from
2004 through 2011. In response to the Subpoena, the Company is cooperating with the government and has provided documents as
requested and no claim has yet been asserted by the OIG. The Company continues to review the methodologies around the matters
raised as well as the facts that impact them. Due to the on-going review, various questions of fact and the continuing discussions with the
government the Company is unable at this time to predict the outcome or estimate the potential impact that could result from the final
resolution of the investigation.
The Company is party to other claims, legal actions, complaints, and contractual disputes that arise in the ordinary course of business.
The Company believes that any liability that may ultimately result from the resolution of these matters will not, individually or in the
aggregate, have a material adverse effect on its financial position or results of operations.
Note 15 - Segment reporting
The Company has three reportable segments: Life Sciences, Clinical Labs and Therapeutics. The Company’s Life Sciences segment
develops, manufactures, and markets products to research and pharmaceutical customers. The Clinical Labs segment provides
diagnostic services to the health care community. The Company’s Therapeutics segment conducts research and development activities
for therapeutic drug candidates. The Company evaluates segment performance based on segment income (loss) before taxes. Costs
excluded from segment income (loss) before taxes and reported as “Other” consist of corporate general and administrative costs which
are not allocable to the three reportable segments.
Management of the Company assesses assets on a consolidated basis only and therefore, assets by reportable segment have not been
included in the reportable segments below. The accounting policies of the reportable segments are the same as those described in the
summary of significant accounting policies.
F-29
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
The following financial information represents the operating results of the reportable segments of the Company:
Year ended July 31, 2013
Revenues:
Clinical laboratory services
Product revenues
Royalty and license fee income
Total revenues
Operating expenses:
Cost of clinical laboratory services
Cost of product revenues
Research and development
Selling, general and administrative
Provision for uncollectible accounts
receivable
Legal
Total operating expenses
Clinical
Labs
Life
Sciences
Therapeutics
Other
Consolidated
$
55,889
- $
-
55,889
-
32,526
5,292
37,818
-
-
-
-
- $
-
-
-
38,251
-
294
19,942
4,232
316
63,035
-
16,584
2,356 $
15,511
264
57
34,772
-
-
1,239
- $
-
-
1,239
-
-
-
8,201
-
5,440
13,641
55,889
32,526
5,292
93,707
38,251
16,584
3,889
43,654
4,496
5,813
112,687
Operating income (loss)
(7,146)
3,046
(1,239)
(13,641)
(18,980)
Other income (expense)
Interest
Other
Foreign exchange gain
(46)
49
-
13
(71)
80
-
-
-
(21)
27
-
(54)
5
80
(Loss) income before income taxes
$
(7,143) $
3,066 $
(1,239) $
(13,635) $
(18,949)
Depreciation and amortization included
above
$
1,377 $
3,102 $
22 $
104 $
4,605
Share-based compensation included in
above:
Cost of clinical laboratory services
Research and development
Selling, general and administrative
Total
Capital expenditures
$
$
$
9 $
-
36
45 $
1
2
10
13
757 $
231
-
-
- $
- $
-
- $
-
487
487 $
- $
10
2
533
545
988
F-30
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
The following financial information represents the operating results of the reportable segments of the Company:
Year ended July 31, 2012
Revenues:
Clinical laboratory services
Product revenues
Royalty and license fee income
Total revenues
Operating expenses:
Cost of clinical laboratory services
Cost of product revenues
Research and development
Selling, general and administrative
Provision for uncollectible accounts
receivable
Legal
Impairment charges
Total operating expenses
Clinical
Labs
Life
Sciences
Therapeutics
Other
Consolidated
$
59,403
- $
-
59,403
-
37,722
5,958
43,680
-
-
-
-
- $
-
-
-
36,305
-
299
20,856
4,987
262
-
62,709
-
19,668
4,308 $
18,305
117
536
24,540
67,474
-
-
1,686
- $
-
-
-
1,686
-
-
-
8,767
-
2,926
-
11,693
59,403
37,722
5,958
103,083
36,305
19,668
6,293
47,928
5,104
3,724
24,540
143,562
Operating loss
(3,306)
(23,794)
(1,686)
(11,693)
(40,479)
Other income (expense)
Interest
Other
Foreign exchange loss
(5)
28
-
23
27
(540)
-
-
-
3
22
-
21
77
(540)
Loss before income taxes
$
(3,283) $
(24,284) $
(1,686) $
(11,668) $
(40,921)
Depreciation and amortization included
above
$
1,092 $
3,217 $
43 $
125 $
4,477
Share-based compensation included in
above:
Cost of clinical laboratory services
Research and development
Selling, general and administrative
Total
Capital expenditures
$
$
$
10
- $
49
59 $
4
59
63
921 $
443
-
-
- $
- $
-
- $
-
597
597 $
10
4
705
719
- $
1,364
F-31
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Year ended July 31, 2011
Revenues:
Clinical laboratory services
Product revenues
Royalty and license fee income
Total revenues
Operating expenses:
Cost of clinical laboratory services
Cost of product revenues
Research and development
Selling, general and administrative
Provision for uncollectible accounts
receivable
Legal
Total operating expenses
Clinical
Labs
Life
Sciences
Therapeutics
Other
Consolidated
$
52,762
- $
-
52,762
41,830
7,437
49,267
-
-
-
-
- $
-
-
-
31,682
-
-
18,426
4,415
387
54,910
-
22,137
5,784 $
17,855
16
726
46,518
-
-
2,022
- $
-
-
2,022
-
-
-
8,910
-
2,597
11,507
52,762
41,830
7,437
102,029
31,682
22,137
7,806
45,191
4,431
3,710
114,957
Operating (loss) income
(2,148)
2,749
(2,022)
(11,507)
(12,928)
Other income (expense)
Interest
Other
Foreign exchange gain
(Loss) income before income taxes
(5)
30
-
(2,123) $
2
(3)
49
2,797 $
-
-
-
(2,022) $
14
18
-
(11,475) $
11
45
49
(12,823)
$
Depreciation and amortization included
above
$
1,012 $
3,282 $
47 $
128 $
4,469
Share-based compensation included in
above:
Cost of clinical laboratory services
Research and development
Selling, general and administrative and
$
legal
Total
10
- $
61
71
- $
14
84
98 $
Capital expenditures
$
834 $
389
-
-
- $
- $
-
- $
-
880
880 $
- $
10
14
1,025
1,049
1,223
F-32
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013 and 2012
(Dollars in thousands except share data)
Geographic financial information is as follows:
Net sales to unaffiliated customers:
United States
Switzerland
United Kingdom
Other international countries
Total
Long-lived assets at July 31,
United States
Switzerland
United Kingdom
Other international countries
Total
2013
80,559
5,499
2,324
5,325
93,707
2013
23,136
1,984
491
401
26,012
$
$
$
$
2012
87,776
6,802
2,728
5,777
103,083
2012
25,081
2,223
618
426
28,348
$
$
$
$
2011
85,691
8,508
2,825
5,005
102,029
2011
44,028
8,958
2,857
1,850
57,693
$
$
$
$
The Company’s reportable segments are determined based on the services they perform, the products they sell, and the royalties and
license fee income they earn, not on the geographic area in which they operate. The Company’s Clinical Labs segment operates 100% in
the United States with all revenue derived there. The Life Sciences segment earns product revenue both in the United States and foreign
countries and royalty and license fee income in the United States. The following is a summary of the Life Sciences segment revenues
attributable to customers located in the United States and foreign countries:
United States
Foreign countries
2013
24,669
13,149
37,818
$
$
2012
28,372
15,308
43,680
$
$
2011
32,928
16,339
49,267
$
$
Note 16 - Summary of Selected Quarterly Financial Data (unaudited)
The following table contains statement of operations information for each quarter of the years ended July 31, 2013 and 2012. The
Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Unaudited quarterly financial data for fiscal 2013 and 2012 is summarized as follows:
Fiscal 2013
Total revenues
Gross profit
Loss before income taxes
Net loss
Basic and diluted loss per common share
Fiscal 2012
Total revenues
Gross profit
Loss before income taxes
Net loss
Basic and diluted loss per common share
$
$
$
$
October 31,
January 31,
April 30,
Quarter Ended
2012
25,630 $
11,736
(3,755)
(3,691)
(0.09) $
2013
22,210 $
8,642
(5,854)
(5,674)
(0.14) $
Quarter Ended
2013
22,598 $
9,048
(5,808 )
(5,770 )
(0.15 ) $
October 31,
January 31,
April 30,
2012
24,973 $
11,579
(4,076)
(4,221)
(0.11) $
2012
25,949 $
12,056
(3,445)
(3,411)
(0.09) $
2011
25,753 $
11,802
(4,326)
(4,494)
(0.12) $
F-33
July 31,
2013
23,269
9,446
(3,532)
(3,102)
(0.08)
July 31,
2012
26,408
11,673
(29,074)
(27,143)
(0.69)
ENZO BIOCHEM, INC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 31, 2013, 2012 and 2011
(in thousands)
Year ended
July 31,
Description
Balance at
Beginning
of period
Charged
to
costs
and expenses
Charged
to other
accounts Deductions
Balance at
end of period
2013
2012
2011
2013
2012
2011
Allowance for doubtful
accounts receivable
Allowance for doubtful
accounts receivable
Allowance for doubtful
accounts receivable
Deferred tax valuation
allowance
Deferred tax valuation
allowance
Deferred tax valuation
allowance
(1) Write-off of uncollectible accounts receivable.
3,273
4,496
5,062(1)
2,707
3,488
5,104
5,319(1)
3,273
2,839
4,431
3,782(1)
3,488
41,261
6,362
32,920
8,341
28,901
4,019
47,623
41,261
32,920
S-1
List of subsidiaries of the Company
EXHIBIT 21
Enzo Clinical Labs, Inc., a New York Corporation
Enzo Life Sciences, Inc., a New York Corporation
Enzo Life Sciences (ELS) AG, wholly-owned subsidiary of Enzo Life Sciences, Inc. in Lausen, Switzerland
Enzo Therapeutics, Inc., a New York Corporation
Enzo Realty, LLC, a New York Corporation
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements of Enzo Biochem, Inc. and subsidiaries (the “Company”) on
Form S-8 (File Nos. 333-87153, 333-89308, 333-123712 and 333-172127), and on Form S-3 (File No 333-190321) of our reports, dated
October 15, 2013, on our audit of the consolidated financial statements and financial statement schedule as of July 31, 2013 and for the
year then ended and the effectiveness of the Company’s internal control over financial reporting as of July 31, 2013, which reports are
included in this Annual Report on Form 10-K.
EXHIBIT 23.1
/s/ EisnerAmper LLP
New York, New York
October 15, 2013
EXHIBIT 23.2
We consent to the incorporation by reference in the following Registration Statements:
Consent of Independent Registered Public Accounting Firm
(1) Registration Statement (Form S-8 No. 333-87153, 333-89308, 333-123712 and 333-172127) pertaining to the1999 Stock Option
Plan, the 2005 Equity Compensation Incentive Plan and the 2011 Incentive Plan of Enzo Biochem, Inc. and;
(2) Registration Statement (Form S-3 No. 333-190321) of Enzo Biochem, Inc.;
of our report dated October 15, 2012, with respect to the consolidated financial statements and schedule of Enzo Biochem, Inc. as of July
31, 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for
the years ended July 31, 2012 and 2011, included in this Annual Report (Form 10-K) of Enzo Biochem, Inc. for the year ended July 31,
2013.
/s/ Ernst & Young LLP
Jericho, New York
October 15, 2013
CERTIFICATIONS
EXHIBIT 31 (a)
In connection with the Annual Report on Form 10-K of Enzo Biochem, Inc. (“the Company”) for the fiscal year ended July 31, 2013 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. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002, that:
1. I have reviewed this Annual Report on Form 10-K 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 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 principles;
(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 (the Company’s fourth fiscal quarter in the case of an annual report) 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 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: October 15, 2013
By: /s/ Elazar Rabbani, Ph.D.
Elazar Rabbani, Ph.D.
Chairman of the Board, Chief Executive Officer and Director
CERTIFICATIONS
EXHIBIT 31 (b)
In connection with the Annual Report on Form 10-K of Enzo Biochem, Inc. (“the Company”) for the fiscal year ended July 31, 2013 as
filed with the Securities and Exchange Commission on the date hereof, I, Barry Weiner, Chief Financial Officer and Principal
Accounting Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of
2002, that:
1. I have reviewed this Annual Report on Form 10-K 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 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 principles;
(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 (the Company’s fourth quarter in the case of an annual report) 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 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: October 15, 2013
By: /s/ Barry Weiner
Barry Weiner
President, Chief Financial Officer, Principal Accounting
Officer, Treasurer and Director
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32 (a)
In connection with the Annual Report of Enzo Biochem, Inc., and Subsidiaries (“the Company”) on Form 10-K for the fiscal year ended
July 31, 2013 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. § 1350, as adopted pursuant to § 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: October 15, 2013
By: /s/ Elazar Rabbani, Ph.D.
Elazar Rabbani, Ph.D.
Chairman of the Board, Chief Executive Officer and Director
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.
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32 (b)
In connection with the Annual Report of Enzo Biochem, Inc., and Subsidiaries (“the Company”) on Form 10-K for the fiscal year ended
July 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Barry Weiner, Chief Financial
Officer and Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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: October 15, 2013
By: /s/ Barry Weiner
Barry Weiner
President, Chief Financial Officer, Principal Accounting
Officer, Treasurer and Director
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.
Performance Graph
The graph below compares the five-year cumulative shareholder total return based upon an initial $100 investment (assuming
the reinvestment of dividends) for Enzo Biochem, Inc. shares of Common Stock with the comparable return for the New York Stock
Exchange Market Value Index and two peer issuer indices selected on an industry basis. The two peer group indices include: (i) 145
biotechnology companies engaged in the research and development of diagnostic substances and (ii) 11 companies engaged in the
medical laboratories business. All of the indices include only companies whose common stock has been registered under Section 12 of
the Securities Exchange Act of 1934 for at least the time frame set forth in the graph.
The total shareholder returns depicted in the graph are not necessarily indicative of future performance. The Performance Graph
and related disclosure shall not be deemed to be incorporated by reference in any filing by the Company under the Securities Act of 1933
or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates the graph and such disclosure by
reference.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL
RETURN AMONG ENZO BIOCHEM, INC.,
NYSE MARKET INDEX, MORNINGSTAR DIAGNOSTIC AND RESEARCH
INDEX AND MEDICAL LABORATORIES INDEX
S
R
A
L
L
O
D
$150
$125
$100
$75
$50
$25
0
2008
2009
2010
2011
2012
2013
ENZO BIOCHEM, INC.
MEDICAL LABORATORIES
NYSE COMPOSITE INDEX
MORNINGSTAR DIAGNOSTIC & RESEARCH
ASSUMES $100 INVESTED ON AUGUST 1, 2008
ASSUMES DIVIDEND REINVESTED
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES , PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
Company/Market/Peer Group
Enzo Biochem, Inc.
NYSE Composite Index
Morningstar Diagnostic & Research
Medical Laboratories
7/31/2008
7/31/2009
7/31/2010
7/31/2011
7/31/2012
7/31/2013
100.00
100.00
100.00
100.00
35.89
78.69
77.00
97.71
32.37
87.87
74.32
93.84
27.03
103.88
93.61
112.81
10.56
103.97
96.41
113.80
15.34
129.88
126.70
123.85
Corporate Information
Board of Directors
Officers and Management
Corporate Office
Gregory M. Bortz
Founder and Manager Partner
Creo Capital Partners, LLC
Former SVP Lehman Brothers, Inc.
Bernard L. Kasten, MD
Executive Chairman, GeneLinks, Inc.
Former Chairman, Cleveland Biolabs, Inc.
Former Chief Laboratory Officer,
Quest Diagnostics, Inc.
Former CEO, Siga Technologies, Inc.
Dov Perlysky
Managing Member of Nesher, LLC
Former VP of Laidlaw Global Securities
Elazar Rabbani, Ph.D.
Chairman of the Board,
Chief Executive Officer and Secretary
Barry W. Weiner
President, Chief Financial Officer,
Principal Accounting Officer and Treasurer
Elazar Rabbani, Ph.D.
Chairman of the Board
Chief Executive Officer
Barry W. Weiner
President and Chief Financial Officer.
Andrew P. Whiteley
Chief Operating Officer,
Enzo Life Sciences, Inc
Andrew R. Crescenzo, CPA
Senior Vice President, Finance
David C. Goldberg
Vice President,
Corporate Development and Interim
President of Enzo Clinical Labs, Inc.
Herbert B. Bass
Vice President, Finance
Paul C. O’Brien
Vice President, Global
Human Resources
Enzo Biochem, Inc.
527 Madison Ave.
New York, NY 10022
(212) 583-0100
Corporate Subsidiaries
Enzo Clinical Labs, Inc.
60 Executive Blvd,
Farmingdale, NY 11735
(631) 755-5500
Enzo Life Sciences, Inc.
10 Executive Blvd.
Farmingdale, NY 11735
(631) 694-7070
Enzo Therapeutics, Inc.
10 Executive Blvd.
Farmingdale, NY 11735
(631) 755-5500
Corporate Information
General Counsel
McDermott, Will and Emery, LLP
340 Madison Avenue
New York, NY 10173
Independent Auditors
EisnerAmper LLP
750 Third Ave
New York, NY 10017
Transfer Agent and Registrar
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, NY 10038
Common Stock
Listed on NYSE
(Symbol: ENZ)
Market for Registrant’s Common Equity and Related Stockholder Matters
The common stock of the Company is traded on the New York Stock Exchange: (Symbol: ENZ). The following table sets forth the high and
low sale price of the Company’s Common Stock for the periods indicated as reported on the New York Stock Exchange.
2013 Fiscal Year
(August 1, 2012 to July 31, 2013):
High
Low
2012 Fiscal Year
(August 1, 2011 to July 31, 2012):
High
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
As of September 30, 2013, the Company had approximately 913 stockholders of record of its Common Stock.
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$1.33
$1.86
$1.83
$1.96
2.17
3.16
3.13
2.43
$3.93
$2.85
$3.15
$2.80
Low
$2.05
$1.98
$2.13
$1.43
The Company has not paid a cash dividend on its Common Stock and intends to continue a policy of retaining earnings to finance and build its
operations. Accordingly, the Company does not anticipate the payment of cash dividends to holders of Common Stock in the foreseeable future.
Enzo Biochem, Inc.
527 Madison Ave.
New York, NY 10022
212.583.0100
www.enzo.com